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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, 2004.
000-18122
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(Commission File Number)
ARC Wireless Solutions, Inc.
----------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0454148
---- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation)
10601 West 48th Avenue
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
--------------
(Former Name or Former Address, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- -----
As of November 1, 2004, the Registrant had 153,888,000 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, 2004
Table of Contents
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2004
(unaudited) and December 31, 2003................................3
Consolidated Statements of Operations for the Three Months
and Nine Months EndedSeptember 30, 2004 and 2003 (unaudited).....4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2004 and 2003 (unaudited)..........................5
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........15
Item 4. Controls and Procedures...........................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................15
Item 6. Exhibits and Reports on Form 8-K..................................15
Signatures.................................................................16
Exhibit 31.1
Exhibit 32.1
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Consolidated Balance Sheets
September 30, December 31,
2004 2003
Assets (unaudited) *
Current assets:
Cash and equivalents $ 512,000 $ 227,000
Accounts receivable - trade, net 4,127,000 4,543,000
Accounts receivable - vendors, net 449,000 248,000
Inventory, net 7,059,000 6,081,000
Other current assets 1,205,000 117,000
---------------------------------------
Total current assets 13,352,000 11,216,000
---------------------------------------
Property and equipment, net 511,000 531,000
---------------------------------------
Other assets:
Intangible assets including goodwill, net 10,937,000 10,934,000
Deposits 160,000 59,000
---------------------------------------
Total assets $ 24,960,000 $ 22,740,000
=======================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 4,014,000 $ 3,300,000
Bank debt - current 3,918,000 409,000
Accrued expenses 1,197,000 418,000
Current portion of capital lease obligations 55,000 40,000
---------------------------------------
Total current liabilities 9,184,000 4,167,000
Capital lease obligations, less current portion 95,000 97,000
Bank debt, less current portion 167,000 3,704,000
---------------------------------------
Total liabilities 9,446,000 7,968,000
---------------------------------------
Commitments
Stockholders' equity:
Common stock 78,000 78,000
Preferred stock -- --
Additional paid-in capital 21,703,000 21,702,000
Treasury stock (1,195,000) (1,195,000)
Accumulated deficit (5,072,000) (5,813,000)
---------------------------------------
Total stockholders' equity 15,514,000 14,772,000
---------------------------------------
Total liabilities and stockholders' equity $ 24,960,000 $ 22,740,000
=======================================
* These numbers were derived from the audited financial statements for the year
ended December 31, 2003.
See accompanying notes.
3
ARC Wireless Solutions, Inc.
Consolidated Statements of Operations
Three months ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---------------------------------------------------------------------
(unaudited) (unaudited)
Sales, net $ 9,495,000 $ 8,928,000 $ 26,681,000 $ 21,920,000
Cost of sales 7,617,000 7,619,000 21,678,000 18,169,000
---------------------------------------------------------------------
Gross profit 1,878,000 1,309,000 5,003,000 3,751,000
---------------------------------------------------------------------
Operating expenses:
Selling, general and administrative expenses 1,581,000 1,350,000 4,355,000 3,973,000
---------------------------------------------------------------------
Total operating expenses 1,581,000 1,350,000 4,355,000 3,973,000
---------------------------------------------------------------------
Income (loss) from operations 297,000 (41,000) 648,000 (222,000)
Other income (expense):
Interest expense, net (73,000) (48,000) (219,000) (138,000)
Gain on debt settlement -- 148,000 -- 148,000
Other income 119,000 9,000 334,000 27,000
---------------------------------------------------------------------
Total other income (expense) 46,000 109,000 115,000 37,000
---------------------------------------------------------------------
Income (loss) before income taxes 343,000 68,000 763,000 (185,000)
Provision for income taxes (7,000) (8,000) (22,000) (35,000)
---------------------------------------------------------------------
Net Income (loss) $ 336,000 $ 60,000 $ 741,000 $ (220,000)
=====================================================================
=====================================================================
Net income (loss) per share - basic $ .002 -- $ .005 $ (.001)
=====================================================================
Net income (loss) per share - diluted $ .002 -- $ .005 $ (.001)
=====================================================================
See accompanying notes.
4
ARC Wireless Solutions, Inc.
Consolidated Statements of Cash Flows
Nine months ended June 30,
2004 2003
---------------------------------
(unaudited)
Operating activities
Net income (loss) $ 741,000 $ (220,000)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) Operating activities:
Depreciation and amortization 178,000 199,000
Debt Cancellation -- (148,000)
Provision for doubtful accounts 167,000 (365,000)
Non-cash expense for issuance of stock and options 1,000 53,000
Changes in operating assets and liabilities:
Accounts receivable, trade and vendor 49,000 1,807,000
Inventory (978,000) (1,437,000)
Prepaids and other current assets (1,088,000) (67,000)
Other assets (102,000) (14,000)
Accounts payable and accrued expenses 1,493,000 454,000
--------------------------------
Net cash provided by operating activities 461,000 262,000
--------------------------------
Investing activities
Patent acquisition costs (14,000) (13,000)
Purchase of plant and equipment (94,000) (160,000)
--------------------------------
Net cash used in investing activities (108,000) (173,000)
--------------------------------
Financing activities
Repayment of line of credit and capital lease obligations (188,000) (14,000)
Net borrowings under lines of credit and other debt 120,000 180,000
--------------------------------
Net cash provided by (used in) financing activities (68,000) 166,000
--------------------------------
Net increase in cash 285,000 255,000
Cash, beginning of period 227,000 265,000
--------------------------------
Cash, end of period $ 512,000 $ 520,000
================================
Supplemental cash flow information:
Cash paid for interest $ 264,000 $ 136,000
Equipment acquired under capital lease $ 52,000 $ 65,000
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Notes to Consolidated Financial Statements
September 30, 2004
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-K for the
year ended December 31, 2003.
The Company operates in three business segments, which are identified as
distribution, manufacturing and cable, offering a wide variety of wireless
component and network solutions to service providers, systems integrators, value
added resellers, businesses and consumers, primarily in the United States.
Operating results for the three months and nine months ended September 30, 2004
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2004 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
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.
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 or
exceeds the fair value of the underlying stock on the date of grant, no
compensation expenses are recognized.
6
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 income
(loss) and per share amounts for the three months and nine months ended
September 30, 2004 and 2003, respectively, would have been adjusted to the pro
forma amounts indicated below:
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
-------------------------------------------------------------
Net income (loss) as reported $ 336,000 $ 60,000 $ 741,000 $(220,000)
Add: stock based compensation included in
reported net income (loss) -- -- -- --
Deduct: Stock-based compensation cost under SFAS 123
(37,000) (19,000) (43,000) (56,000)
--------- --------- --------- ---------
Pro forma net income (loss) $ 299,000 $ 41,000 $ 698,000 $(276,000)
========= ========= ========= =========
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 153,888,000 153,400,000 153,886,000 153,300,000
Pro forma shares used in the calculation of
pro forma net income (loss) per common
share-diluted 153,926,000 153,650,000 153,982,000 153,300,000
Reported net income loss) per common share-basic
and diluted $.002 $ -- $.005 $(.001)
Pro forma net income (loss) per common share-basic
and diluted $.002 $ -- $.005 $(.001)
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 Three and Nine Months Ended
September 30, 2004 June 30, 2004 September 30, 2003
- ----------------------------------------- --------------------- ------------------- ----------------------------------
Volatility 1.04 .87 1.5
- ----------------------------------------- --------------------- ------------------- ----------------------------------
Expected life of options (in years) 2 2 2
- ----------------------------------------- --------------------- ------------------- ----------------------------------
Dividend Yield 0% 0% 0%
- ----------------------------------------- --------------------- ------------------- ----------------------------------
Risk free interest rate 2.75% 2.25% 2.5%
- ----------------------------------------- --------------------- ------------------- ----------------------------------
Note 3. Earnings Per Share
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
reflects 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 500,000 were
not included in the computation of diluted loss per share because their effect
was anti-dilutive; therefore, basic and fully diluted loss per share are the
same for the nine months ended September 30, 2003.
7
The following table represents a reconciliation of the shares used to calculate
basic and diluted earnings per share for the respective periods indicated:
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003 September 30, 2004 September 30,
Numerator: Net Income (Loss) $ 336,000 $ 60,000 $ 741,000 $ (220,000)
=================================================================================
Denominator:
Denominator for basic earnings per
share - weighted average shares
153,888,000 153,400,000 153,886,000 153,300,000
Effect of dilutive securities
Employee stock options 38,000 250,000 96,000 --
Common stock warrants -- -- -- --
---------------------------------------------------------------------------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversion
153,926,000 153,650,000 153,982,000 153,300,000
=================================================================================
Basic earnings (loss) per share $.002 $ -- $.005 $(.001)
=================================================================================
Diluted earnings (loss) per share $.002 $ -- $.005 $(.001)
=================================================================================
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,
------------------------------
2004 2003
------------------------------
Raw materials $1,040,000 $ 963,000
Work in progress 124,000 127,000
Finished goods 6,597,000 5,489,000
------------------------------
7,761,000 6,579,000
Inventory reserve (702,000) (498,000)
------------------------------
Net inventory $7,059,000 $6,081,000
==============================
Note 5. Revolving Bank Loan Agreements and Notes Payable
On October 29, 2002, Winncom's $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 $3,718,000 was outstanding. 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% (5% at September 30, 2004) 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% (5.25% at September 30, 2004). The term
loan shall come due on October 26, 2006.
8
The agreement contains several covenants, which, among other things, require
that Winncom maintain certain financial ratios as defined in the line-of-credit
agreement. In addition, the agreement limits the payment of management fees to
ARC Wireless, dividends and the purchase of property and equipment. As of
September 30, 2004 Winncom was in compliance with these covenants.
We entered into a new financing agreement with Wells Fargo Business Credit, Inc.
("WFBC"), (the "WFBC Facility") on December 9, 2003. The new financing agreement
is for a term of one year and is renewable for additional one-year terms. The
WFBC Facility provides for the sale of accounts receivable by ARC to WFBC at a
1% discount for the first 15 days and an additional .055 of 1% per day until the
account receivable is paid in full. Sales of accounts receivable and advances
under the WFBC Facility are subject to conditions and restrictions, including,
without limitation, accounts receivable eligibility restrictions, verification,
and approval. Obligations under the WFBC Facility are collateralized by
substantially all of the assets of ARC. Advances under the WFBC Facility are
made only at the sole discretion of WFBC, even if the accounts receivable
offered by ARC for sale to WFBC satisfy all necessary conditions and
restrictions. WFBC is under no obligation to purchase accounts receivable from
ARC or advance any funds or credit to ARC under the WFBC Facility.
Revolving bank lines of credit and other bank debt at September 30, 2004 and
December 31, 2003 consist of:
September 30, December 31,
------------------------------------
2004 2003
------------------------------------
Bank line of credit - Winncom $ 3,519,000 $3,399,000
Bank term loan - Winncom 333,000 472,000
Bank Facility - ARC 233,000 242,000
------------------------------------
4,085,000 4,113,000
Less current portion (3,918,000) (409,000)
-----------------------------------
Long-term portion $ 167,000 $3,704,000
====================================
Note 6. Equity Transactions
For the quarter ended March 31, 2003, the Company recorded the issuance of 6,250
shares of common stock to directors for outstanding obligations for accrued
directors' fees in the amount of $500.
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.
For the quarter ended March 31, 2004, the Company recorded the issuance of 4,790
shares of common stock to directors for outstanding obligations for accrued
directors' fees in the amount of $750.
For the quarter ended June 30, 2004, the Company recorded the issuance of 1,785
shares of common stock to directors for outstanding obligations for accrued
directors' fees in the amount of $250.
Note 7. 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.
9
The Company has three reportable segments that are separate business units that
offer different products as follows: distribution of wireless communication
products, antenna manufacturing and cable products. Each segment consists of a
single operating unit and the accounting policies of the reporting segments are
the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus an agreed upon
intercompany profit on intersegment sales and transfers.
Financial information regarding the Company's three operating segments for the
three months and nine months ended September 30, 2004 and 2003 are as follows:
Three months Ended September 30, 2004
Distribution Manufacturing Cable Corporate Total
------------------------------------------------------------------------------------
Net Sales 2004 7,906,000 1,631,000 86,000 (128,000) 9,495,000
2003 7,608,000 1,438,000 5,000 (123,000) 8,928,000
Net Earnings (Loss) 2004 423,000 212,000 (15,000) (284,000) 336,000
2003 214,000 (83,000) 117,000 (188,000) 60,000
Earnings (Loss) before 2004 430,000 212,000 (15,000) (284,000) 343,000
Income Taxes 2003 222,000 (83,000) 117,000 (188,000) 68,000
Identifiable Assets 2004 22,904,000 3,585,000 340,000 (1,869,000) 24,960,000
2003 21,940,000 3,450,000 249,000 (1,814,000) 23,825,000
Nine months Ended September, 2004
Distribution Manufacturing Cable Corporate Total
------------------------------------------------------------------------------------
Net Sales 2004 21,747,000 4,956,000 278,000 (300,000) 26,681,000
2003 17,873,000 4,268,000 8,000 (229,000) 21,920,000
Net Earnings (Loss) 2004 802,000 674,000 (40,000) (695,000) 741,000
2003 370,000 (107,000) 112,000 (595,000) (220,000)
Earnings (Loss) before 2004 824,000 674,000 (40,000) (695,000) 763,000
Income Taxes 2003 405,000 (107,000) 112,000 (595,000) (185,000)
Identifiable Assets 2004 22,904,000 3,585,000 340,000 (1,869,000) 24,960,000
2003 21,940,000 3,450,000 249,000 (1,814,000) 23,825,000
Corporate represents the operations of the parent Company, including segment
eliminations.
10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations for the Three Month Ended September 30, 2004 and 2003
Sales were $9.5 million and $8.9 million, respectively for the three-month
periods ended September 30, 2004 and 2003. The 7% increase in revenues comparing
the three months ended September 30, 2004 to the three months ended September
30, 2003 is attributable to an increase in revenues from the Wireless
Communications Solutions Division from $1.4 million for the quarter ended
September 30, 2003 to $1.6 million for the quarter ended September 30, 2004, an
increase in Starworks' revenues from $5,000 for the quarter ended September 30,
2003 to $86,000 for the quarter ended September 30, 2004; and an increase in
Winncom's revenues from $7.6 million for the quarter ended September 30, 2003 to
$7.9 million for the quarter ended September 30, 2004.
Gross profit margins were 19.8% and 14.7% for the three-months ended September
30, 2004 and September 30, 2003, respectively. The increase in gross margin for
the quarter ended September 30, 2004 as compared to the quarter ended September
30, 2003 is primarily the result of the larger percentage in revenues from the
Wireless Communications Solutions Division in relation to overall revenues as
well as increased margins in the Wireless Communications Solutions Division. For
the quarter ended September 30, 2004, the Wireless Communications Solutions
Division sales accounted for 15.8% of total revenues compared to the quarter
ended September 30, 2003 in which the Wireless Communications Solutions Division
sales accounted for 14.7% of total 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, 2003,
the Wireless Communications Solutions Division benefited somewhat from the sale
of portions of the inventory purchased from BATC whereas no benefit was
recognized in the quarter ended September 30, 2004. This benefit has a positive
impact on gross margins. The Company does not anticipate that this benefit will
continue in any significant amount in the future.
Selling, general and administrative expenses (SG&A) increased by $231,000 for
the three months ended September 30, 2004 compared to the three months ended
September 30, 2003. SG&A as a percent of revenue increased from 15.1% for the
three months ended September 30, 2003 to 16.7% for the three months ended
September 30, 2004. The increase in SG&A from 2003 to 2004 is primarily
attributable to an increase in salaries and wages, including sales commissions,
which increased from $760,000 for the three months ended September 30, 2003 to
$905,000 for the three months ended September 31, 2004. Salaries and wages
remain the largest component of SG&A, constituting 57% and 56% of the total for
the quarters ended September 30, 2004 and 2003, respectively.
Net interest expense was $73,000 for the three months ended September 30, 2004
compared to $48,000 for the three months ended September 30, 2003. The average
balance outstanding on the line of credit and term loan was $3.9 million for the
quarter ended September 30, 2004 and $3.6 million for the quarter ended
September 30, 2003, and the interest rate was 4.5% for quarter ended September
30, 2003 compared to 5% for the quarter ended September 30, 2004. In addition,
the increase in interest expense is due to the fact that the Company was
factoring accounts receivable of its Wireless Communications Solutions Division
during the third quarter of 2004 and no factoring occurred in the third quarter
of 2003. The interest expense from factoring was $25,000 for the quarter ended
September 30, 2004 and $0 for the quarter ended September 30, 2003.
The Company had net income of $336,000 for the quarter ended September 30, 2004
as compared to net income of $60,000 for the three months ended September 30,
2003. The 460% increase in net income is primarily due to a 7% increase in sales
comparing 2004 to 2003, an increase in gross margin from 14.7% to 19.8% and a
$110,000 increase in other income (consisting primarily of cash purchase
discounts due to improved cash flow, inventory turns and accounts receivable
collections).
Results of Operations for the Nine Months Ended September 30, 2004 and 2003
Sales were $26.7 million and $21.9 million for the nine-month periods ended
September 30, 2004 and 2003, respectively. The 22% increase in revenues
11
comparing the nine months ended September 30, 2004 to the nine months ended
September 30, 2003 is attributable to an increase in revenues from the Wireless
Communications Solutions Division from $4.27 million for the nine months ended
September 30, 2003 to $4.96 million for the nine months ended September 30,
2004, an increase in Starworks' revenues from $8,000 for the nine months ended
September 30, 2003 to $278,000 for the nine months ended September 30, 2004; and
an increase in Winncom's revenues from $17.9 million for the nine months ended
September 30, 2003 to $21.7 million for the nine months ended September 30,
2004.
Gross profit margins were 18.7% and 17.1% for the nine-months ended September
30, 2004 and September 30, 2003, respectively. The slight increase in gross
margin for the nine months ended September 30, 2004 as compared to the nine
months ended September 30, 2003, despite a smaller percentage in revenues from
the Wireless Communications Solutions Division in relation to overall revenues,
is primarily due to higher gross margins from the Wireless Communications
Solutions Division comparing 2003 to 2004. For the nine months ended September
30, 2004, the Wireless Communications Solutions Division sales accounted for
17.4% of total revenues compared to the nine months ended September 30, 2003 in
which the Wireless Communications Solutions Division sales accounted for 18.4%
of total 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 nine months ended September 30, 2003, 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, 2004. This benefit has a positive impact on gross margins. The Company does
not anticipate that this benefit will continue in any significant amount in the
future.
Selling, general and administrative expenses (SG&A) increased by $382,000 for
the nine months ended September 30, 2004 compared to the nine months ended
September 30, 2003. SG&A as a percent of revenue decreased from 18.1% for the
nine months ended September 30, 2003 to 16.3% for the nine months ended
September 30, 2004 primarily because of the 22% increase in sales from 2003 to
2004. The increase in SG&A from 2003 to 2004 is primarily attributable to an
increase in salaries and wages, including sales commissions, which increased
from $2.1 million for the nine months ended September 30, 2003 to $2.4 million
for the nine months ended September 30, 2004. Salaries and wages remain the
largest component of SG&A, constituting 55% and 52% of the total for the nine
months ended September 30, 2004 and 2003, respectively.
Net interest expense was $219,000 for the nine months ended September 30, 2004
compared to $138,000 for the nine months ended September 30, 2003. The average
balance outstanding on the line of credit and term loan was $3.7 million for the
nine months ended September 30, 2004 and September 30, 2003, and the average
interest rate was 5.1% for the nine month ended September 30, 2004 and 4.6% for
the nine months ended September 30, 2003. The primary reason for the increase in
interest expense is the fact that the Company was factoring accounts receivable
of its Wireless Communications Solutions Division during the nine months ended
September 30, 2004 and no factoring occurred during the nine months ended
September 30, 2003. The interest expense from factoring was $85,000 for the nine
months ended September 30, 2004 and $0 for the nine months ended September 30,
2003.
The Company had net income of $741,000 for the nine months ended September 30,
2004 as compared to a net loss of $220,000 for the nine months ended September
30, 2003. The increase in net income is primarily due to a 22% increase in sales
comparing 2004 to 2003, a slight increase in gross margin from 17.1% to 18.8%
and a $307,000 increase in other income (consisting primarily of cash purchase
discounts due to improved cash flow, inventory turns and accounts receivable
collections).
Financial Condition
Net cash provided by operating activities for the nine months ended September
30, 2004 was $461,000 compared to net cash provided by operating activities of
$262,000 for the nine months ended September 30, 2003. Much of the increase in
2004 is attributable to profitable operations for 2004 compared to 2003. For the
nine months ended September 30, 2004, increases in trade accounts payable and
other accrued expenses of $1.5 million were offset by increases in receivables,
12
inventory and other current assets of $2 million. At September 30, 2004 other
current assets and accrued expenses were substantially higher than normal
because Winncom placed a significant order with one of its vendors which
required a deposit against the order of approximately $1 million and in turn
Winncom required a deposit from its customers for approximately $750,000 for
whom this order was intended. Winncom took delivery of this equipment in October
2004 from the vendor and shipped the product to its customer and as such the
prepayment and the customer deposit were eliminated.
The net cash used in investing activities was $108,000 for the nine months ended
September 30, 2004 compared to $173,000 for the nine months ended September 30,
2003, primarily the result of expenditures for patents and equipment.
The net cash used in financing activities for the nine months ended September
30, 2004 is primarily the result of repayments of capital lease obligations and
long term debt in excess of new borrowings under lines of credit. For the nine
months ended September 30, 2004 we increased borrowings under our lines of
credit facilities by approximately $110,000. The net cash provided by financing
activities for the nine months ended September 30, 2003 is primarily due to net
advances under lines of credit of $180,000.
The Company's working capital at September 30, 2004 was $4.2 million compared to
$7.1 million at December 31, 2003. The most significant change in working
capital from December 31, 2003 to September 30, 2004 was the reclassification of
the bank line of credit from long term to current in the second quarter of 2004
due to the fact that it comes due April 30, 2005.
On October 29, 2002, Winncom's $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 $3,718,000 was outstanding. 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% (5.0% at September 30, 2004 and 4.5% at December
31, 2003) 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% (5.25 %
at September 30, 2004 and 4.75% at December 31, 2003). The term loan shall come
due on October 26, 2006.
The agreement contains several covenants, which, among other things, require
that Winncom maintain certain financial ratios as defined in the line-of-credit
agreement. In addition, the agreement limits the payment of management fees to
ARC Wireless, dividends and the purchase of property and equipment. As of
September 30, 2004, 2004, Winncom was in compliance with these covenants. ARC is
a general corporate guarantor of this loan.
We entered into a new financing agreement with Wells Fargo Business Credit, Inc.
("WFBC"), (the "WFBC Facility") on December 9, 2003. The new financing agreement
is for a term of one year and is renewable for additional one-year terms. The
WFBC Facility provides for the sale of accounts receivable by ARC to WFBC at a
1% discount for the first 15 days and an additional .055 of 1% per day until the
account receivable is paid in full. Sales of accounts receivable and advances
under the WFBC Facility are subject to conditions and restrictions, including,
without limitation, accounts receivable eligibility restrictions, verification,
and approval. Obligations under the WFBC Facility are collateralized by
substantially all of the assets of ARC. Advances under the WFBC Facility are
made only at the sole discretion of WFBC, even if the accounts receivable
offered by ARC for sale to WFBC satisfy all necessary conditions and
restrictions. WFBC is under no obligation to purchase accounts receivable from
ARC or advance any funds or credit to ARC under the WFBC Facility.
Management believes that continued profitable operations, current working
capital and available borrowings on existing bank lines of credit, will be
sufficient to allow the Company to maintain its operations through September 30,
2005 and into the foreseeable future.
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Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical fact included in this Quarterly Report,
including "Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation", regarding our financial position, business strategy,
plans and objectives of our management for future operations and capital
expenditures, and other matters, other than historical facts, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements and the assumptions upon which the
forward-looking statements are based are reasonable, we can give no assurance
that such expectations will prove to have been correct.
Additional statements concerning important factors that could cause actual
results to differ materially from our expectations are disclosed in the
following "Risk Factors" section and elsewhere in this Quarterly Report. In
addition, the words "believe", "may", "will", "when", "estimate", "continue",
"anticipate", "intend", "expect" and similar expressions, as they relate to ARC
Wireless, our business or our management, are intended to identify
forward-looking statements. All written and oral forward-looking statements
attributable to us or persons acting on our behalf subsequent to the date of
this Quarterly Report are expressly qualified in their entirety by the following
Risk Factors. See the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 for additional risk factors that could cause actual results to
differ materially from the Company's expectations.
Risk Factors
Our industry encounters rapid technological changes. We do business in the
wireless communications industries. This industry is characterized by rapidly
developing technology. Changes in technology could affect the market for our
products and necessitate additional improvements and developments to our
products. We cannot predict that our research and development activities will
lead to the successful introduction of new or improved products or that we will
not encounter delays or problems in these areas. The cost of completing new
technologies to satisfy minimum specification requirements and/or quality and
delivery expectations may exceed original estimates that could adversely affect
operating results during any financial period.
Protection of product design. We attempt to protect our product designs by
obtaining patents, when available, and by manufacturing our products in a manner
that makes reverse engineering difficult. These protections may not be
sufficient to prevent our competitors from developing products that perform in a
manner that is similar to or better than our products. Competitors' successes
may result in decreased margins and sales of our products.
Limited financial resources. We have limited financial resources available that
may restrict our ability to grow. Additional capital from sources other than our
operating cash flow may be necessary to develop new products. We cannot predict
that this financing will be available from any source.
Intense competition. The communications and antenna industries are highly
competitive, and we compete with substantially larger companies. These
competitors have larger sales forces and more highly developed marketing
programs as well as larger administrative staffs and more available service
personnel. The larger competitors also have greater financial resources
available to develop and market competitive products. The presence of these
competitors could significantly affect any attempts to develop our business.
However, we believe that we will have certain advantages in attempting to
develop and market our products, including a more cost-effective technology, the
ability to undertake smaller projects, and the ability to respond to customer
requests more quickly than some larger competitors. We cannot be certain that
these conclusions will prove correct.
We also face 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.
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We depend on key employees. We are highly dependent on the services of our
executive management, including Randall P. Marx, our Chief Executive Officer,
and Gregory Raskin, Winncom's CEO. 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 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;
o Cingular, a joint venture of local phone companies BellSouth Corp. and SBC
Communications Inc., has agreed to buy AT&T Wireless Services Inc. for $41
billion in cash to create the largest U.S. wireless company. The merger of
these two companies, which has received government approval, could
adversely impact our base station business in 2005 but the impact is
uncertain at this time and
o the loss of a distribution agreement with a major supplier or the loss of a
major supplier, such as Proxim Corporation, could have a material adverse
impact on the business of Winncom.
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 3. Quantitative and Qualitative Disclosures About Market Risk
We have not used derivative financial instruments.
We are exposed to market risk through interest rates related to our note payable
to the bank which has a variable interest rate equal to KeyBank's existing bank
prime rate (4.5% as of September 30, 2004) plus one-half percent. The prime
interest rate increased from 4.5% to 4.75% on October 1, 2004. An increase in
the bank's prime interest rates on the notes payable by .5% would increase our
yearly interest expense by approximately $18,000, assuming borrowed amounts
15
remain outstanding at current levels. Our management believes that fluctuation
in interest rates in the near term will not materially affect our consolidated
operating results, financial position or cash flow.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of the principal executive
officer and principal financial officer, of our 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, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to disclose in reports that we file or submit 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
our internal control over financial reporting during our most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We and our subsidiaries are involved in various legal proceedings of a nature
considered normal in the course of our operations, principally accounts
receivable collections. While it is not feasible to predict or determine the
final outcome of these proceedings, we have reserved as an allowance for
doubtful accounts for that portion of the accounts receivable it estimates will
be uncollectible.
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.
--------------------
None
SIGNATURES
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 12, 2004 By: /S/ Randall P. Marx
------------------------------------
Randall P. Marx
Chief Executive Officer
Date: November 12, 2004 By: /S/ Monty R. Lamirato
------------------------------------
Monty R. Lamirato
Chief Financial Officer
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