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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10 - QSB
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2002.
ARC Wireless Solutions, Inc.
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(Exact name of small business issuer as specified in its charter)
Utah
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(State or other jurisdiction of incorporation)
000-18122 87-0454148
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(Commission File Number) (IRS Employer Identification Number)
4860 Robb Street, Suite 101
Wheat Ridge, Colorado, 80033-2163
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(Address of principal executive offices including zip code)
(303) 421-4063
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(Small Business Issuer telephone number, including area code)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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As of November 1, 2002, the Registrant had 153,219,690 shares outstanding of its
$.0005 par value common stock.
Transitional Small Business Disclosure Format (Check One):
Yes No X
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ARC Wireless Solutions, Inc.
Quarterly Report on FORM 10-QSB For The Period Ended
September 30, 2002
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001.............................3
Consolidated Statements of Operations for the Three Months
and Nine Months Ended
September 30, 2002 and 2001 (unaudited).......................4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 (unaudited)......................5
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations...............................................12
Financial Condition.................................................15
Forward Looking Statements..........................................16
Item 3. Controls and Procedures..............................................16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds; Recent Sales
of Unregistered Securities..........................................17
Item 6. Exhibits and Reports on Form 8-K....................................17
Signatures...................................................................17
Certification Pursuant to Section 302 of the SARBANES-OXLEY ACT of 2002......18
Exhibit 99.1 - Certification Pursuant to Section 906 of the
SARBANES-OXLEY ACT of 2002................................20
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Consolidated Balance Sheets
September 30, December 31,
2002 2001
Assets (unaudited) *
Current assets:
Cash $ 264,000 $ 345,000
Accounts receivable - customers, net 5,154,000 4,687,000
Accounts receivable - vendors, net 1,273,000 1,214,000
Inventory, net 5,974,000 5,938,000
Other current assets 151,000 117,000
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Total current assets 12,816,000 12,301,000
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Property and equipment, net 561,000 729,000
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Other assets:
Intangible assets including goodwill, net 10,935,000 10,907,000
Deposits 69,000 64,000
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Total assets $ 24,381,000 $ 24,001,000
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Liabilities and stockholders' equity
Current liabilities:
Bank line of credit $ 3,865,000 $ 925,000
Accounts payable 5,057,000 5,273,000
Current portion of capital lease obligations 12,000 11,000
Accrued expenses 413,000 503,000
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Total current liabilities 9,347,000 6,712,000
Capital lease obligations, less current portion 11,000 21,000
Bank line of credit, less current portion 2,621,000
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Total liabilities 9,358,000 9,354,000
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Commitments
Stockholders' equity:
Common stock 78,000 77,000
Preferred stock --
Treasury stock (1,192,000) (1,117,000)
Additional paid-in capital 21,659,000 21,522,000
Accumulated deficit (5,522,000) (5,835,000)
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Total stockholders' equity 15,023,000 14,647,000
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Total liabilities and stockholders' equity $ 24,381,000 $ 24,001,000
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* These numbers were derived from the audited financial statements for the year
ended December 31, 2001.
See accompanying notes.
3
ARC Wireless Solutions, Inc.
Consolidated Statements of Operations
Three months ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
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(unaudited) (unaudited)
Sales, net $ 8,532,000 $ 7,294,000 $ 24,489,000 $ 23,361,000
Cost of sales 7,313,000 6,022,000 19,869,000 19,200,000
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Gross profit 1,219,000 1,272,000 4,620,000 4,161,000
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Operating expenses:
Selling, general and administrative expenses 1,457,000 1,452,000 4,356,000 4,635,000
Amortization of purchased intangibles -- 262,000 -- 760,000
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Total operating expenses 1,457,000 1,714,000 4,356,000 5,395,000
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Income (loss) from operations (238,000) (442,000) 264,000 (1,234,000)
Other income (expense):
Interest expense, net (50,000) (61,000) (151,000) (168,000)
Gain from debt cancellation -- 226,000
Other income 13,000 40,000 31,000 74,000
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Total other income (expense) (37,000) (21,000) 106,000 (94,000)
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Income (loss) before income taxes (275,000) (463,000) 370,000 (1,328,000)
Provision for income taxes (19,000) (1,000) (57,000) (9,000)
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Net Income (loss) $ (294,000) $ (464,000) $ 313,000 $ (1,337,000)
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Net loss per share (basic and diluted) $ (.002) $ (.003) $ .002 $ (.01)
=====================================================================
See accompanying notes.
4
ARC Wireless Solutions, Inc.
Consolidated Statements of Cash Flows
Nine Months Ended September 30,
2002 2001
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(unaudited)
Operating activities
Net income (loss) $ 313,000 $(1,337,000)
Adjustments to reconcile net income (loss) to net cash used in
Operating activities:
Depreciation and amortization 228,000 901,000
Debt cancellations (226,000) --
Loss on disposition of assets 9,000
Non-cash expense for issuance of stock and options 19,000 125,000
Changes in operating assets and liabilities:
Restricted cash -- 344,000
Accounts receivable, trade and vendor (526,000) (1,706,000)
Inventory (36,000) (2,000)
Prepaids and other current assets (34,000) (285,000)
Deposits (5,000) (17,000)
Accounts payable and accrued expenses (80,000) (1,035,000)
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Net cash used in operating activities (338,000) (3,012,000)
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Investing activities
Patent acquisition costs (36,000) (7,000)
Acquisition of businesses, net of cash acquired -- 74,000
Purchase of plant and equipment (61,000) (414,000)
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Net cash used in investing activities (97,000) (347,000)
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Financing activities
Repayment of notes and capital lease obligations (9,000) (12,000)
Net borrowings under lines of credit 319,000 1,706,000
Proceeds from private placement, net 119,000 978,000
Proceeds from exercise of common stock options -- 6,000
Acquisition of treasury shares (75,000) --
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Net cash provided by financing activities 354,000 2,678,000
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Net decrease in cash (81,000) (681,000)
Cash, beginning of period 345,000 1,078,000
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Cash, end of period $ 264,000 $ 397,000
==================================
Supplemental cash flow information:
Cash paid for interest $ 150,000 $ 158,000
Equipment acquired under capital lease $ -- $ 36,000
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Notes to Consolidated Financial Statements
September 30, 2002
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 with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2001.
The Company operates in three business segments, which are identified as
distribution of wireless communications products, antenna design and
manufacturing, and cable products, 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 nine months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002 or any future period.
Certain prior-year amounts have been reclassified to conform to the current-year
presentation. These reclassifications had no effect on the results of operations
or shareholders' equity as previously reported.
Note 2. Consolidation Policy
The accompanying unaudited consolidated financial statements include the
accounts of ARC Wireless Solutions, Inc. ("ARC") and its wholly-owned subsidiary
corporations, Winncom Technologies Corp. ("Winncom") and Starworks Wireless Inc.
("Starworks"), since their respective acquisition dates, after elimination of
all material intercompany accounts, transactions, and profits.
Note 3. Earnings Per Share
As of December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 provides for the
calculation of "Basic" and "Dilutive" earnings per share. Basic earnings 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 per share reflect the potential dilution of
securities that could share in the earnings of the entity. For the three months
and nine months ended September 30, 2001, the Company incurred net losses. Stock
options and stock warrants totaling 1,000,000 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, respectively,
for the three months and nine months ended September 30, 2001.
6
The following table represents a reconciliation of the shares used to calculate
basic and diluted earnings per share for the respective periods indicated:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
Numerator: Net Income (Loss) $ (294,000) $ (464,000) $ 313,000 $ (1,337,000)
=========================================================================
Denominator:
Denominator for basic earnings per
share - weighted average shares
153,300,000 149,965,000 153,100,000 146,806,000
Effect of dilutive securities
Employee stock options -- -- 400,000 --
Common stock warrants -- -- -- --
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Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed conversion
153,300,000 149,965,000 153,500,000 146,806,000
=========================================================================
Basic earnings per share $ (.002) $ (.003) $ .002 $ (.009)
=========================================================================
Diluted earnings per share $ (.002) $ (.003) $ .002 $ (.009)
=========================================================================
Note 4. Revolving Bank Loan
Winncom Technologies Corp. had two bank lines of credit bearing an interest rate
of prime plus 0.5% (5.25% on September 30, 2002). One line of credit was a
revolving line of credit for $3 million, which expired April 30 2003, of which
$2.8 million was outstanding at September 30, 2002. The other line of credit was
for $1 million, of which $1 million was outstanding at September 30, 2002 and
which was due July 31, 2002. As of October 29, 2002 the two outstanding lines of
credit were combined into a single $4 million revolving line of credit due April
30, 2003. The credit line is collateralized by accounts receivable, inventory
and otherwise unencumbered fixed assets of Winncom. The credit line provides
that Winncom is prohibited from guaranteeing any obligations of, or paying or
advancing any distribution or other amount to, ARC Wireless Solutions, Inc. or
any of its subsidiaries. ARC is a general corporate guarantor of this loan.
Note 5. Acquisitions
On August 21, 2001 the Company acquired certain commercial assets of the
wireless communications products line of Ball Aerospace & Technologies Corp.
(BATC), a wholly owned subsidiary of Ball Corporation, for $925,389. The assets
acquired consist mainly of raw materials and finished goods inventory, testing
and production equipment, and the purchase price has been allocated to these
specifically identifiable assets. In November 2001 the purchase price was
adjusted in accordance with the Purchase Agreement for variances in actual
assets delivered to the Company by BATC. BATC refunded to the Company $99,271
pursuant to the Agreement.
Note 6. Equity Transactions
In July 2001, the Company offered each investor who had purchased units ("Unit
Investor") of common stock and common stock purchase warrants ("Warrants") in
the Company's private placement in 2000 the opportunity to either (1) exchange
7
each three Warrants for one share of Common Stock ("Alternative A"), or (2)
reduce the exercise price of each Warrant from $1.50 per share to $1.00 per
share upon the Unit Investor's agreement to reduce the price associated with the
Company's 30-day notice of redemption from $1.75 to $1.50 ("Alternative B");
provided, however, that if the Unit Investor determined to participate in either
Alternative A or B, the Unit Investor was required to waive the Company's
obligation to register the Unit Investor's sale or other transfer of the
Registrable Securities (the "Registration Obligation").
Each Unit Investor electing Alternative A also was required to enter into a
Restricted Sales Agreement (the "Restricted Sales Agreement") that includes the
following restrictions with respect to the sale of all shares of Common Stock
owned by the Unit Investor, except for any shares purchased subsequent to June
30, 2001:
o On any trading day during the one-year period beginning on the day
Alternative A goes into effect (which was August 9, 2001), the Unit
Investor may sell or otherwise dispose of up to the Pro Rata Share, as
defined below, for that Unit Investor, of (i) 15 percent of the
reported trading volume of the Common Stock for the immediately
preceding trading day if the reported trading volume of the Common
Stock for the prior trading day was 400,000 shares or less, or (ii) 20
percent of the reported trading volume of the Common Stock for the
immediately preceding trading day if the reported trading volume of
the Common Stock for the prior trading day was greater than 400,000
shares; and
o On any trading day during the one-year period between the first and
second anniversaries of the effective date of Alternative A, the Unit
Investor may sell or otherwise dispose of up to the Pro Rata Share for
that Unit Investor of (i) 20 percent of the reported trading volume of
the Common Stock for the immediately preceding trading day if the
reported trading volume of the Common Stock for the prior trading day
was 400,000 shares or less, or (ii) 25 percent of the reported trading
volume of the Common Stock for the immediately preceding trading day
if the reported trading volume of the Common Stock for the prior
trading day was greater than 400,000 shares.
The number of shares of Common Stock that the Unit Investor may sell shall not
be increased as a result of any failure by the Unit Investor to sell the maximum
number of Unit Investor Shares permissible at a prior time.
For purposes of Alternative A, the "Pro Rata Share" of any Unit Investor means
the percentage obtained by dividing (1) the number of Units purchased by the
subject Unit Investor in the Year 2000 Placement, by (2) the aggregate total
number of Units purchased by all investors in the Year 2000 Placement who agree
to the sales restrictions described above (the "Contracting Unit Investors").
Notwithstanding the foregoing, if the aggregate number of Units purchased in the
Year 2000 Placement by the Contracting Unit Investors is less than 90 percent of
the total number of Units purchased in the Year 2000 Placement by all investors
in the Year 2000 Placement, then "Pro Rata Share" shall instead mean the
percentage obtained by dividing (X) the number of Units purchased by the subject
Unit Investor in the Year 2000 Placement, by (Z) 90 percent of the aggregate
number of Units purchased by all investors in the Year 2000 Placement.
As of September 30, 2001 holders representing an aggregate of 13,062,000 Units
had agreed to participate in Alternative A and were issued 4,354,003 shares of
common stock and holders representing an aggregate of 1,148,000 Units had agreed
to participate in Alternative B.
The Company sold 5,000,000 shares of restricted common stock at $.20 per share
in a private placement offering through September 2001 from which it received
gross cash proceeds of $1,000,000. Related offering expenses were $22,000.
The Company sold 754,545 shares of restricted common stock at $.165 per share in
a private placement offering through June 30, 2002 from which it received gross
cash proceeds of $124,500. Offering costs associated with this private placement
8
offering were $6,600. Within 30 days following the filing with the SEC of the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2001, the
Company was obligated to file a registration statement covering the resale of
these shares. This registration statement was filed with the SEC on October 3,
2002.
In January 2002 the Company exercised its option to repurchase the remaining
500,000 shares from the McConnell litigation settlement for $75,000.
In March 2002, the Company issued 200,000 shares of restricted common stock for
consulting services valued at $34,000. The consulting agreement provides that,
because it was cancelled in September 2002, 100,000 of these shares are required
to be returned to the Company. The consultant is claiming the right to retain
all 200,000 shares although the Company believes she has no legal basis to do
so.
In the second quarter of 2002 the Company recorded the issuance of 13,945 shares
of common stock to directors for outstanding obligations for accrued directors
fees in the amount of $6,400.
In the third quarter of 2002 the Company recorded the issuance of 7,416 shares
of common stock to directors for outstanding obligations for accrued directors
fees in the amount of $1,000.
Note 7. Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141 "Business Combinations"
("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for under the purchase method. For all business combinations for which
the date of acquisition is after June 30, 2001, SFAS 141 also establishes
specific criteria for the recognition of intangible assets separately from
goodwill and requires unallocated negative goodwill to be written off
immediately as an extraordinary gain, rather than deferred and amortized. SFAS
142 changes the accounting for goodwill and other intangible assets after an
acquisition. The most significant changes made by SFAS 142 are: 1) goodwill and
intangible assets with indefinite lives will no longer be amortized; 2) goodwill
and intangible assets with indefinite lives must be tested for impairment at
least annually; and 3) the amortization period for intangible assets with finite
lives will no longer be limited to forty years. SFAS 142 is effective for fiscal
years beginning after December 15, 2001 and as such the Company adopted SFAS 142
effective January 1, 2002. The adoption of Statement SFAS 141 did not have any
impact on the Company's financial position or cash flows.
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective January 1, 2002. Additionally, under the new accounting
standard, goodwill and other intangible assets will be tested differently than
prior to the adoption of SFAS No. 142. The Company is required to perform these
impairment tests on an annual basis and has performed the transitional
impairment test required upon adoption of SFAS No. 142, using certain valuation
techniques, and has determined that no impairment exists at this time. It is
possible but not predictable that a change in the Company's wireless business,
market capitalization, operating results or other factors could affect the
carrying value of goodwill or other intangible assets and cause an impairment
write-off. As of September 30, 2002 the Company has approximately $10.8 million
of goodwill and other intangible assets subject to SFAS No. 142. Results of
operations prior to the adoption of SFAS No. 142 are not restated.
9
The following reconciles the reported net income (loss) and earnings (loss) per
share to that which would have resulted had SFAS No.142 been applied to the
three months and nine months ended September 30, 2001.
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2001
Reported net loss $ (464,000) $(1,337,000)
Add: Goodwill amortization, net of tax 262,000 760,000
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Adjusted net income (loss) $ 202,000 $ (631,000)
=========== ===========
Reported basic loss per share $ (.003) $ (.009)
Add: Goodwill amortization, net of tax,
per basic share
.002 .005
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Adjusted basic income (loss) per share $ .(001) $ (.004)
=========== ===========
In June 2001, the FASB also approved for issuance SFAS 143 "Asset Retirement
Obligations." SFAS 143 establishes accounting requirements for retirement
obligations associated with tangible long-lived assets, including (1) the timing
of the liability recognition, (2) initial measurement of the liability, (3)
allocation of asset retirement cost to expense, (4) subsequent measurement of
the liability and (5) financial statement disclosures. SFAS 143 requires that an
asset retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. The Company will adopt the statement effective no later than
January 1, 2003, as required. The transition adjustment resulting from the
adoption of SFAS 143 will be reported as a cumulative effect of a change in
accounting principle. The Company does not believe that the adoption of this
statement will have a material effect on its financial position, results of
operations, or cash flows.
In October 2001, the FASB also approved SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144 replaces SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The
new accounting model for long-lived assets to be disposed of by sale applies to
all long-lived assets, including discontinued operations, and replaces the
provisions of APB Opinion No. 30, Reporting Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business, for the disposal of segments of
a business. Statement 144 requires that those long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured at net realizable value or include amounts
for operating losses that have not yet occurred. Statement 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of the entity in a disposal
transaction. The Company adopted the provisions of Statement 144 effective
January 1, 2002 and the adoption did not have a material effect on its financial
position, results of operations, or cash flows.
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," effective for fiscal years beginning May 15, 2002 or later that
rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment
of Debt", FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements", and FASB Statement No. 44, "Accounting for
Intangible Assets of Motor Carriers". This Statement Amends FASB Statement No. 4
and FASB Statement No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback transactions.
This Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The Company implemented SFAS No. 145 effective July 1,
2002 and the early adoption did not have a material impact on its financial
condition or results of operations.
10
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS 146 requires recording costs associated
with exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally before an actual
liability has been incurred. Adoption of SFAS 146 is required with the beginning
of fiscal year 2003. The Company does not anticipate a significant impact on its
results of operations from adopting this Statement.
Note 8. 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 design and 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
nine months ended September 30, 2002 and 2001 are as follows:
Distribution Manufacturing Cable Corporate Total
------------ ------------- ----- --------- -----
Net Sales Sept. 2002 $ 18,930,000 $ 5,304,000 $ 393,000 $ (138,000) $ 24,489,000
Sept. 2001 $ 20,247,000 $ 2,059,000 $ 1,153,000 $ (98,000) $ 23,361,000
Net Earnings Sept. 2002 $ 132,000 $ 441,000 $ (81,000) $ (179,000) $ 313,000
(Loss) Sept. 2001 $ 415,000 $ (213,000) $ (314,000) $ (1,225,000) $ (1,337,000)
Earnings (Loss) Sept. 2002 $ 189,000 $ 441,000 $ (81,000) $ (179,000) $ 370,000
before Income Sept. 2001 $ 424,000 $ (213,000) $ (341,000) $ (1,198,000) $ (1,328,000)
Taxes
Identifiable Sept. 2002 $ 21,834,000 $ 4,115,000 $ 333,000 $ (1,235,000) $ 24,381,000
Assets Sept. 2001 $ 21,003,000 $ 3,660,000 $ 3,358,000 $ (1,864,000) $ 26,157,000
Corporate represents the operations of the parent Company, including segment
eliminations.
11
Note 9. Critical Accounting Policies
The Company's significant accounting policies are summarized in Note 1 of its
consolidated financial statements on Form 10-KSB. The preparation of financial
statements requires management to make estimates and assumptions that affect
amounts reported therein, including estimates about the effects of matters or
future events that are inherently uncertain. Policies determined to be critical
are those that have the most significant impact on the Company's financial
statements and require management to use a greater degree of judgment and/or
estimates. Actual results may differ from these estimates under different
assumptions or conditions.
On an on-going basis, management evaluates its estimates and judgments,
including those related to allowance for doubtful accounts, inventory valuations
and recoverability of intangible assets, including goodwill. Management bases
its estimates and judgments on historical experience and on various other
factors that are also believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value of
assets and liabilities that are not readily apparent form other sources.
However, future events are subject to change and the best estimates and
assumptions routinely require adjustment. Our major operating assets are trade
and vendor accounts receivable, inventory, property and equipment and intangible
assets. Our reserve for doubtful accounts of $1,143,000 should be adequate for
any exposure to loss in our accounts receivable as of September 30, 2002. We
have also established reserves for slow moving and obsolete inventories and
believe the current reserve of $334,000 is adequate. We depreciate our property
and equipment over their estimated useful lives and we have not identified any
items that are impaired.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations, Three Months Ended September 30, 2002 and 2001
Sales were approximately $8.5 million for the three-months ended September 30,
2002 and $7.3 million for the three-months ended September 30, 2001. Revenues
from the Wireless Communications Products Division increased from $754,000 for
the quarter ended September 30, 2001 to $1,563,000 for the quarter ended
September 30, 2002, primarily from revenues from base station antennas which
were $770,000 for the quarter ended September 30, 2002 and $190,000 for the
quarter ended September 30, 2001 and sales from the new Freedom Antenna which
were $249,000 for the quarter ended September 30, 2002 and $0 for the quarter
ended September 30, 2001. Revenues from Winncom increased from $6,247,000 for
the quarter ended September 30, 2001 to $6,943,000 for the quarter ended
September 30, 2002. The increases in the Wireless Communications Products
Division revenues and Winncom's revenues were offset by a decrease in Starworks
revenues from $312,000 for the quarter ended September 30, 2001 to $109,000 for
the quarter ended September 30, 2002.
Gross profit margins were 14.3% and 17.4% for the three-months ended September
30, 2002 and September 30, 2001, respectively. The decrease in gross margin for
the quarter ended September 30, 2002 vs. the quarter ended September 30, 2001 is
primarily due to Winncom. As a result of product mix, Winncom's profit margins
decreased from 16.3% for the quarter ended September 30, 2001 to 11.4% for the
quarter ended September 30, 2002. In addition, as a result of some product mix
changes at the Wireless Communications Products Division, the profit margins
decreased from 32.5% for the quarter ended September 30, 2001 to 29.6% for the
quarter ended September 30, 2002. When the Company purchased certain commercial
assets of the wireless communications products line of BATC, which consisted of
raw materials and finished goods inventory among other assets, these assets were
purchased at a substantial discount from their fair market or replacement value.
During the quarter ended September 30, 2002, the Wireless Communications
Products Division benefited from the sale of portions of the inventory purchased
from BATC. Depending on the product mix, the Company may realize additional
benefit from the below-market cost of the BATC inventory in the future, but the
benefit will diminish as the inventory is depleted and replaced with inventory
purchased at current market prices. Based on the Company's estimates of current
12
replacement costs for the BATC inventory included in cost of goods sold during
the third quarter, the Company estimates that the benefit resulting from
inventory purchased at below-market costs was between $25,000 and $50,000 for
the quarter ended September 30, 2002. Because the BATC inventory was not
purchased until August 21, 2001, only one month's benefit was recognized for the
quarter ended September 30, 2001.
Selling, general and administrative expenses (SG&A) increased slightly by $5,000
for the three months ended September 30, 2002 compared to the three months ended
September 30, 2001. This slight increase in SG&A is primarily the result of the
addition of management and staff as a result of the acquisition of certain
commercial assets from BATC, which was partially offset by lower litigation
costs incurred this quarter compared to the prior quarter. SG&A as a percent of
revenue decreased from 19.9% for the three months ended September 30, 2001 to
17.1% for the three months ended September 30, 2002.
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective January 1, 2002. Consequently, there was no amortization of
purchased intangibles for the quarter ended September 30, 2002 as compared to
$262,000 in amortization of purchased intangibles for the quarter ended
September 30, 2001. (See Note 7)
Net interest expense was $50,000 for the three months ended September 30, 2002
and $61,000 for the three months ended September 30, 2001. The average balance
outstanding on the lines of credit was higher by $400,000 for the quarter ended
September 30, 2002 as compared to the quarter ended September 30, 2001, but the
interest rate was 7% for 2002 as compared to 9% for 2001. The line of credit
balance was increased by $925,000 in September 2001 as the proceeds were used to
finance the Ball assets acquisition (see Note 6 above.)
The Company had a net loss for the three months ended September 30, 2002 of
$294,000 compared to a net loss of $464,000 for the three months ended September
30, 2001 primarily due to the termination of amortization of goodwill effective
January 1, 2002 and an increase in revenues, both of which were partially offset
by a decrease in gross margin percent from 17.4% for the quarter ended September
30, 2001 to 14.3% for the quarter ended September 30, 2002.
Results of Operations, Nine Months Ended September 30, 2002 and 2001
Sales were $24,489,000 and $23,361,000 for the nine-month periods ended
September 30, 2002 and 2001, respectively. The increase of 4.8% comparing the
nine months ended September 30, 2002 to the nine months ended September 30, 2001
is attributable to the 152% increase in revenues from the Wireless
Communications Products Division from $2.1 million for the nine months ended
September 30, 2001 to $5.3 million for the nine months ended September 30, 2002.
While revenues from all product lines increased over 2002 the most significant
increase in revenues came from base station antennas, which were $2.8 million
for the nine months ended September 30, 2002 and $200,000 for the nine months
ended September 30, 2001. The increase in the Wireless Communications Products
Division revenues were partially offset by a decrease in Starworks revenues from
$1,153,000 for the nine months ended September 30, 2001 to $393,000 for the nine
months ended September 30, 2002 and a decrease in Winncom revenues from $20.2
million for the nine months ended September 30, 2001 to $18.9 million for the
nine months ended September 30, 2002.
Gross profit margins were 18.9% and 17.8% for the nine months ended September
30, 2002 and September 30, 2001, respectively. The increase in gross margin for
the nine months ended September 30, 2002 vs. the nine months ended September 30,
2001 is primarily the result of the increase in revenues from the Wireless
Communications Products Division, whose products have a higher margin than those
of Winncom or Starworks. 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
13
purchased at a substantial discount from their fair market or replacement value.
During the nine months ended September 30, 2002, the Wireless Communications
Products Division benefited from the sale of portions of the inventory purchased
from BATC, and this benefit is reflected in higher gross margins. Depending on
the product mix, the Company may realize additional benefit from the
below-market cost of the BATC inventory in the future, but the benefit will
diminish as the inventory is depleted and replaced with inventory purchased at
current market prices. Based on the Company's estimates of current replacement
costs for the BATC inventory included in cost of goods sold for the nine months
ended September 30, 2002, the Company estimates that the benefit resulting from
inventory purchased at below-market costs was between $300,000 and $400,000 for
the nine months ended September 30, 2002. Because the BATC inventory was not
purchased until August 21, 2001, the benefit recognized for the nine months
ended September 30, 2001 was approximately $40,000.
Selling, general and administrative expenses (SG&A) decreased by $279,000 for
the nine months ended September 30, 2002 compared to the nine months ended
September 30, 2001. In addition, SG&A as a percent of revenue decreased from
19.8% for the nine months ended September 30, 2001 to 17.8% for the nine months
ended September 30, 2002. The decrease in SG&A comparing 2002 to 2001 is
primarily due to legal fees in connection with the Starworks' litigation and
certain employee termination costs, which were incurred in 2001 but not in 2002.
During the nine months ended September 30, 2001, termination agreements were
entered into with the former CEO of the Company and the former CFO of the
Company. The former CEO received $63,000 of severance payments plus options to
purchase 250,000 shares of the Company's common stock at an exercise price of
$0.325 per share and the former CFO received $47,000 of severance payments plus
options to purchase 350,000 shares of the Company's common stock at $0.26 per
share. The Company recognized $232,000 of expense related to these termination
agreements during the nine months ended September 30, 2001, including $122,000
of non-cash compensation related to the issuance of the options. This expense
was partially offset by the elimination of $96,000 of accrued bonuses as part of
the severance agreements. In addition, the nine months ended September 30, 2001
included $283,000 in expenses related to impairment of assets, adjustments,
litigation and other costs of the Kit Company acquisition.
In accordance with SFAS No. 142, the Company discontinued the amortization of
goodwill effective January 1, 2002. Consequently, there was no amortization of
purchased intangibles for the nine months ended September 30, 2002 as compared
to $760,000 in amortization of purchased intangibles for the nine months ended
September 30, 2001. (See Note 7.)
Net interest expense was $151,000 for the nine months ended September 30, 2002
compared to $168,000 for the nine months ended September 30, 2001. Although the
average balance outstanding on the lines of credit was higher for the nine
months ended September 30, 2002 as compared to the nine months ended September
30, 2001, the interest rate was 7.25% for 2002 as compared to 9% for 2001. The
line of credit balance was increased by $925,000 in September 2001 as the
proceeds were used to finance the Ball assets acquisition. (See Note 6 above.)
During the nine months ended September 30, 2002, the Company realized a gain
from debt settlements of $226,000. As a result of the adoption of SFAS 145, the
Company classified this amount as other income. There was no gain from debt
settlements for the nine months ended September 30, 2001.
The Company had net income for the nine months ended September 30, 2002 of
$313,000 compared to a net loss of $1,337,000 for the nine months ended
September 30, 2001 primarily due to five factors: 1) an increase in revenues
from $23.4 million for the nine months ended June 30, 2001 to $24.5 million for
the nine months ended September 30, 2002, 2) an increase in gross margin percent
from 17.8% for the nine months ended September 30, 2001 to 18.9% for the nine
months ended September 30, 2002, which resulted partially from the use of
inventory at below-market cost and partially from increased sales of higher
margin products, 3) a reduction in SG&A expenses relative to revenues from 19.8%
in 2001 to 17.8% in 2002, 4) the termination of amortization of goodwill
effective January 1, 2002 which was $760,000 for the nine months ended September
30, 2001 and 5) gain from debt settlements of $226,000 recorded for the nine
months ended September 30, 2002.
14
Financial Condition
The net cash used in operating activities decreased from $3,012,000 for the nine
months ended September 30, 2001 to $338,000 for the nine months ended September
30, 2002 primarily due to an increase in income from operations in 2002 of
$313,000 as compared to a loss from operations in 2001 of $1,337,000. The
increase in receivables in 2002 is primarily attributable to increases in
Winncom's receivables from $4.9 million at December 31, 2001 to $5.4 million at
September 30, 2002. Winncom's receivables increased at September 30, 2002
compared to December 31, 2001 because Winncom's sales were $5.9 million in the
4th quarter of 2001 compared to sales of $6.9 million for the 3rd quarter ended
September 30, 2002. There were only minimal increases in inventory, prepaids and
accounts payable from December 31, 2001 to September 31, 2002.
The net cash used in investing activities of $97,000 in 2002 and $347,000 in
2001 is primarily the result of increases in patents and purchases of equipment.
Most of the 2001 increase in plant and equipment is the result of the purchase
of BATC assets in August 2001.
The net cash provided by financing activities of $354,000 in 2002 is primarily
the result of increases in net borrowings under lines of credit of $319,000 and
net proceeds from a private placement of $119,000, partially offset by the
purchase of treasury stock in the amount of $75,000 in connection with the
McConnell litigation settlement. For 2001 the net cash provided by financing
activities of $2,678,000 is primarily the result of increases in net borrowings
under lines of credit of $1,706,000 and net proceeds from a private placement of
$978,000. Borrowings under the line of credit increased by $925,000 in August
2001 as a result of the purchase of certain BATC assets.
The Company's working capital at September 30, 2002 was $3.5 million compared to
$5.6 million at December 31, 2001. The decrease is the result of the
classification of the bank line of credit in the amount of $2.9 million from
long-term debt to current liabilities as it is due April 2003. Excluding this
reclassification, working capital would have improved to $6.4 million as
compared to $5.6 million at December 31, 2001.
In conjunction with the acquisition of Winncom Technologies Corp. on May 24,
2000, the Company assumed a $1,500,000 revolving line of credit from a bank
bearing an interest rate of prime plus 0.5% (5.5% at December 31, 2001 and at
June 30, 2002). The line is collateralized by accounts receivable, inventory and
otherwise unencumbered fixed assets of Winncom. The credit line provides that
Winncom is prohibited from guaranteeing any obligations of, or paying or
advancing any distribution or other amount to, ARC Wireless Solutions, Inc. or
any of its subsidiaries. ARC is a general guarantor of this loan. On November
27, 2000 the line was increased to $3,000,000, of which $2,621,000 was
outstanding at December 31, 2001, and $2,865,000 was outstanding at September
30, 2002. As of October 29, 2002 the $3 million line of credit and the $1
million line of credit discussed below were combined into a single $4 million
line of credit with a due date of April 30, 2003.
In connection with the acquisition of the Ball Assets in August 2001, Winncom
established a new second line of credit in the amount of $1 million bearing an
interest rate of prime plus 0.5% (5.5% at December 31, 2001 and at June 30,
2002). This line is also collateralized by accounts receivable, inventory and
otherwise unencumbered fixed assets of Winncom. ARC is a general corporate
guarantor of this loan. As of December 31, 2001 and September 30, 2002, $925,000
and $1,000,000, respectively, were outstanding under this line of credit. The
outstanding balance under this letter of credit was due and payable July 31,
2002. On October 29, 2002 the $3 million line of credit, discussed above, and
the $1 million line of credit were combined into a single $4 million line of
credit with a due date of April 30, 2003.
15
In conjunction with the acquisition of Starworks Technology Inc. on September
29, 2000, the Company assumed a $1.5 million revolving bank loan, which was
secured by accounts receivable and restricted cash maintained in a
non-collection reserve account. The Company ceased assigning Starworks' accounts
receivable to the bank in February 2001. There is no balance outstanding under
the revolving bank loan at September 30, 2002 or December 31, 2001.
The Company has recently been approved for a $500,000 lease line of credit.
Under this agreement $229,000 of capital assets acquired from Ball in August
2001 will be subject to a sale lease-back in which the Company will receive
proceeds of up to $159,000. The remaining open balance on the lease line will be
used to finance capital expenditures budgeted for the remainder of 2002 although
currently there are no material commitments for capital expenditures.
The Company closed the operations of Starworks in the Atlanta location on July
12, 2002. The expected closure costs were accrued as of December 31, 2001. With
the closure of Starworks in Atlanta the Company expects to reduce monthly
operating costs by approximately $16,000 to $20,000.
At September 30, 2002 the Company's backlog was approximately $1 million all of
which is expected to be completed by December 31, 2002.
Management believes that current working capital, available borrowings on
existing bank lines of credit, proceeds from the sale and leaseback and from
available borrowings on the new lease line 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, 2002 and
into the foreseeable future.
Forward Looking Statements
This report contains forward-looking statements. Although the Company believes
that the expectations reflected in the forward looking statements and the
assumptions upon which the forward looking statements are based are reasonable,
it can give no assurance that such expectations and assumptions will prove to be
correct. See the Company's Annual Report on Form 10-KSB for additional
statements concerning important factors, such as demand for products,
manufacturing costs and competition that could cause actual results to differ
materially from the Company's expectations.
Item 3. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures
Based on an evaluation carried out under the supervision, and with the
participation of ARC management, including the Chief Executive Officer and the
Chief Financial Officer during the 90 day period prior to the filing of this
report, the Company's Chief Executive Officer and Chief Financial Officer
believe ARC's disclosure controls and procedures, as defined in Securities
Exchange Act Rules 13a-14 and 15d-14, are to the best of their knowledge,
effective.
(b) Changes in internal controls
Subsequent to the date of this evaluation, the Chief Executive Officer and
Chief Financial Officer are not aware of any significant changes in the
Company's internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses, or in other factors that could
significantly affect these controls to ensure that information required to be
disclosed by ARC, in reports that it files or submits under the Securities Act
of 1934, is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and regulations.
16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds; Recent Sales of Unregistered
Securities
In March 2002, the Company sold 754,545 shares of restricted common stock at
$.165 per share to two accredited investors in a private placement transaction.
These sales resulted in gross proceeds to the Company of $124,500. The issuance
of these shares of common stock were made pursuant to exemptions from
registration in accordance with Rules 505 and/or 506 and/or Sections 3(b) and/or
4(2) of the Securities Act. The Company intends to use the net proceeds from
this offering for working capital purposes. Pursuant to the terms of the private
placement the Company is obligated to file with the SEC, within 30 days after
the filing with the SEC of the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2001, a registration statement covering resale of these
shares. This registration statement was filed with the SEC on October 3, 2002.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
---------
None
(b) Reports on Form 8-K.
--------------------
During the period ended September 30, 2002, the Company filed a
Current Report on Form 8-K reporting Regulation FD disclosure pursuant
to Item 9 on March 19, 2002 and August 12, 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: November 13, 2002 By: /S/ Randall P. Marx
-----------------------------------
Randall P. Marx
Chief Executive Officer
Date: November 13, 2002 By: /S/ Monty R. Lamirato
-----------------------------------
Monty R. Lamirato
Chief Financial Officer
17
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Randall P. Marx, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of ARC Wireless
Solutions, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, is made known to us by others within
those entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 13, 2002 /s/ Randall P. Marx
--------------------------------
Randall P. Marx
Chief Executive Officer
18
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Monty R. Lamirato, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of ARC Wireless
Solutions, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, is made known to us by others within
those entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 13, 2002 /s/ Monty R. Lamirato
----------------------------------
Monty R. Lamirato
Chief Financial Officer
19