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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 September 30, 2003.
000-18122
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(Commission File Number)
ARC Wireless Solutions, Inc.
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(Exact name of registrant as specified in its charter)
Utah 87-0454148
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation)
10601 West 48th Ave
Wheat Ridge, Colorado, 80033-2660
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(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ ]
As of November 1, 2003, the Registrant had 153,881,488 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
September 30, 2003
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003 (unaudited)
and December 31, 2002...............................................3
Consolidated Statements of Operations for the Three Months and
Nine Months Ended September 30, 2003 and 2002 (unaudited)...........4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 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...........16
Item 4. Controls and Procedures..............................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................18
Item 6. Exhibits and Reports on Form 8-K.....................................18
Signatures....................................................................18
Exhibit 31.1..................................................................19
Exhibit 32.1..................................................................21
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Consolidated Balance Sheets
September 30, December 31,
2003 2002
Assets (unaudited) *
Current assets:
Cash and equivalents $ 520,000 $ 265,000
Accounts receivable - customers, net 4,040,000 5,216,000
Accounts receivable - vendors, net 673,000 939,000
Inventory, net 6,834,000 5,397,000
Other current assets 198,000 131,000
------------ ------------
Total current assets 12,265,000 11,948,000
------------ ------------
Property and equipment, net 543,000 505,000
------------ ------------
Other assets:
Intangible assets including goodwill, net 10,935,000 10,934,000
Deposits 82,000 68,000
------------ ------------
Total assets $ 23,825,000 $ 23,455,000
============ ============
Liabilities and stockholders' equity
Current liabilities:
Bank line of credit $ 167,000 $ 3,718,000
Accounts payable 4,665,000 4,166,000
Current portion of capital lease obligations 27,000 14,000
Accrued expenses 355,000 548,000
------------ ------------
Total current liabilities 5,214,000 8,446,000
Capital lease obligations, less current portion 43,000 5,000
Bank line of credit and term loan, less current portion 3,731,000 --
------------ ------------
Total liabilities 8,988,000 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 21,702,000 21,649,000
Accumulated deficit (5,748,000) (5,528,000)
------------ ------------
Total stockholders' equity 14,837,000 15,004,000
------------ ------------
Total liabilities and stockholders' equity $ 23,825,000 $ 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 September 30, Nine Months Ended September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Sales, net $ 8,928,000 $ 8,532,000 $ 21,920,000 $ 24,489,000
Cost of sales 7,619,000 7,313,000 18,169,000 19,869,000
------------ ------------ ------------ ------------
Gross profit 1,309,000 1,219,000 3,751,000 4,620,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses 1,350,000 1,457,000 3,973,000 4,356,000
------------ ------------ ------------ ------------
Total operating expenses 1,350,000 1,457,000 3,973,000 4,356,000
------------ ------------ ------------ ------------
Income (loss) from operations (41,000) (238,000) (222,000) 265,000
Other income (expense):
Interest expense, net (48,000) (50,000) (138,000) (151,000)
Gain from debt cancellation 148,000 -- 148,000 226,000
Other income 9,000 13,000 27,000 31,000
------------ ------------ ------------ ------------
Total other income (expense) 109,000 (37,000) 37,000 106,000
------------ ------------ ------------ ------------
Income (loss) before income taxes 68,000 (275,000) (185,000) 370,000
Provision for income taxes (8,000) (19,000) (35,000) (57,000)
------------ ------------ ------------ ------------
Net Income (loss) $ 60,000 $ (294,000) $ (220,000) $ 313,000
============ ============ ============ ============
Net Income (loss) per share (basic and diluted) -- $ (.002) $ (.001) $ .002
============ ============ ============ ============
Net income (loss) per share - basic -- -- -- --
============ ============ ============ ============
Net income (loss) per share - diluted -- -- -- --
============ ============ ============ ============
See accompanying notes.
4
ARC Wireless Solutions, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30,
2003 2002
----------- -----------
(unaudited)
Operating activities
Net income (loss) $ (220,000) $ 313,000
Adjustments to reconcile net income (loss) to net cash
provided (used in)
Operating activities:
Depreciation and amortization 199,000 228,000
Debt cancellations (148,000) (226,000)
Provision for doubtful accounts (365,000) 144,000
Loss on disposition of assets -- 9,000
Non-cash expense for issuance of stock and options 53,000 19,000
Changes in operating assets and liabilities:
Accounts receivable, trade and vendor 1,807,000 (670,000)
Inventory (1,437,000) (36,000)
Prepaids and other current assets (67,000) (34,000)
Other assets (14,000) (5,000)
Accounts payable and accrued expenses 454,000 (80,000)
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Net cash provided by (used in) operating activities 262,000 (338,000)
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Investing activities
Patent acquisition costs (13,000) (36,000)
Purchase of plant and equipment (160,000) (61,000)
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Net cash used in investing activities (173,000) (97,000)
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Financing activities
Repayment of line of credit and capital lease obligations (14,000) (9,000)
Net borrowings under lines of credit 180,000 319,000
Proceeds from private placement, net -- 119,000
Acquisition of treasury shares -- (75,000)
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Net cash provided by (used in) financing activities 166,000 354,000
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Net increase (decrease) in cash 255,000 (81,000)
Cash, beginning of period 265,000 345,000
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Cash, end of period $ 520,000 $ 264,000
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Supplemental cash flow information:
Cash paid for interest $ 136,000 $ 150,000
Equipment acquired under capital lease $ 65,000 --
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Notes to Consolidated Financial Statements
September 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 nine months ended September 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 nine months ended September 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 nine
months ended September 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 Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2003 2002 2003 2002
------------ ----------- ----------- ------------
Numerator: Net Income (Loss) $ 60,000 $ (294,000) $ (220,000) $ 313,000
============ =========== =========== ============
Denominator:
Denominator for basic earnings per
share - weighted average shares 153,400,000 153,300,000 153,300,000 153,100,000
Effect of dilutive securities
Employee stock options 250,000 -- -- 400,000
Common stock warrants -- -- --
------------ ----------- ----------- ------------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed conversion 153,650,000 153,300,000 153,300,000 153,500,000
============ =========== =========== ============
Basic earnings per share -- $ (.002) $ (.001) $ .002
============ =========== =========== ============
Diluted earnings per share -- $ (.002) $ (.001) $ .002
============ =========== =========== ============
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:
September 30, December 31,
------------ -----------
2003 2002
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Raw materials $ 945,000 $ 984,000
Work in progress 123,000 100,000
Finished goods 6,079,000 4,695,000
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7,147,000 5,779,000
Inventory reserve (313,700) (382,000)
----------- -----------
Net inventory $ 6,834,000 $ 5,397,000
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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 September 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.
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.
7
On October 29, 2002, $3 million line of credit and the $1 million line of credit
were combined into a single $4 million revolving line of credit due April 30,
2003, of which $3,898,000 was outstanding at September 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 in order to allow time for Winncom and the bank to negotiate
the terms of a new line of credit facility. On October 1, 2003 Winncom executed
a new $4,000,000 line of credit agreement with the bank with interest at prime
plus .5% due April 30, 2005 and converted $500,000 of the balance outstanding
under the line of credit at September 30, 2003 into a 36-month term loan with
monthly principal payments of $13,888 plus interest at prime plus .75%. The term
loan shall come due on October 26, 2006.
Revolving bank lines of credit consist of:
September 30, December 31,
------------ -----------
2003 2002
----------- -----------
Bank revolving line of credit - Winncom $ 3,398,000 $ 3,718,000
Bank term loan - Winncom 500,000 --
----------- -----------
3,898,000 3,718,000
Less current portion (167,000) (3,718,000)
----------- -----------
Non-current portion $ 3,731,000 $ --
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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 nine months ended September 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.
In September 2003 the Company contributed 649,278 shares of common stock, valued
at $52,000, into the Company 401(k) Plan as an employer matching contribution.
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
8
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.
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.
9
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
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 September 30, Nine Months Ended September 30,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income (loss) as reported $ 60,000 $ (294,000) $ (220,000) $ 313,000
Add: stock based compensation included in
reported net income (loss) -- -- -- --
Deduct: Stock-based compensation cost
under SFAS 123 (19,000) (69,000) (56,000) (156,000)
------------- ------------- ------------- -------------
Pro forma net income (loss) $ 41,000 $ (363,000) $ (276,000) $ 157,000
============= ============= ============= =============
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 153,650,000 153,300,000 153,300,000 153,500,000
Reported net income (loss) per common
share - basic and diluted $ -- $ (.002) $ (.001) $ .002
Pro forma net income (loss) per common
share - basic and diluted $ -- $ (.002) $ (.001) $ .002
10
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 Nine Months Ended
September 30, September 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%
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 nine months ended September 30, 2003 and 2002, respectively
are as follows:
Three Months Ended September 30,
Distribution Manufacturing Cable Corporate Total
------------ ------------ ------------ ------------ ------------
Net Sales 2003 $ 7,608,000 $ 1,438,000 $ 5,000 $ (123,000) $ 8,928,000
2002 $ 6,943,000 $ 1,563,000 $ 109,000 $ (83,000) $ 8,532,000
Net Earnings (Loss) 2003 $ 214,000 $ (83,000) $ 117,000 $ (188,000) $ 60,000
2002 $ 9,000 $ (74,000) $ (27,000) $ (202,000) $ (294,000)
Earnings (Loss)
before Income Taxes 2003 $ 222,000 $ (83,000) $ 117,000 $ (188,000) $ 68,000
2002 $ 28,000 $ (74,000) $ (27,000) $ (202,000) $ 275,000)
Identifiable Assets 2003 $ 21,940,000 $ 3,450,000 $ 249,000 $ (1,814,000) $ 23,825,000
2002 $ 21,834,000 $ 4,115,000 $ 333,000 $ (1,235,000) $ 24,381,000
11
Nine Months Ended September 30,
Distribution Manufacturing Cable Corporate Total
------------ ------------ ------------ ------------ ------------
Net Sales 2003 $ 17,873,000 $ 4,268,000 $ 8,000 $ (229,000) $ 21,920,000
2002 $ 18,930,000 $ 5,304,000 $ 393,000 $ (138,000) $ 24,489,000
Net Earnings (Loss) 2003 $ 370,000 $ (107,000) $ 112,000 $ (595,000) $ (220,000)
2002 $ 132,000 $ 441,000 $ (81,000) $ (179,000) $ 313,000
Earnings (Loss)
before Income Taxes 2003 $ 405,000 $ (107,000) $ 112,000 $ (595,000) $ (185,000)
2002 $ 189,000 $ 441,000 $ (81,000) $ (179,000) $ 370,000
Identifiable Assets 2003 $ 21,940,000 $ 3,450,000 $ 249,000 $ (1,814,000) $ 23,825,000
2002 $ 21,834,000 $ 4,115,000 $ 333,000 $ (1,235,000) $ 24,381,000
The segment entitled "Corporate" represents the operations of the parent
Company, including segment eliminations.
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 September 30, 2003 and 2002
Sales were $8.9 million and $8.5 million for the three-month periods ended
September 30, 2003 and 2002, respectively. The increase in revenues comparing
the three months ended September 30, 2003 with the three months ended September
30, 2002 is attributable to three factors: 1) a $125,000 decrease in revenues
from the Wireless Communications Solutions Division, primarily revenues from
base station antennas; 2) a decrease in Starworks' revenues from $109,000 for
the quarter ended September 30, 2002 to $5,000 for the quarter ended September
30, 2003; and 3) an increase in Winncom revenues from $6.9 million for the
quarter ended September 30, 2002 to $7.6 million for the quarter ended September
30, 2003. The overall increase in revenues is primarily due to the increased
demand for Wi-Fi products such as those sold by Winncom.
Gross profit margins were 14.7% and 14.3% for the three-months ended September
30, 2003 and September 30, 2002, respectively. The slightly higher gross margin
for the quarter ended September 30, 2003 as compared with the quarter ended
September 30, 2002 is primarily the result of a 1% increase in gross margins at
Winncom. For the quarter ended September 30, 2003, the Wireless Communications
Solutions Division sales, whose products have higher gross margins than
Winncom's products, accounted for only 14.7% of revenues compared with the
quarter ended September 30, 2002 in which the Wireless Communications Solutions
Division sales accounted for 17.3% 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 September 30, 2002,
12
the Wireless Communications Solutions Division benefited from the sale of
portions of the inventory purchased from BATC significantly more than in the
quarter ended September 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 September 30, 2003 and 2002, the Company
estimates that the benefit resulting from inventory purchased at below-market
costs was between $40,000 and $70,000 for the quarter ended September 30, 2003
and between $50,000 and $80,000 for the quarter ended September 30, 2002.
Selling, general and administrative expenses (SG&A) decreased by $107,000 for
the three months ended September 30, 2003 from the three months ended September
30, 2002. The decrease in SG&A for the quarter ended September 30, 2003 is
primarily due to a $100,000 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 for the quarter. SG&A as a percent of revenue decreased from
17.1% for the three months ended September 30, 2002 to 15.1% for the three
months ended September 30, 2003. Salaries and wages, including sales based
commissions, remain the largest component of SG&A constituting up 60% of the
total SG&A for the quarter ended September 30, 2003 and 53% of the total SG&A
for the quarter ended September 30, 2002. The total dollar amount of salaries
and wages was $40,000 higher for the quarter ended September 30, 2003 as
compared with the quarter ended September 30, 2002.
Net interest expense was $48,000 for the three months ended September 30, 2003
compared with $50,000 for the three months ended September 30, 2002. The average
balance outstanding on the lines of credit was $3.9 million for the quarters
ended September 30, 2003 and September 30, 2002, but the interest rate was 4.75%
for the quarter ended September 30, 2003 as compared with 5.0% for quarter ended
September 30, 2002.
Included in other income for the three months ended September 30, 2003 is a gain
from debt settlements of $148,000. There was no gain from debt settlements for
the quarter ended September 30, 2002.
The Company had net income of $60,000 for the three months ended September 30,
2003 as compared with a net loss of $294,000 for the three months ended
September 30, 2002. The difference is due to increased sales from the quarter
ended September 30, 2002 to the quarter ended September 30, 2003, a reduction in
SG&A of $107,000 from the quarter ended September 30, 2002 to the quarter ended
September 30, 2003and a gain on debt settlements of $148,000 in the quarter
ended September 30, 2003 and there were no gains on debt settlements in the
quarter ended September 30, 2002.
Results of Operations: Nine Months Ended September 30, 2003 and 2002
Sales were $22 million and $24.5million for the nine-month periods ended
September 30, 2003 and 2002, respectively. The decrease in revenues for the nine
months ended September 30, 2003 compared with the nine months ended September
30, 2002 is attributable to three factors: 1) a decrease in the Wireless
Communications Solutions Division's revenues from base station antennas, 2) a
decrease in Starworks' revenues from $393,000 for the nine months ended
September 30, 2002 to $8,000 for the nine months ended September 30, 2003; and
3) a decrease in Winncom revenues from $18.9 million for the nine months ended
September 30, 2002 to $17.9 million for the nine months ended September 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
Gross profit margins were 17.1% and 18.9% for the nine-months ended September
30, 2003 and September 30, 2002, respectively. The lower gross margin for the
nine months ended September 30, 2003 vs. the nine months ended September 30,
2002 is primarily the result of the larger percentage decrease in revenues from
the Wireless Communications Solutions Division, whose products have a higher
margin than the products of Winncom or Starworks. For the nine months ended
September 30, 2003, the Wireless Communications Solutions Division sales
accounted for 18.4% of revenues as compared with the nine months ended September
30, 2002, in which the Wireless Communications Solutions Division sales
accounted for 21.1% of revenues. In August 2001, when the Company purchased
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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 nine months ended September 30, 2002,
the Wireless Communications Solutions Division benefited from the sale of
portions of the inventory purchased from BATC significantly more than in the
nine months ended September 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 nine-month periods ended September 30, 2003 and 2002, the Company
estimates that the benefit resulting from inventory purchased at below-market
costs was between $70,000 and $100,000 for the nine months ended September 30,
2003 and between $300,000 and $400,000 for the nine months ended September 30,
2002.
Selling, general and administrative expenses (SG&A) for the nine months ended
September 30, 2003 decreased by $383,000 for the nine months ended September 30,
2003 as compared with the nine months ended September 30, 2002, despite our
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 expense of $250,000 and the cessation of operations of Starworks in
Atlanta in July 2002 that has reduced SG&A expenses by approximately $120,000.
Despite the $383,000 reduction of SG&A between 2002 and 2003, SG&A as a percent
of revenue increased slightly from 17.8% for the nine months ended September 30,
2002 to 18.1% for the nine months ended September 30, 2003. Salaries and wages
remain the largest component of SG&A constituting 44% of the total SG&A for the
nine months ended September 30, 2003 and 40% for the nine months ended September
30, 2002. The total dollar amount of salaries and wages was relatively the same
comparing the nine months ended September 30, 2003 with the nine months ended
September 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 $138,000 for the nine months ended September 30, 2003
compared with $151,000 for the nine months ended September 30, 2002. The average
balance outstanding on the line of credit was $3.8 million for both the nine
months ended September 30, 2003 and 2002, but the interest rate was 4.75% for
the nine months ended September 30, 2003 as compared with 5.0% for the nine
months ended September 30, 2002.
Included in other income for the nine months ended September 30, 2003 is a gain
from debt settlements of $148,000 and included in other income for the nine
months ended September 30, 2002 is a gain from debt settlements of $226,000.
The Company had a net loss of $220,000 for the nine months ended September 30,
2003 as compared with net income of $313,000 for the nine months ended September
30, 2002. The difference is primarily due to three factors: 1) a 10% decrease in
sales comparing the nine months ended September 30, 2003 with the nine months
ended September 30, 2002, 2) a decrease in gross margin from 18.9% to 17.1%
comparing the nine months ended September 30, 2003 with the nine months ended
September 30, 2002 and 3) the gain from debt settlements of $226,000 recorded
for the nine months ended September 30, 2002 as compared with a gain from debt
settlements for the nine months ended September 30, 2003 of $148,000.
Financial Condition
The net cash provided by operating activities was $262,000 for the nine months
ended September 30, 2003 as compared with net cash used in operating activities
of $338,000 for the nine months ended September 30, 2002. The primary reason for
14
the decline in net cash used in operating activities was improved collections of
accounts receivable. Even though the Company had a loss of $220,000 for the nine
months ended September 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 $4.7 million at September 30, 2003. Part of the
decrease in accounts receivable form December 31, 2002 to September 30, 2003 is
also due to a decrease in sales. Inventories increased by approximately $1.4
million from December 31, 2002 to September 30, 2003 with the increase funded by
accounts payable increases of $500,000 and advances under the revolving line of
credit of $180,000 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 Wi-Fi products in Eastern Europe.
The net cash used in investing activities was $173,000 for the nine months ended
September 30, 2003 compared with $97,000 for the nine months ended September 30,
2002, primarily the result of expenditures for patents and equipment.
The net cash provided by financing activities for the nine months ended
September 30, 2003 is primarily due to net borrowings under lines of credit of
$180,000. 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 $119,000 offset by the purchase of shares
of the Company's common stock in the amount of $75,000 in connection with the
McConnell litigation settlement.
The Company's working capital at September 30, 2003 was $7.1 million compared
with $3.5 million at December 31, 2002 primarily the result of the
reclassification to long-term of the revolving line of credit, which was
extended to April 30, 2005 as noted below.
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 September 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.
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.
On October 29, 2002, the $3 million line of credit and the $1 million line of
credit were combined into a single $4 million revolving line of credit due April
30, 2003, of which $3,898,000 was outstanding at September 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 in order to allow time for Winncom and the
bank to negotiate the terms of a new line of credit facility. On October 1, 2003
Winncom executed a new $4,000,000 line of credit agreement with the bank with
interest at prime plus .5% due April 30,2005 and converted $500,000 of the
balance outstanding under the line of credit at September 30, 2003 into a 36
month term loan with monthly principal payments of $13,888 plus interest at
prime plus .75%. The term loan shall come due on October 26, 2006.
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.
15
Management believes that current working capital and available borrowings on 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
We have not used derivative financial instruments. We believe our exposure to
market risks, including exchange rate risk, interest rate risk and commodity
price risk, is not material at the present time.
Our industry encounters rapid technological changes. We do business in the
wireless communications industry. 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.
16
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.
Other. In addition, there are other risks, which if realized, in whole or in
part, could have a material adverse effect on our business, financial condition
and/or results of operations, including, without limitation:
o intense competition, regionally and internationally, including competition
from alternative business models, such as manufacturer-to-end-user selling,
which may lead to reduced prices, lower sales or reduced sales growth,
lower gross margins, extended payment terms with customers, increased
capital investment and interest costs, bad debt risks and product supply
shortages;
o Termination of a supply or services agreement with a major supplier or
customer or a significant change in supplier terms or conditions of sale;
o the continuation or worsening of the severe downturn in economic conditions
(particularly purchases of technology products) and failure to adjust costs
in a timely fashion in response to a sudden decrease in demand;
o losses resulting from significant credit exposure to reseller customers and
negative trends in their businesses;
o reductions in credit ratings and/or unavailability of adequate capital;
o failure to attract new sources of business from expansion of products or
services or entry into new markets;
o inability to manage future adverse industry trends;
o future periodic assessments required by current or new accounting standards
resulting in additional charges;
We have instituted in the past and continue to institute changes in our
strategies, operations and processes to address these risk factors and to
mitigate their impact on our results of operations and financial condition.
However, no assurances can be given that we will be successful in these efforts.
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.
17
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 2. Changes in Securities and Use of Proceeds
During the nine months ended September 30, 2003, the Company issued a total of
6,250 shares of common stock to two directors as payment of directors' fees
pursuant to the Company's 1997 Stock Option and Compensation Plan. These shares
were issued in reliance on exemptions from registration under Section 3(a)
and/or 4(2) of the Securities Act of 1933, as amended, and/or Rules 5050 and/or
506 thereunder. No proceeds were received by the Company for the shares, which
were issued in lieu of paying cash directors' fees in the aggregate amount of
$500.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
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.
During the quarter ended September 30, 2003 the Company filed a Current
Report on Form 8-K reporting other events pursuant to Item 5 on August 5,
2003.
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: November 14, 2003 By: /S/ Randall P. Marx
-----------------------
Randall P. Marx
Chief Executive Officer
Date: November 14, 2003 By: /S/ Monty R. Lamirato
-------------------------
Monty R. Lamirato
Chief Financial Officer
18