UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2004.
000-18122
---------
(Commission File Number)
ARC Wireless Solutions, Inc.
----------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0454148
---- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation)
10601 West 48th Avenue
Wheat Ridge, Colorado, 80033-2163
---------------------------------
(Address of principal executive offices including zip code)
(303) 421-4063
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former Name or Former Address, if Changed Since Last Report)
Indicate by check mark whether the 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 May 1, 2004, the Registrant had 153,886,278 shares outstanding of its
$.0005 par value common stock.
ARC Wireless Solutions, Inc.
Quarterly Report on FORM 10-Q For The Period Ended
March 31, 2004
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004 (unaudited)
and December 31, 2003.............................................3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2004 and 2003 (unaudited).........................4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 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..................................................................17
Exhibit 32.1..................................................................19
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Consolidated Balance Sheets
March 31, December 31,
2004 2003
Assets (unaudited) *
Current assets:
Cash and equivalents $ 398,000 $ 227,000
Accounts receivable - trade, net 4,306,000 4,543,000
Accounts receivable - vendors, net 238,000 248,000
Inventory, net 6,472,000 6,081,000
Other current assets 229,000 117,000
------------ ------------
Total current assets 11,643,000 11,216,000
------------ ------------
Property and equipment, net 578,000 531,000
------------ ------------
Other assets:
Intangible assets including goodwill, net 10,934,000 10,934,000
Deposits 63,000 59,000
------------ ------------
Total assets $ 23,218,000 $ 22,740,000
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,568,000 $ 3,300,000
Bank debt - current 645,000 409,000
Accrued expenses 405,000 418,000
Current portion of capital lease obligations 55,000 40,000
------------ ------------
Total current liabilities 4,673,000 4,167,000
Capital lease obligations, less current portion 122,000 97,000
Bank debt, less current portion 3,569,000 3,704,000
------------ ------------
Total liabilities 8,364,000 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 (5,732,000) (5,813,000)
------------ ------------
Total stockholders' equity 14,854,000 14,772,000
------------ ------------
Total liabilities and stockholders' equity $ 23,218,000 $ 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 March 31,
2004 2003
----------- -----------
(unaudited)
Sales, net $ 7,233,000 $ 6,115,000
Cost of sales 5,876,000 5,018,000
----------- -----------
Gross profit 1,357,000 1,097,000
----------- -----------
Operating expenses:
Selling, general and administrative expenses 1,283,000 1,435,000
----------- -----------
Total operating expenses 1,283,000 1,435,000
----------- -----------
Income (loss) from operations 74,000 (338,000)
Other income (expense):
Interest expense, net (67,000) (45,000)
Other income 82,000 9,000
----------- -----------
Total other income (expense) 15,000 (36,000)
----------- -----------
Income (loss) before income taxes 89,000 (374,000)
Provision for income taxes (8,000) (15,000)
----------- -----------
Net Income (loss) $ 81,000 $ (389,000)
=========== ===========
=========== ===========
Net income (loss) per share - basic $ .001 $ (.002)
=========== ===========
Net income (loss) per share - diluted $ .001 --
=========== ===========
See accompanying notes.
4
ARC Wireless Solutions, Inc.
Consolidated Statements of Cash Flows
Three months ended March 31,
2004 2003
----------- -----------
(unaudited)
Operating activities
Net income (loss) $ 81,000 $ (389,000)
Adjustments to reconcile net income (loss) to net cash provided by
Operating activities:
Depreciation and amortization 57,000 73,000
Provision for doubtful accounts 30,000 (158,000)
Non-cash expense for issuance of stock and options 1,000 --
Changes in operating assets and liabilities:
Accounts receivable, trade and vendor 218,000 1,220,000
Inventory (391,000) (768,000)
Prepaids and other current assets (112,000) 31,000
Other assets (5,000) (3,000)
Accounts payable and accrued expenses 255,000 248,000
----------- -----------
Net cash provided by operating activities 134,000 254,000
----------- -----------
Investing activities
Patent acquisition costs (4,000) (7,000)
Purchase of plant and equipment (48,000) (23,000)
----------- -----------
Net cash used in investing activities (52,000) (30,000)
----------- -----------
Financing activities
Repayment of line of credit and capital lease obligations (12,000) (104,000)
Net borrowings under lines of credit and other debt 101,000 --
----------- -----------
Net cash provided by (used in) financing activities 89,000 (104,000)
----------- -----------
Net increase (decrease) in cash 171,000 120,000
Cash, beginning of period 227,000 265,000
----------- -----------
Cash, end of period $ 398,000 $ 385,000
=========== ===========
Supplemental cash flow information:
Cash paid for interest $ 95,000 $ 73,000
Equipment acquired under capital lease $ 52,000 --
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Notes to Consolidated Financial Statements
March 31, 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 ended March 31, 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 ended March 31, 2004 and 2003,
respectively, would have been adjusted to the pro forma amounts indicated below:
March 31,
2004 2003
------------- -------------
Net income (loss) as reported $ 81,000 $ (389,000)
Add: stock based compensation included in reported net
income (loss) -- --
Deduct: Stock-based compensation cost under SFAS 123 (4,000) (22,000)
------------- -------------
Pro forma net income (loss) $ 77,000 $ (411,000)
============= =============
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 153,883,000 153,223,000
Proforma shares used in the calculation of Proforma net income
(loss) per common share - diluted 154,133,000 153,223,000
Reported net income (loss) per common share - basic and diluted $ .001 $ (.002)
Pro forma net income (loss) per common share - basic and
diluted $ .001 $ (.002)
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 Three Months Ended
March 31, 2004 March 31, 2003
-------------- --------------
Volatility .87 N/A
Expected life of options (in years) 2 N/A
Dividend Yield 0.00% N/A
Risk free interest rate 2.50% N/A
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
reflect the potential dilution of securities that could share in the earnings of
the entity. For the quarter ended March 31, 2003, the Company incurred a net
loss and stock options and stock warrants totaling 500,000 were not included in
the computation of diluted loss per share because their effect was
anti-dilutive; therefore, basic and fully diluted loss per share are the same
for the quarter ended March 31, 2003.
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
March 31, 2004 March 31, 2003
-------------- --------------
Numerator: Net Income (Loss) $ 81,000 $ (389,000)
============= =============
Denominator:
Denominator for basic earnings per share -
weighted average shares 153,883,000 153,223,000
Effect of dilutive securities
Employee stock options 250,000 --
Common stock warrants --
------------- -------------
Denominator for diluted earnings per share
- - adjusted weighted average shares and
assumed conversion 154,133,000 153,223,000
============= =============
Basic earnings (loss) per share $ .001 $ (.002)
============= =============
Diluted earnings (loss) per share $ .001 $ (.002)
============= =============
Note 4. Inventory
Inventory is valued at the lower of cost or market using standard costs that
approximate average cost. Inventories are reviewed periodically and items
considered to be slow-moving or obsolete are reduced to estimated net realizable
value through an appropriate reserve. Inventory consists of the following:
March 31, December 31,
2004 2003
----------- -----------
Raw materials $ 899,000 $ 963,000
Work in progress 126,000 127,000
Finished goods 5,940,000 5,489,000
----------- -----------
6,965,000 6,579,000
Inventory reserve (493,000) (498,000)
----------- -----------
Net inventory $ 6,472,000 $ 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% due April 30, 2005 and converted $500,000 of the
balance outstanding under the line of credit at September 30, 2003 into a
36-month term loan with monthly principal payments of $13,888 plus interest at
prime plus .75%. The term loan shall come due on October 26, 2006.
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 March
31, 2004 Winncom was in compliance with these covenants.
8
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 March 31, 2004 and
December 31, 2003 consist of:
March 31, December 31,
2004 2003
----------- -----------
Bank line of credit - Winncom $ 3,318,000 $ 3,399,000
Bank term loan - Winncom 417,000 472,000
Bank Facility - ARC 479,000 242,000
----------- -----------
4,214,000 4,113,000
Less current portion (645,000) (409,000)
----------- -----------
Long-term portion $ 3,569,000 $ 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 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.
Note 7. Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities with certain
characteristics. FIN 46 is effective immediately for all enterprises with
variable interests in variable interest entities created after January 31, 2003,
and is effective beginning with the September 30, 2003, quarterly financial
statements for all variable interests in a variable interest entity created
before February 1, 2003. The adoption of this interpretation did not have any
impact on the Company's financial position or results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") for certain decisions made as part of the Derivatives
Implementation Group process. SFAS 149 also amends SFAS 133 to incorporate
clarifications of the definition of a derivative. This statement is effective
for contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The Company does not anticipate
that the adoption of SFAS 149 will have a significant impact on the Company's
financial position or results of operations.
9
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for the
classification and measurement of certain financial instruments with
characteristics of both liabilities and equity. This Statement is effective for
financial instruments entered into or modified after May 31, 2003, and is
effective for all affected financial instruments beginning with the September
30, 2003, quarterly financial statements. The adoption of this statement did not
have any impact on the Company's financial position or results of operations.
Note 9. Industry Segment Information
SFAS No. 131 "Disclosure about Segments of an Enterprise and Related
Information" requires that the Company disclose certain information about its
operating segments where operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments.
The Company has three reportable segments that are separate business units that
offer different products as follows: distribution of wireless communication
products, antenna manufacturing and cable products. Each segment consists of a
single operating unit and the accounting policies of the reporting segments are
the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus an agreed upon
intercompany profit on intersegment sales and transfers.
Financial information regarding the Company's three operating segments for the
quarters ended March 31, 2004 and 2003 are as follows:
Distribution Manufacturing Cable Corporate Total
------------ ------------ ------------ ------------ ------------
Net Sales 2004 $ 5,626,000 $ 1,606,000 $ 77,000 $ (76,000) $ 7,233,000
2003 $ 5,006,000 $ 1,183,000 $ 2,000 $ (76,000) $ 6,115,000
Net Earnings (Loss) 2004 $ 93,000 $ 171,000 $ (13,000) $ (170,000) $ 81,000
2003 $ 54,000 $ (181,000) $ 1,000 $ (263,000) $ (389,000)
Earnings (Loss) 2004 $ 101,000 $ 171,000 $ (13,000) $ (170,000) $ 89,000
before Income Taxes 2003 $ 69,000 $ (181,000) $ 1,000 $ (263,000) $ (374,000)
Identifiable Assets 2004 $ 20,979,000 $ 3,678,000 $ 284,000 $ (1,723,000) $ 23,218,000
2003 $ 21,243,000 $ 3,446,000 $ 216,000 $ (1,695,000) $ 23,210,000
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
Sales were $7.2 million and $6.1 million for the three-month periods ended March
31, 2004 and 2003, respectively. The increase in revenues comparing the three
months ended March 31, 2004 to the three months ended March 31, 2003 is
attributable to an increase in revenues from the Wireless Communications
Solutions Division from $1.1 million for the quarter ended March 31, 2003 to
$1.5 million for the quarter ended March 31, 2004, an increase in Starworks'
revenues from $2,000 for the quarter ended March 31, 2003 to $77,000 for the
quarter ended March 31, 2004; and an increase in Winncom's revenues from $5
million for the quarter ended March 31, 2003 to $5.6 million for the quarter
ended March 31, 2004.
Gross profit margins were 18.8% and 17.9% for the three-months ended March 31,
2004 and March 31, 2003, respectively. The increase in gross margin for the
quarter ended March 31, 2004 as compared to the quarter ended March 31, 2003 is
primarily the result of the larger percentage in revenues from the Wireless
Communications Solutions Division, whose products have a higher margin than the
products of Winncom or Starworks. For the quarter ended March 31, 2004, the
Wireless Communications Products Division sales accounted for 21.2% of revenues
compared to the quarter ended March 31, 2003 where the Wireless Communications
Products Division sales accounted for 19.3% of revenues. In August 2001, when
the Company purchased certain commercial assets of the wireless communications
products line of BATC, which consisted of raw materials and finished goods
inventory among other assets, these assets were purchased at a substantial
discount from their fair market or replacement value. During the quarter ended
March 31, 2003, the Wireless Communications Solutions Division benefited from
the sale of portions of the inventory purchased from BATC significantly more
than in the quarter ended March 31, 2004, and this benefit also 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) decreased by $152,000 for
the three months ended March 31, 2004 compared to March 31, 2003. The decrease
in SG&A from 2003 to 2004 is primarily attributable to; a reduction in employer
matching contribution $52,000; legal fees, $33,000; bad debt expense $57,000;
and other costs $10,000. In addition to decreasing SG&A by $152,000 comparing
2004 to 2003, SG&A as a percent of revenue decreased from 23.5% for the three
months ended March 31, 2003 to 17.75% for the three months ended March 31, 2004
primarily because of the 17% increase in sales from 2003 to 2004. Salaries and
wages remain the largest component of SG&A constituting 49% and 47% of the total
for the quarters ended March 31, 2004 and 2003, respectively.
Net interest expense was $67,000 for the three months ended March 31, 2004
compared to $45,000 for the three months ended March 31, 2003. The average
balance outstanding on the line of credit and term loan was $3.7 million for the
quarter ended March 31, 2004 and $3.6 million for the quarter ended March 31,
2003, and the interest rate was 4.75% for the quarter ended March 31, 2004 and
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 first quarter of 2004 and no factoring was
occurring in the first quarter of 2003. The interest expense from factoring was
$23,000 for the quarter ended March 31, 2004 and $0 for the quarter ended March
31, 2003.
The Company had net income of $81,000 for the quarter ended March 31, 2004 as
compared to a net loss of $389,000 for the three months ended March 31, 2003.
The difference is primarily due to a 17% increase in sales comparing 2004 to
2003, an increase in the gross margin from 17.9% to 18.8%, a $73,000 increase in
other income (consisting primarily of cash purchase discounts), and a reduction
in SG&A expenses of $152,000 from 2003 to 2004.
11
Financial Condition
The net cash provided by operating activities was $134,000 for the quarter ended
March 31, 2004 and $254,000 for the quarter ended March 31, 2003. The net cash
from operations in 2004 was primarily due to net income for the quarter. For the
quarter ended March 31, 2004, increases in inventory and other current assets
were funded through a reduction in accounts receivable and increases in trade
accounts payable. Even though the Company had a loss of $389,000 for the quarter
ended March 31, 2003, we were able to fund those losses through accounts
receivable collections, with accounts receivable decreasing from $6.2 million at
December 31, 2002 to $5.1 million at March 31, 2003. Inventories increased by
approximately $800,000 from December 31, 2002 to March 31, 2003 and part of that
increase was funded by accounts payable increases, approximately $250,000, and
the remainder was funded by accounts receivable collections.
The net cash used in investing activities was $52,000 for the quarter ended
March 31, 2004 compared to $30,000 for the quarter ended March 31, 2003,
primarily the result of expenditures for patents and equipment.
The net cash provided by financing activities for the quarter ended March 31,
2004 is primarily the result of increases in funding by the Company under its
accounts receivable factoring credit facility. We have not had to increase
borrowings under other lines of credit facilities. The net cash used in
financing activities for the quarter ended March 31, 2003 is due to repayments
under lines of credit of $104,000.
The Company's working capital at March 31, 2004 was $6.97 million compared to
$7.1 million at December 31, 2003. There was no significant change in working
capital from December 31, 2003 to March 31, 2004.
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% (4.75% at March 31, 2004 and 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%. 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 March
31, 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.
12
Management believes that current working capital and available borrowings on
existing bank lines of credit, together with additional equity infusions that
management believes will be available, will be sufficient to allow the Company
to maintain its operations through December 31, 2004 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 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.
13
We depend on key employees. We are highly dependent on the services of our
executive management, including Randall P. Marx, our Chief Executive Officer 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 intense competition, regionally and internationally, including competition
from alternative business models, such as manufacturer-to-end-user selling,
which may lead to reduced prices, lower sales or reduced sales growth,
lower gross margins, extended payment terms with customers, increased
capital investment and interest costs, bad debt risks and product supply
shortages;
o Termination of a supply or services agreement with a major supplier or
customer or a significant change in supplier terms or conditions of sale;
o the continuation or worsening of the severe downturn in economic conditions
(particularly purchases of technology products) and failure to adjust costs
in a timely fashion in response to a sudden decrease in demand;
o losses resulting from significant credit exposure to reseller customers and
negative trends in their businesses;
o reductions in credit ratings and/or unavailability of adequate capital;
o failure to attract new sources of business from expansion of products or
services or entry into new markets;
o inability to manage future adverse industry trends;
o future periodic assessments required by current or new accounting standards
resulting in additional charges;
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 could adversely impact the company's 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.
14
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 believe our exposure to
market risks, including exchange rate risk, interest rate risk and commodity
price risk, is not material at the present time.
Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and principal financial officer concluded that
the Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. There was no change in the Company's internal control over financial
reporting during the Company's most recently completed fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in various legal proceedings of a
nature considered normal in the course of its operations, principally accounts
receivable collections. While it is not feasible to predict or determine the
final outcome of these proceedings, management has reserved as an allowance for
doubtful accounts for that portion of the accounts receivable it estimates will
be uncollectible.
Item 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.
The Company filed a Current Report on Form 8-K dated March 30, 2004,
furnishing under Item 12 a press release reporting the Company's
results of operations for the year ended December 31, 2003.
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ARC WIRELESS SOLUTIONS, INC.
Date: May 14, 2004 By: /S/ Randall P. Marx
------------------------
Randall P. Marx
Chief Executive Officer
Date: May 14, 2004 By: /S/ Monty R. Lamirato
--------------------------
Monty R. Lamirato
Chief Financial Officer
16