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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 June 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 August 1, 2002, the Registrant had 153,312,274 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
June 30, 2002
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited)
and December 31, 2001.......................................F-1
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 2002 and 2001 (unaudited).....F-2
Consolidated Statements of Cash Flows for the Three Months
and Six Months Ended June 30, 2002 and 2001 (unaudited).....F-3
Notes to Consolidated Financial Statements........................F-4
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations..............................................3
Financial Condition................................................5
Forward Looking Statements.........................................7
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds; Recent Sales
of Unregistered Securities..........................................7
Item 6. Exhibits and Reports on Form 8-K...................................7
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Consolidated Balance Sheets
June 30, December 31,
2002 2001
Assets (unaudited) *
Current assets:
Cash $ 108,000 $ 345,000
Accounts receivable - customers, net 4,630,000 4,687,000
Accounts receivable - vendors, net 1,663,000 1,214,000
Inventory, net 6,549,000 5,938,000
Other current assets 257,000 117,000
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Total current assets 13,207,000 12,301,000
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Property and equipment, net 630,000 729,000
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Other assets:
Intangible assets including goodwill, net 10,931,000 10,907,000
Deposits 65,000 64,000
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Total assets $ 24,833,000 $ 24,001,000
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Liabilities and stockholders' equity
Current liabilities:
Bank line of credit $ 3,865,000 $ 925,000
Accounts payable 5,242,000 5,273,000
Current portion of capital lease obligations 9,000 11,000
Accrued expenses 367,000 503,000
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Total current liabilities 9,483,000 6,712,000
Capital lease obligations, less current portion 17,000 21,000
Bank line of credit, less current portion -- 2,621,000
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Total liabilities 9,500,000 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 21,677,000 21,522,000
Accumulated deficit (5,230,000) (5,835,000)
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Total stockholders' equity 15,333,000 14,647,000
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Total liabilities and stockholders' equity $ 24,833,000 $ 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.
F-1
ARC Wireless Solutions, Inc.
Consolidated Statements of Operations
Three months ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
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(unaudited) (unaudited)
Sales, net $ 7,951,000 $ 7,968,000 $ 15,957,000 $ 16,067,000
Cost of sales 6,352,000 6,394,000 12,556,000 13,179,000
------------ ------------ ------------ ------------
Gross profit 1,599,000 1,574,000 3,401,000 2,888,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative expenses 1,445,000 1,369,000 2,899,000 3,182,000
Amortization of purchased intangibles -- 248,000 -- 498,000
------------ ------------ ------------ ------------
Total operating expenses 1,445,000 1,617,000 2,899,000 3,680,000
------------ ------------ ------------ ------------
Income (loss) from operations 154,000 (43,000) 502,000 (792,000)
Other income (expense):
Interest expense, net (53,000) (59,000) (101,000) (107,000)
Gain from debt cancellation 48,000 -- 226,000 --
Other income 11,000 22,000 17,000 34,000
------------ ------------ ------------ ------------
Total other income (expense) 6,000 (37,000) 142,000 (73,000)
------------ ------------ ------------ ------------
Income (loss) before income taxes 160,000 (80,000) 644,000 (865,000)
Provision for income taxes (19,000) (4,000) (39,000) (8,000)
------------ ------------ ------------ ------------
Net Income (loss) $ 141,000 $ (84,000) 605,000 $ (873,000)
============ ============ ============ ============
Net loss per share (basic and diluted) -- $ (.001) -- $ (.006)
============ ============ ============ ============
Net income (loss) per share - basic $ .001 -- $ .004 --
============ ============ ============ ============
Net income (loss) per share - diluted $ .001 -- $ .004 --
============ ============ ============ ============
See accompanying notes.
F-2
ARC Wireless Solutions, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 30,
2002 2001
--------------------------
(unaudited)
Operating activities
Net income (loss) $ 605,000 $ (873,000)
Adjustments to reconcile net income (loss) to net cash used in
Operating activities:
Depreciation and amortization 151,000 590,000
Debt cancellations (226,000) --
Non-cash expense for issuance of stock and options 36,000 125,000
Changes in operating assets and liabilities:
Restricted cash -- 194,000
Accounts receivable, trade and vendor (392,000) (1,195,000)
Inventory (611,000) 620,000
Prepaids and other current assets (140,000) (327,000)
Deposits (1,000) 22,000
Accounts payable and accrued expenses 58,000 (693,000)
Other -- --
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Net cash used in operating activities (520,000) (1,537,000)
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Investing activities
Patent acquisition costs (29,000) (5,000)
Acquisition of businesses, net of cash acquired -- 27,000
Purchase of plant and equipment (47,000) (91,000)
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Net cash used in investing activities (76,000) (69,000)
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Financing activities
Repayment of notes and capital lease obligations (6,000) (8,000)
Net borrowings under lines of credit 319,000 484,000
Proceeds from private placement, net 121,000 862,000
Proceeds from exercise of common stock options -- 5,000
Acquisition of treasury shares (75,000) --
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Net cash provided by financing activities 359,000 1,343,000
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Net increase (decrease) in cash (237,000) (263,000)
Cash, beginning of period 345,000 1,078,000
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Cash, end of period $ 108,000 $ 815,000
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Supplemental cash flow information:
Cash paid for interest $ 99,000 $ 107,000
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See accompanying notes.
F-3
ARC Wireless Solutions, Inc.
Notes to Consolidated Financial Statements
June 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 six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended 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 six months ended June 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 for the three
months and six months ended June 30, 2001.
F-4
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 Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
Numerator: Net Income (Loss) $ 141,000 $ (84,000) $ 605,000 $ (873,000)
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per
share - weighted average shares
153,298,000 145,546,000 152,916,000 145,200,000
Effect of dilutive securities
Employee stock options 532,000 -- 401,000 --
Common stock warrants -- -- -- --
----------- ----------- ----------- -----------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed conversion 153,830,000 145,546,000 153,317,000 145,200,000
=========== =========== =========== ===========
Basic earnings per share $ .001 $ (.001) $ .004 $ (.006)
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Diluted earnings per share $ .001 $ (.001) $ .004 $ (.006)
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Note 4. Revolving Bank Loan
Winncom Technologies Corp. has two bank lines of credit bearing an interest rate
of prime plus 0.5% (5.25% on June 30, 2002). One line of credit is a revolving
line of credit for $3.5 million, of which $2.8 million is outstanding at June
30, 2002. It expires in April 2003. The other line of credit is for $1 million,
of which $925,000 is outstanding at June 30, 2002 and which was due July 31,
2002. We are currently in negotiations with the Bank to increase our revolving
line of credit facility and combine the two outstanding lines into a single
credit line. The credit lines are 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
each three Warrants for one share of Common Stock ("Alternative A"), or (2)
F-5
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
offering were $4,100. Within 30 days following the filing with the SEC of the
F-6
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 is intended to be filed with the SEC
by August 31, 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.
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.
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 June 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.
F-7
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 six months ended June 30, 2001.
Three Months Six Months
Ended June 30, Ended June 30,
2001 2001
Reported net loss $ ( 84,000) $(873,000)
Add: Goodwill amortization, net of tax 248,000 498,000
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Adjusted net income (loss) $ 164,000 $(375,000)
========== =========
Reported basic loss per share $ (.001) $ (.006)
Add: Goodwill amortization, net of tax, per basic share
.002 .003
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Adjusted basic income (loss) per share $ .001 $ (.003)
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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 does not expect the implementation of SFAS
No. 145 to have a material impact on its financial condition or results of
operations.
F-8
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
six months ended June 30, 2002 and 2001 are as follows:
June
30 Distribution Manufacturing Cable Corporate Total
-- ------------ ------------- ----- --------- -----
Net Sales 2002 $11,987,000 $ 3,741,000 $ 285,000 $ (56,000) $15,957,000
2001 $14,000,000 $ 1,305,000 $ 841,000 $ (79,000) $16,067,000
Net Earnings 2002 $ 123,000 $ 515,000 $ (54,000) $ 21,000 $ 605,000
(Loss) 2001 $ 397,000 $ (130,000) $ (243,000) $ (897,000) $ (873,000)
Earnings (Loss)
before Income 2002 $ 162,000 $ 515,000 $ (54,000) $ 21,000 $ 644,000
Taxes 2001 $ 405,000 $ (130,000) $ (243,000) $ (897,000) $ (865,000)
Identifiable 2002 $22,025,000 $ 4,242,000 $ 400,000 $(1,834,000) $24,833,000
Assets 2001 $20,244,000 $ 2,772,000 $ 3,245,000 $ (684,000) $25,577,000
Corporate represents the operations of the parent Company, including segment
eliminations.
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.
F-9
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. Our
major operating assets are trade and vendor accounts receivable, inventory,
property and equipment and intangible assets. Our reserve for doubtful accounts
of $1,084,000 should be adequate for any exposure to loss in our accounts
receivable as of June 30, 2002. We have also established reserves for slow
moving and obsolete inventories and believe the current reserve of $309,000 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 June 30, 2002 and 2001
Sales were approximately $8 million for both the three-month periods ended June
30, 2002 and 2001. Revenues from the Wireless Communications Products Division,
increased from $739,000 for the quarter ended June 30, 2001 to $1,782,000 for
the quarter ended June 30, 2002, primarily from revenues from base station
antennas which were $730,000 for the quarter ended June 30, 2002 and $0 for the
quarter ended June 30, 2001,. The increase in the Wireless Communications
Products Division revenues were offset by a decrease in Starworks revenues from
$429,000 for the quarter ended June 30, 2001 to $91,000 for the quarter ended
June 30, 2002 and a decrease in Winncom revenues from $6.8 million for the
quarter ended June 30, 2001 to $6.1 million for the quarter ended June 30, 2002.
Gross profit margins were 20.1% and 19.8% for the three-months ended June 30,
2002 and June 30, 2001, respectively. The slight increase in gross margin for
the quarter ended June 30, 2002 vs. the quarter ended June 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. As a result of product mix Winncom's profit margins decreased from
17.8% for the quarter ended June 30, 2001 to 13.1% for the quarter ended June
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 June 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 during the second quarter, the Company estimates
that the benefit resulting from inventory purchased at below-market costs was
between $50,000 and $100,000 for the quarter ended June 30, 2002. Because the
BATC inventory was not purchased until August 21, 2001, no such benefit was
recognized for the quarter ended June 30, 2001.
Selling, general and administrative expenses (SG&A) increased slightly by
$76,000 for the three months ended June 30, 2002 compared to the three months
ended June 30, 2001. This 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 form BATC. SG&A as a percent of revenue increased from 17.2%
for the three months ended June 30, 2001 to 18.2% for the three months ended
June 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 June 30, 2002 as compared to
$248,000 in amortization of purchased intangibles for the quarter ended June 30,
2001. (See Note 7)
3
Net interest expense was $53,000 for the three months ended June 30, 2002 and
$59,000 for the three months ended June 30, 2001. The average balance
outstanding on the lines of credit was higher by $1.6 million for the quarter
ended June 30, 2002 as compared to the quarter ended June 30, 2001 but the
interest rate was 5.25% 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.)
Included in other income for the three months ended June 30, 2002 is a gain from
debt settlements of $48,000. There was no gain from debt settlements for the
quarter ended June 30, 2001.
The Company had net income for the three months ended June 30, 2002 of $141,000
compared to a net loss of $84,000 for the three months ended June 30, 2001
primarily due to three factors, 1) an increase in gross margin percent from
20.3% for the quarter ended June 30, 2001 to 21.1% for the quarter ended June
30, 2002, which resulted partially from the use of inventory at below-market
cost and partially from increased sales of higher margin products, 2) the
termination of amortization of goodwill effective January 1, 2002 which was
$250,000 for the quarter ended June 30, 2001 and $0 for the quarter ended June
30, 2002 and 3) the gain from debt settlements of $48,000 recorded for the
quarter ended June 30, 2002.
Results of Operations, Six Months Ended June 30, 2002 and 2001
Sales were $15,957,000 and $16,067,000 for the six-month periods ended June 30,
2002 and 2001, respectively. The slight decrease, less than 1%, in revenues
comparing the six months ended June 30, 2002 to the six months ended June 30,
2001 is attributable to a decrease in Starworks revenues from $841,000 for the
six months ended June 30, 2001 to $284,000 for the six months ended June 30,
2002 and a decrease in Winncom revenues from $14 million for the six months
ended June 30, 2001 to $12 million for the six months ended June 30, 2002, which
decreases were substantially offset by the increase in revenues from the
Wireless Communications Products Division, primarily revenues from base station
antennas which were $2 million for the six months ended June 30, 2002 and $0 for
the six months ended June 30, 2001.
Gross profit margins were 21.3% and 18.0% for the six months ended June 30, 2002
and June 30, 2001, respectively. The increase in gross margin for the six months
ended June 30, 2002 vs. the six months ended June 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 purchased at a
substantial discount from their fair market or replacement value. During the six
months ended June 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 six months ended June 30, 2002, the
Company estimates that the benefit resulting from inventory purchased at
below-market costs was between $200,000 and $300,000 for the six months ended
June 30, 2002. Because the BATC inventory was not purchased until August 21,
2001, no such benefit was recognized for the six months ended June 30, 2001.
4
Selling, general and administrative expenses (SG&A) decreased by $283,000 for
the six months ended June 30, 2002 compared to the six months ended June 30,
2001. In addition, SG&A as a percent of revenue decreased from 19.8% for the six
months ended June 30, 2001 to 18.2% for the six months ended June 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 six months ended
June 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 six
months ended June 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 six months ended June 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 six months ended June 30, 2002 as compared to
$498,000 in amortization of purchased intangibles for the six months ended June
30, 2001. (See Note 7)
Net interest expense was $101,000 for the six months ended June 30, 2002
compared to $107,000 for the six months ended June 30, 2001. The average balance
outstanding on the lines of credit was higher by $1.6 million for the quarter
ended June 30, 2002 as compared to the quarter ended June 30, 2001 but the
interest rate was 5.25% 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.)
Included in other income for the six months ended June 30, 2002 is a gain from
debt settlements of $226,000. There was no gain from debt settlements for the
six months ended June 30, 2001.
The Company had net income for the six months ended June 30, 2002 of $605,000
compared to a net loss of $873,000 for the six months ended June 30, 2001
primarily due to four factors, 1) an increase in gross margin percent from 18%
for the six months ended June 30, 2001 to 21.3% for the six months ended June
30, 2002, which resulted partially from the use of inventory at below-market
cost and partially from increased sales of higher margin products, 2) a
reduction in SG&A expenses relative to revenues from 19.8% in 2001 to 18.2% in
2002, 3) the termination of amortization of goodwill effective January 1, 2002
which was $498,000 for the six months ended June 30, 2001 and 4) gain from debt
settlements of $226,000 recorded for the six months ended June 30, 2002.
Financial Condition
The net cash used in operating activities decreased from $1,537,000 for the six
months ended June 30, 2001 to $520,000 for the six months ended June 30, 2002
primarily due to an increase in income from operations in 2002 of $502,000 as
compared to a loss from operations in 2001 of $792,000. The increase in
inventory in 2002 was largely attributable to increases in Winncom's inventory
from $3.9 million at December 31, 2001 to $4.6 million at June 30, 2002.
Accounts receivable have increased due to increases in receivables from vendors
for special pricing discount and other purchase discounts, which typically are
outstanding for 90 to 105 days. There was only a slight decrease in accounts
payable in 2002 which was primarily due to improved efforts to increase
inventory turns and the depletion of the BATC inventory purchased in August 2001
whose purchase was financed by a bank line of credit rather than trade accounts
payable.
The net cash used in investing activities of $76,000 in 2002 and $69,000 in 2001
is primarily the result of increases in patents and purchases of equipment.
5
The net cash provided by financing activities of $359,000 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 $121,000, 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
$1,343,000 is primarily the result of increases in net borrowings under lines of
credit of $484,000 and net proceeds from a private placement of $862,000.
The Company's working capital at June 30, 2002 was $3.7 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 $6.6 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 $2,940,000 was outstanding at June 30,
2002. This agreement expires in April 2003, at which time all borrowings are due
in full in the event the line is not renewed.
In connection with the acquisition of the Ball Assets in August 2001, Winncom
established a new line of credit in the amount of $1 million bearing an interest
rate of prime plus 0.5% (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 June 30, 2002, $925,000 was outstanding
under this line of credit. This balance due under this letter of credit was due
March 31, 2002. The Company is currently negotiating with the bank to convert
this line of credit, currently due, to a long-term credit facility.
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 June 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 approximately $229,000. The remaining open balance on the lease line
will be used to finance capital expenditures budgeted for the remainder of 2002.
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.
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, the renegotiation of the
$1 million line of credit that was due March 31, 2002, 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.
6
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.
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. 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, which is intended to be
filed with the SEC by August 31, 2002.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits.
---------
None
(b) Reports on Form 8-K.
--------------------
During the period ended June 30, 2002, the Company filed a
Current Report on Form 8-K reporting Regulation FD
disclosure pursuant to Item 9 on March 19, 2002.
7
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: August 12, 2002 By: /s/ Randall P. Marx
-------------------------------
Randall P. Marx
Chief Executive Officer
Date: August 12, 2002 By: /s/ Monty R. Lamirato
-------------------------------
Monty R. Lamirato
Chief Financial Officer
8