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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10 - Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2005
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
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation) Identification Number)
10601 West 48th Avenue
Wheat Ridge, Colorado, 80033-2660
---------------------------------
(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 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__
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As of August 1, 2005, the Registrant had 154,286,173 shares outstanding of its
$.0005 par value common stock.
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ARC Wireless Solutions, Inc.
Quarterly Report on FORM 10-Q
For The Period Ended June 30, 2005
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2005
(unaudited) and December 31, 2004................................3
Consolidated Statements of Operations for the
Three Months and Six Months Ended
June 30, 2005 and 2004 (unaudited)...............................4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2005 and 2004 (unaudited)...............................5
Notes to Consolidated Financial Statements..........................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........18
Item 4. Controls and Procedures.............................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ........19
Item 6. Exhibits............................................................19
Signatures...................................................................19
Exhibit 31.1.................................................................20
Exhibit 32.1.................................................................22
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Consolidated Balance Sheets
June 30, December 31,
2005 2004
Assets (unaudited) *
Current assets:
Cash and equivalents $ 698,000 $ 321,000
Accounts receivable - trade, net 4,191,000 4,145,000
Accounts receivable - vendors, net 339,000 688,000
Inventory, net 4,397,000 5,624,000
Other current assets 400,000 209,000
----------------------------
Total current assets 10,025,000 10,987,000
----------------------------
Property and equipment, net 441,000 527,000
----------------------------
Other assets:
Goodwill, net 10,824,000 10,824,000
Intangible assets, net 107,000 113,000
Deposits 68,000 42,000
----------------------------
Total assets $ 21,465,000 $ 22,493,000
============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,377,000 $ 2,253,000
Bank debt - current 1,690,000 493,000
Accrued expenses 612,000 890,000
Current portion of capital lease obligations 55,000 62,000
----------------------------
Total current liabilities 5,734,000 3,698,000
Capital lease obligations, less current portion 67,000 90,000
Bank debt, less current portion 42,000 3,243,000
----------------------------
Total liabilities 5,843,000 7,031,000
----------------------------
Commitments
Stockholders' equity:
Common stock 78,000 78,000
Preferred stock --
Additional paid-in capital 21,758,000 21,704,000
Treasury stock (1,195,000) (1,195,000)
Accumulated deficit (5,019,000) (5,125,000)
----------------------------
Total stockholders' equity 15,622,000 15,462,000
----------------------------
Total liabilities and stockholders' equity $ 21,465,000 $ 22,493,000
============================
* These numbers were derived from the audited financial statements for the year
ended December 31, 2004.
See accompanying notes.
3
ARC Wireless Solutions, Inc.
Consolidated Statements of Operations
Three months ended June 30, Six Months Ended June 30,
2005 2004 2005 2004
---------------------------------------------------------------------
(unaudited) (unaudited)
Sales, net $ 8,634,000 $ 9,952,000 $ 17,658,000 $ 17,186,000
Cost of sales 6,800,000 8,184,000 14,412,000 14,060,000
---------------------------------------------------------------------
Gross profit 1,834,000 1,768,000 3,246,000 3,126,000
---------------------------------------------------------------------
Operating expenses:
Selling, general and administrative expenses 1,587,000 1,492,000 3,172,000 2,775,000
---------------------------------------------------------------------
Total operating expenses 1,587,000 1,492,000 3,172,000 2,775,000
---------------------------------------------------------------------
Income from operations 247,000 276,000 74,000 351,000
Other income (expense):
Interest expense, net (72,000) (79,000) (141,000) (146,000)
Other income 40,000 134,000 188,000 215,000
---------------------------------------------------------------------
Total other income (expense) (32,000) 55,000 47,000 69,000
---------------------------------------------------------------------
Income before income taxes 215,000 331,000 121,000 420,000
Provision for income taxes (8,000) (7,000) (15,000) (15,000)
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Net Income $ 207,000 $ 324,000 $ 106,000 $ 405,000
=====================================================================
=====================================================================
Net income per share - basic $ .001 $ .002 $ .001 $ .003
=====================================================================
Net income per share - diluted $ .001 $ .002 $ .001 $ .003
=====================================================================
See accompanying notes.
4
ARC Wireless Solutions, Inc.
Consolidated Statements of Cash Flows
Six months ended June 30,
2005 2004
----------------------------------
(unaudited)
Operating activities
Net income $ 106,000 $ 405,000
Adjustments to reconcile net income to net cash
provided by Operating activities:
Depreciation and amortization 130,000 115,000
Provision for doubtful accounts 136,000 108,000
Non-cash expense for issuance of stock and options (3,000) 1,000
Changes in operating assets and liabilities:
Accounts receivable, trade and vendor 167,000 (263,000)
Inventory 1,227,000 (250,000)
Prepaids and other current assets (191,000) (140,000)
Other assets (26,000) (2,000)
Accounts payable and accrued expenses 903,000 723,000
----------------------------------
Net cash provided by operating activities 2,449,000 697,000
----------------------------------
Investing activities
Patent acquisition costs (1,000) (10,000)
Purchase of plant and equipment (37,000) (60,000)
----------------------------------
Net cash used in investing activities (38,000) (70,000)
----------------------------------
Financing activities
Repayment of line of credit and capital lease obligations (2,034,000) (139,000)
Net borrowings under lines of credit and other debt -- --
----------------------------------
Net cash used in financing activities (2,034,000) (139,000)
----------------------------------
Net increase in cash 377,000 488,000
Cash, beginning of period 321,000 227,000
----------------------------------
Cash, end of period $ 698,000 $ 715,000
==================================
Supplemental cash flow information:
Cash paid for interest $ 141,000 $ 174,000
Equipment acquired under capital lease -- $ 52,000
Issuance of common stock for accrued 401(k) employer matching $ 57,000 --
contribution
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Notes to Consolidated Financial Statements
June 30, 2005
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, 2004.
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 six months ended June 30, 2005 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2005 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 options and grants 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 six months ended June 30,
2005 and 2004, respectively, would have been adjusted to the pro forma amounts
indicated below:
Three Months Ended June 30 Six Months Ended June 30
2005 2004 2005 2004
------------------------------------------------------------------
Net income (loss) as reported $ 207,000 $ 324,000 $ 106,000 $ 405,000
Add: stock based compensation
included in reported net income (loss) -- -- -- --
Deduct: Stock-based compensation cos
under SFAS No. 123
(12,000) (2,000) (16,000) (8,000)
------------------------------------------------------------------
Pro forma net income (loss) $ 195,000 $ 322,000 $ 90,000 $ 397,000
==================================================================
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 154,017,000 153,888,000 153,955,000 153,885,000
Pro forma shares used in the
calculation of pro forma net
income (loss) per common share- diluted 154,048,000 153,888,000 154,105,000 154,010,000
Reported net income (loss) per
common share - basic and diluted $.001 $.002 $.001 $.003
Pro forma net income (loss) per
common share - basic and diluted $.001 $.002 $.001 $.003
Pro forma information regarding net loss is required by SFAS No. 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 No. 123.
Options granted were estimated using the Black-Scholes valuation model. The
following weighted average assumptions were used:
------------------------------------------------------------------------------
Three and Six Months Three and Six Months
Ended Ended
June 30, 2005 June 30, 2004
------------------------------------------------------------------------------
Volatility 1.024 .87
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Expected life of options (in years) 2-3 2
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Dividend Yield 0% 0%
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Risk free interest rate 4.00% 2.25%
------------------------------------------------------------------------------
7
Note 2. Earnings Per Share
SFAS 128 provides for the calculation of Basic and Diluted 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.
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 Six Months Ended Six Months Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Numerator: Net Income (Loss) $ 207,000 $ 324,000 $ 106,000 $ 405,000
=========================================================================
Denominator:
Denominatorfor basic earnings per
share - weighted average shares
154,017,000 153,888,000 153,955,000 153,885,000
Effect of dilutive securities
Employee stock options 31,000 -- 150,000 125,000
Common stock warrants -- -- -- --
-------------------------------------------------------------------------
Denominator for diluted earnings per
share -- adjusted weighted average
shares and assumed conversion
154,048,000 153,888,000 154,105,000 154,010,000
=========================================================================
Basic earnings (loss) per share $ .001 $ .002 $ .001 $ .003
=========================================================================
Diluted earnings (loss) per share $ .001 $ .002 $ .001 $ .003
=========================================================================
Note 3. Inventory
Inventory is valued at the lower of cost or market using standard costs that
approximate average cost. Inventories are reviewed periodically and items
considered to be slow-moving or obsolete are reduced to estimated net realizable
value through an appropriate reserve. Inventory consists of the following:
June 30, December 31,
---------------------------------
2005 2004
--------------------------------
Raw materials $ 912,000 $ 917,000
Work in progress 128,000 112,000
Finished goods 4,140,000 5,307,000
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5,180,000 6,336,000
Inventory reserve (783,000) (712,000)
----------- -----------
Net inventory $ 4,397,000 $ 5,624,000
=========== ===========
8
Note 4. Revolving Bank Loan Agreements and Notes Payable
On October 1, 2003 our subsidiary Winncom, executed a new $4,000,000
line-of-credit agreement with a bank with interest at prime plus .5% (6.75% at
June 30, 2005) due April 30, 2006 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%
(7.0% at June 30, 2005). The term loan will become 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 by
Winncom to the Company, and also limits dividends and the purchase of property
and equipment. As of June 30, 2005 Winncom was in compliance with these
covenants.
We entered into a financing agreement (the "WFBC Facility") with Wells Fargo
Business Credit, Inc. ("WFBC"), on December 9, 2003. The financing agreement was
for a term of one year and was renewable for additional one-year terms. The WFBC
Facility provided for the sale of accounts receivable by the Company 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 were subject to conditions and restrictions,
including, without limitation, accounts receivable eligibility restrictions,
verification, and approval. Obligations under the WFBC Facility were
collateralized by substantially all of the assets of the Company. Advances under
the WFBC Facility were made at the sole discretion of WFBC, even if the accounts
receivable offered by ARC for sale to WFBC satisfied all necessary conditions
and restrictions. WFBC was under no obligation to purchase accounts receivable
from the Company or to advance any funds or credit to the Company under the WFBC
Facility. This financing agreement was terminated on May 10, 2005.
On May 10, 2005 the Company entered into a new $1.5 million revolving
line-of-credit agreement (the "Credit Facility") with Citywide Banks. The new
Credit Facility has a maturity of one year, with interest at 2% over prime
(8.25% at June 30, 2005), contains covenants to maintain certain financial
statement ratios, and is collateralized by essentially all of the assets of ARC
Wireless Solutions, Inc ("ARC") and its wholly owned subsidiary, Starworks
Wireless Inc.("Starworks"), but excluding Winncom Technologies Corp.. The
borrowing base will be calculated on a percentage of trade accounts receivable
and inventory for ARC and Starworks combined. As of June 30, 2005 ARC was in
compliance with these covenants.
Revolving bank lines-of-credit and other bank debt at June 30, 2005 and December
31, 2004 were:
June 30, December 31,
-------------------------------
2005 2004
-------------------------------
Bank line-of-credit - Winncom $ 969,000 $ 3,118,000
Bank term loan - Winncom 208,000 292,000
Bank line-of-credit - ARC 555,000 326,000
------------------------------
1,732,000 3,736,000
Less current portion (1,690,000) (493,000)
------------------------------
Long-term portion $ 42,000 $ 3,243,000
==============================
Note 5. Equity Transactions
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.
9
For the quarter ended March 31, 2005, the Company recorded the issuance of 3,332
shares of common stock to directors for outstanding obligations for accrued
directors' fees in the amount of $500. In addition, during the quarter ended
March 31, 2005, 120,000 shares of common stock were returned to the Company in
settlement of a dispute regarding shares issued for consulting fees in 2001.Of
the 120,000 shares of common stock returned to the Company, 100,000 have
previously been recorded as cancelled in 2002 as a result of the early
termination of a consulting agreement in September 2002.
In May 2005 the Company contributed 407,488 shares of common stock, valued at
$57,000, into the ARC Wireless Solutions, Inc. 401(k) Plan as an employer
matching contribution for the Plan year 2004.
Note 6. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
123(R) is effective for the Company beginning January 1, 2006, supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No.
95, Statement of Cash Flows.
SFAS No. 123(R) requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income statement based on
their fair values. Pro-forma disclosure is no longer an alternative. The Company
has not yet completed its evaluation of the effect of SFAS No. 123(R) but
expects its adoption to have an effect on the financial statements similar to
the pro-forma effects reported in Note 1 to the Consolidated Financial
Statements under the caption above "Stock Based Compensation".
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, which revised
ARB 43, relating to inventory costs. This revision is to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs and
wasted material (spoilage). This Statement requires that these items be
recognized as a current period charge regardless of whether they meet the
criterion specified in ARB 43. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be based on
normal capacity of the production facilities. SFAS No. 151 is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company does not believe the adoption of SFAS No. 151 will have a material
impact on the Company's financial statements.
The FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which changes the
guidance in APB Opinion 29, Accounting for Nonmonetary Transactions. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 153 is effective during fiscal years beginning after June 15, 2005. The
Company does not believe the adoption of SFAS No. 153 will have a material
impact on the Company's financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." SFAS No. 154 requires restatement of prior periods' financial
statements for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. Also, SFAS No. 154 requires that retrospective application of a change
in accounting principle be limited to the direct effects of the change. SFAS No.
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005.
10
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.
The Company has three reportable segments that are separate business units that
offer different products as follows: distribution of wireless communications
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 six months ended June 30, 2005 and 2004 are as follows:
Three months Ended June 30, 2005 and 2004
Distribution Manufacturing Cable Corporate Total
------------------------------------------------------------------------------
Net Sales 2005 6,943,000 1,677,000 100,000 (86,000) 8,634,000
2004 8,215,000 1,719,000 115,000 (97,000) 9,952,000
Net Earnings (Loss) 2005 143,000 284,000 (4,000) (216,000) 207,000
2004 285,000 291,000 (12,000) (240,000) 324,000
Earnings (Loss) before 2005 151,000 284,000 (4,000) (216,000) 215,000
Income Taxes 2004 292,000 291,000 (12,000) (240,000) 331,000
Identifiable Assets 2005 19,714,000 3,190,000 183,000 (1,622,000) 21,465,000
2004 21,577,000 3,470,000 348,000 (1,613,000) 23,782,000
Six months Ended June 30, 2005 and 2004
Distribution Manufacturing Cable Corporate Total
-------------------------------------------------------------------------------
Net Sales 2005 14,881,000 2,769,000 161,000 (153,000) 17,658,000
2004 13,842,000 3,325,000 192,000 (173,000) 17,186,000
Net Earnings (Loss) 2005 268,000 256,000 (16,000) (402,000) 106,000
2004 378,000 462,000 (25,000) (410,000) 405,000
Earnings (Loss) before 2005 283,000 256,000 (16,000) (402,000) 121,000
Income Taxes 2004 393,000 462,000 (25,000) (410,000) 420,000
Identifiable Assets 2005 19,714,000 3,190,000 183,000 (1,622,000) 21,465,000
2004 21,577,000 3,470,000 348,000 (1,613,000) 23,782,000
Corporate represents the operations of the parent Company, including segment
eliminations.
11
Approximately $2.9 million or 16.4% of the sales for the six months ended June
30, 2005 and approximately $2.3 million or 13.4% of the sales for the six months
ended June 30, 2004 represented foreign sales in Eastern Europe which includes
Russia, Kazakhstan and Uzbekistan.
Note 8. Commitments and Contingencies
On May 9, 2005, the Export Import Bank of the United States ("Ex-Im Bank") Board
of Directors approved the majority of the financing for a project awarded to
Winncom Technologies Corp. ("Winncom") for the development of a modern
telecommunications infrastructure to be located on the left bank of the City of
Astana, Kazakhstan. The Ex-Im Bank is the official export credit agency of the
United States. Ex-Im Bank's mission is to assist in financing the export of U.S.
goods and services to international markets.
In October 2004, Winncom, a wholly owned subsidiary of ARC Wireless Solutions,
Inc., entered into a "Frame" Agreement (Agreement of Understanding) with Joint
Stock Company Kazakhtelecom ("Kazakhtelecom"), Kazakhstan's national
telecommunications operator for the Republic of Kazakhstan, that gives Winncom
the right, subject to Winncom obtaining 100% financing for the project upon
terms and conditions acceptable to Kazakhtelecom, and subject to a number of
other matters, to undertake, on a turnkey basis, development of a modern
telecommunications infrastructure to be located on the left bank of the City of
Astana, Kazakhstan. With several competing bids, Winncom was awarded the
contract after several months of negotiations. The total cost of the project is
for a total of $54,945,700.
As of June 30, 2005, Kazakhtelecom has not approved the terms from Ex-Im Bank
for the majority of the project financing, and Winncom has no commitments for
the additional financing to be able to undertake the project. If Winncom is able
to obtain the full amount of the financing, Winncom will be paid on a pro-rata
basis by Kazakhtelecom after Kazakhtelecom enters into the appropriate
agreements with the financial institution(s) for the repayment of the funds to
the financial institution(s). Also, in order for Winncom to commence the
project, Kazakhtelecom must approve a work program and timeline to be submitted
by Winncom. This has not yet occurred. The project, if it commences, is expected
to take approximately 30 months from the date the work program and total
financing have been approved by Kazakhtelecom. This timeline may be delayed for
seasonal purposes due to inclement winter weather in Kazakhstan.
Although the financing is the only known obstacle at this time, there can be no
assurances that Winncom will be successful in securing the financing or in
meeting all of the other terms and conditions pursuant to the terms of the
Agreement to the extent that the financing for the project is secured.
As of June 30, 2005, Winncom has deferred approximately $50,000 in project costs
(site survey and engineering) because it believes the project will go forward..
If the project does not go forward Winncom will be required to expense these
deferred project costs.
On June 11, 2005, Proxim Corporation and its subsidiaries Proxim Wireless
Networks, Inc., Proxim International Holdings,Inc. and Wireless Home Corporation
(collectively, "Proxim") each filed voluntary petitions for relief under Chapter
11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the District of Delaware ("Bankruptcy Court"). Each
of these entities has indicated that it will continue to operate its business as
a "debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the applicable provisions of the Bankruptcy Code and orders of
the Bankruptcy Court. Winncom Technologies Corp., a wholly-owned subsidiary of
ARC Wireless Solutions, Inc, is a distributor for Proxim Corporation, and Proxim
has represented a substantial portion of Winncom's product purchases over the
last few years.
On July 18, 2005, Proxim entered into an agreement to sell its assets to
Terabeam Wireless. The asset purchase agreement was approved by the U.S.
Bankruptcy Court for District of Delaware on July 20, 2005. Following that
approval, the parties addressed the other pre-closing issues and completed the
transaction on July 27, 2005. Under the terms of the asset purchase agreement,
Terabeam acquired and assumed most of the domestic and foreign operations of
Proxim for a cash purchase price of approximately $25,200,000, subject to
certain adjustments, liability assumptions, and deductions.
Due to the uncertainty leading up to and after Proxim's announcement of
bankruptcy and a pending sale of assets, Winncom's customers decreased orders of
Proxim equipment. Based on discussions with Proxim and Terabeam, Winncom expects
12
to see an eventual resumption of normal sales volumes of Proxim equipment.
Nevertheless, there can be no assurance that these product purchases will
continue to occur as expected.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations for the Three Month Ended June 30, 2005 and 2004
Sales were $8.6 million and $9.95 million for the three-month periods ended June
30, 2005 and 2004, respectively. The decrease in revenues comparing the three
months ended June 30, 2005 to the three months ended June 30, 2004 is primarily
attributable to a decrease in Winncom's revenues from $8.2 million for the
quarter ended June 30, 2004 to $6.9 million for the quarter ended June 30, 2005;
a slight decrease in revenues from the Wireless Communications Solutions
Division from $1.71 million for the quarter ended June 30, 2004 to $1.68 million
for the quarter ended June 30, 2005 and a slight decrease in Starworks' revenues
from $115,000 for the quarter ended June 30, 2004 to $100,000 for the quarter
ended June 30, 2005. As noted above, the decrease in revenue in the second
quarter of 2005 was attributable to Winncom's customers decreasing Proxim
equipment orders due to their concern related to the announcement by Proxim of
its bankruptcy and pending sales of assets, which was completed on July 27, 2005
(See Note 8 to the Consolidated Financial Statements).
Gross profit margins were 21.2% and 17.8% for the three-months ended June 30,
2005 and June 30, 2004, respectively. The increase in gross margin for the
quarter ended June 30, 2005 as compared to the quarter ended June 30, 2004 is
primarily the result of a larger percentage in revenues from the Wireless
Communications Solutions Division in relation to overall revenues. Products from
this division have a higher margin than the products of Winncom or Starworks.
For the quarter ended June 30, 2005, the Wireless Communications Solutions
Division sales accounted for 18.4% of total revenues compared to the quarter
ended June 30, 2004 in which the Wireless Communications Solutions Division
sales accounted for 16.3% of total revenues.
Selling, general and administrative expenses (SG&A) increased by $95,000 for the
three months ended June 30, 2005 compared to the three months ended June 30,
2004. SG&A as a percent of revenue increased from 15% for the three months ended
June 30, 2004 to 18.4% for the three months ended June 30, 2005. The increase in
SG&A from 2004 to 2005 is primarily attributable to increases in international
marketing costs and compensation (including commissions). Due to the potential
of wireless networking in international markets, Winncom has been increasing its
resources and marketing costs for its international markets. International costs
primarily include marketing, advertising, trade shows, travel and outside
services. Salaries and wages remain the largest component of SG&A, constituting
52% and 58% of the total for the quarters ended June 30, 2005 and 2004,
respectively. As of June 30, 2005, Winncom has deferred approximately $50,000 in
project costs (site survey and engineering) related to the Kazakhtelecom
project. If the project does not go forward Winncom will be required to expense
these deferred project costs.
Net interest expense was $72,000 for the three months ended June 30, 2005
compared to $79,000 for the three months ended June 30, 2004. The average
balance outstanding on the lines-of-credit and term loan was $1.9 million for
the quarter ended June 30, 2005 and $3.7 million for the quarter ended June 30,
2004, but the prime interest rate averaged 6% for the quarter ended June 30,
2005 compared to 4% for the quarter ended June 30, 2004. The Company reduced its
inventory and trade accounts payable by $1.2 million and $900,000 respectively
thereby reducing its average line-of-credit balance by $1.8million.
The Company had net income of $207,000 for the quarter ended June 30, 2005 as
compared to net income of $324,000 for the three months ended June 30, 2004.
Even though net sales were less in 2005 than in 2004, the Company had higher
margins and higher gross margin in 2005. The increase in gross margin of $66,000
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was more than offset by an increase in SG&A of $95,000 and a reduction in other
income (consisting primarily of vendor early payment discounts due to improved
inventory turns and accounts receivable collections) of nearly $94,000 of which
$65,000 was a reduction in early payment discounts. Other income in 2004 also
included collection of a previously written off account receivable of $15,000.
The reduction in vendor early payment discounts was due to Winncom suspending
early payments to Proxim, its largest vendor (see Note 8 to the Consolidated
Financial Statements).
Results of Operations for the Six Months Ended June 30, 2005 and 2004
Sales were $17.66 million and $17.19 million for the six-month periods ended
June 30, 2005 and 2004, respectively. The slight increase in revenues comparing
the six months ended June 30, 2005 to the six months ended June 30, 2004 is
attributable to an increase in Winncom's revenues from $13.8 million for the six
months ended June 30, 2004 to $14.9 million for the six months ended June 30,
2005, offset by a decrease in revenues from the Wireless Communications
Solutions Division from $3.3 million for the six months ended June 30, 2004 to
$2.8 million for the six months ended June 30, 2005, and a slight decrease in
Starworks' revenues from $192,000 for the six months ended June 30, 2004 to
$161,000 for the six months ended June 30, 2005. Sales increased for the six
month period ending June 30, 2005 despite the decrease in revenue in the second
quarter of 2005 which was attributable to Winncom's customers decreasing Proxim
equipment orders due to their concern related to the announcement by Proxim of
its bankruptcy and pending sales of assets, which was completed on July 27, 2005
(See Note 8 to the Consolidated Financial Statements). Winncom's revenues in
2005 were boosted by a sale to a single customer of $1.4 million in the first
quarter of 2005. The decrease in revenues from the Wireless Communication
Solutions Division in 2005 compared to 2004 is primarily the result of
management's decision to withhold shipments and minimize the Company's risk to a
significant customer whose credit privileges were suspended due to delinquent
payments. The customer has announced a recapitalization of its company and
shipments commenced again in June of 2005.
Gross profit margins were 18.4% and 18.2% for the six-months ended June 30, 2005
and June 30, 2004, respectively. The slight increase in gross margin for the six
months ended June 30, 2005 as compared to the six months ended June 30, 2004 is
primarily the result of slightly higher margins at Winncom and the Wireless
Communications Solutions Division in 2005 as compared to 2004. For the six
months ended June 30, 2005, the Wireless Communications Solutions Division sales
accounted for 14.8% of total revenues compared to the six months ended June 30,
2004 in which the Wireless Communications Solutions Division sales accounted for
18.3% of total revenues.
Selling, general and administrative expenses (SG&A) increased by $397,000 for
the six months ended June 30, 2005 compared to the six months ended June 30,
2004. The increase in SG&A from 2004 to 2005 is primarily attributable to
increases in international marketing costs and compensation (including
commissions). Due to the potential of wireless networking in international
markets, Winncom has been increasing its resources and marketing costs for its
international markets. International costs primarily include marketing,
advertising, trade shows, travel and outside services. SG&A as a percent of
revenue increased from 16.1% for the six months ended June 30, 2004 to 18% for
the six months ended June 30, 2005. Salaries and wages remain the largest
component of SG&A, constituting 51.7% and 54% of the total for the six months
ended June 30, 2005 and 2004, respectively. As of June 30, 2005, Winncom has
deferred approximately $50,000 in project costs (site survey and engineering)
related to the Kazakhtelecom project. If the project does not go forward Winncom
will be required to expense these deferred project costs.
Net interest expense was $146,000 for the six months ended June 30, 2005
compared to $141,000 for the six months ended June 30, 2004. The average balance
outstanding on the line of credit and term loan was $3.7 million for the six
months ended June 30, 2004 and $2.4 million for the six months ended June 30,
2005, and the prime interest rate averaged 4% for the six months ended June 30,
2004 compared to 5.625% for the six months ended June 30, 2005. The reduction of
the average line-of-credit balance was primarily due to a $1.2 million reduction
in inventory and a $900,000 increase in trade accounts payable.
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The Company had net income of $106,000 for the six months ended June 30, 2005 as
compared to net income of $405,000 for the six months ended June 30, 2004. Even
though net sales were slightly higher in 2005 than in 2004, the slight increase
in gross margin of $120,000 was more than offset by an increase in SG&A of
$397,000 and a reduction in other income (consisting primarily of vendor early
payment discounts due to improved inventory turns and accounts receivable
collections) of nearly $27,000. Other income in 2005 consisted of a gain on
sales of assets of $60,000 for which there was none in 2004 and in 2004 included
collection of a previously written off account receivable of $15,000. The
reduction in vendor early payment discounts of approximately $65,000 was due to
Winncom suspending early payments to Proxim, its largest vendor (see Note 8 to
the Consolidated Financial Statements).
Financial Condition
Net cash provided by operating activities was $2.4 million for the six months
ended June 30, 2005 compared to net cash provided by operating activities of
$697,000 for the six months ended June 30, 2004. The primary reasons for the
increase are a reduction of both inventory of $1.2 million and accounts
receivable of $420,000.
Net cash used in investing activities was $70,000 for the six months ended June
30, 2004 compared to $38,000 for the six months ended June 30, 2005, primarily
the result of expenditures for patents and equipment.
Net cash used by financing activities for the six months ended June 30, 2005 and
2004 is primarily the result of reductions in bank lines-of-credit though
reductions in inventory and accounts receivable.
The Company's working capital at June 30, 2005 was $4.3 million compared to $7.3
million at December 31, 2004. The most significant change in working capital
from December 31, 2004 to June 30, 2005 was the reclassification of the bank
line-of-credit of $970,000 from long term to current in the second quarter of
2005 due to the fact that it comes due April 30, 2006 and an increase in trade
accounts payable of $1.1 million. In addition, we had reductions of both
inventory of $1.2 million and accounts receivable of $420,000.
On October 1, 2003 our subsidiary Winncom, executed a new $4,000,000
line-of-credit agreement with a bank with interest at prime plus .5% (6.75% at
June 30, 2005) due April 30, 2006 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%
(7.0% at June 30, 2005). The term loan will become 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 by
Winncom to the Company, and also limits dividends and the purchase of property
and equipment. As of June 30, 2005 Winncom was in compliance with these
covenants.
We entered into a financing agreement (the "WFBC Facility") with Wells Fargo
Business Credit, Inc. ("WFBC"), on December 9, 2003. The financing agreement was
for a term of one year and was renewable for additional one-year terms. The WFBC
Facility provided for the sale of accounts receivable by the Company 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 were subject to conditions and restrictions,
including, without limitation, accounts receivable eligibility restrictions,
verification, and approval. Obligations under the WFBC Facility were
collateralized by substantially all of the assets of the Company. Advances under
the WFBC Facility were made 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 was under no obligation to purchase accounts receivable from
the Company or to advance any funds or credit to the Company under the WFBC
Facility. This financing agreement was terminated on May 10, 2005.
On May 10, 2005 the Company entered into a new $1.5 million revolving line of
credit agreement (the "Credit Facility") with Citywide Banks. The new Credit
Facility has a maturity of one year, with interest at 2% over prime (8.25% at
15
June 30, 2005), with covenants to maintain certain financial statement ratios
and is collateralized by essentially all of the assets of ARC Wireless
Solutions, Inc ("ARC") and its wholly owned subsidiary Starworks Wireless
Inc.("Starworks"), but excluding Winncom Technologies Corp.. The borrowing base
will be calculated on a percentage of trade accounts receivable and inventory
for ARC and Starworks combined. As of June 30, 2005 ARC was in compliance with
these covenants.
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 December 31,
2005 and into the foreseeable future.
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 the
Company, 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, 2004 for additional risk factors that could cause actual results to
differ materially from the Company's expectations.
Risk Factors
1. We have a history of prior losses and there is no assurance that our
operations will be profitable in the future. From inception in September
1987 through the fiscal year ended December 31, 1992, and again for the
years ended December 31, 1998 through the fiscal year ended December 31,
2001 and for the fiscal year ended December 31, 2003, we incurred losses
from operations. We operated profitably during each of the fiscal years
ended December 31, 1993 through 1997 and again for the fiscal years ended
December 31, 2002 and 2004. Profits for some of these years were marginal,
and we cannot be assured that our operations in the future will be
profitable. See the financial statements included in Item 14 of our Annual
Report on Form 10-K.
2. Our industry encounters rapid technological changes and there is no
assurance that our research and development activities can timely lead to
new and improved products when the market demands them. 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.
3. We rely on the protection of patents and certain manufacturing practices to
protect our product designs and there is no assurance that these measures
will be successful. We attempt to protect our product designs by obtaining
16
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.
4. 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.
5. We face intense competition in our industry and there is no assurance that
we will be able to adequately compete with our larger competitor. 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.
6. Our success depends on the availability of efficient labor and we cannot
predict that we will continue to have access to this labor at an affordable
cost. We produce and assemble our antenna and coaxial cable kit products at
our own facilities and are dependent on efficient workers for these
functions. We cannot predict that efficient workers will continue to be
available to us at a cost consistent with our budget.
7. The success of our business is highly dependent on key employees, some of
whom do not have employment agreements with us. We are highly dependent on
the services of our executive management, including Randall P. Marx, our
Chief Executive Officer and Gregory E. Raskin, Winncom's CEO. The loss of
the services of any of our executive management could have a material
adverse effect on us.
8. We may incur significant costs in complying with new governmental
regulations which affect our industry, and this may require us to divert
funds we use for the development of our business and product . 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.
9. Historically, there has been an extremely limited public market for our
shares and we cannot predict that the recent trading volume will be
sustained. Historically, there has been an extremely limited public market
for our shares. We cannot predict that the recent trading volume will be
sustained. The prices of our shares are highly volatile. Due to the
relatively low price of the shares, many brokerage firms may not effect
transactions and may not deal with low priced shares, as it may not be
economical for them to do so. This could have an adverse effect on
sustaining the market for our shares. Further, we believe it is improbable
that any investor will be able to use our shares as collateral in a margin
account. For the foreseeable future, trading in the shares, if any, will
occur in the over-the-counter market and the shares will be quoted on the
OTC Bulletin Board. On August 5, 2005, the low bid price for the common
stock was $0.11, the high asked price was $0.11 and the closing sale price
was $0.11. Because of the matters described above, a holder of our shares
may be unable to sell shares when desired, if at all.
10. We have not paid any cash dividends with respect to our shares, and it is
unlikely that we will pay any cash dividends on our shares in the
foreseeable future. We currently intend that any earnings that we may
realize will be retained in the business for further development and
expansion.
17
Other Risks. 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 a 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; (See Note 6. Recent
Accounting Pronouncements)
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 notes
payable to the banks which has a variable interest rate equal to the existing
bank prime rate (6.25% as of June 30, 2005) plus one-half to two percent. The
prime interest rate increased from 4.0% to 6.25% since June 1, 2004 and has
increased by another 1.25% since January 1, 2005. An increase in the bank's
prime interest rates on the various notes payable by .5% would increase our
yearly interest expense by approximately $15,000, assuming borrowed amounts
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
18
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 which we estimate
will be uncollectible.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May, 2005, the Company contributed 407,488 shares of common stock valued at
$57,000, into the ARC Wireless Solutions, Inc. 401(k) Plan as an employere
matching contribution for the Plan year 2004. These shares were issued pursuant
to exemptions from registration set forth in Section 4(2) of the Securities Act
of 1933, as amended, and Regulation D promulgated thereunder.
Item 6. Exhibits
(a) Exhibits.
Exhibit No. Description
31.1 and 31.2 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
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: August 11, 2005 By: /s/ Randall P. Marx
-------------------
Randall P. Marx
Chief Executive Officer
Date: August 11, 2005 By: /s/ Monty R. Lamirato
---------------------
Monty R. Lamirato
Chief Financial Officer
19