UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2006.
000-18122
---------
(Commission File Number)
ARC Wireless Solutions, Inc.
----------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0454148
---- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation)
10601 West 48th Avenue
Wheat Ridge, Colorado, 80033-2163
---------------------------------
(Address of principal executive offices including zip code)
(303) 421-4063
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former Name or Former Address, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of Exchange Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [x]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [x]
As of August 1, 2006, the Registrant had 154,359,449 shares outstanding of its
$.0005 par value common stock.
ARC Wireless Solutions, Inc.
Quarterly Report on FORM 10-Q/A For The Period Ended
June 30, 2006
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30,
2006 (unaudited) and December 31, 2005...............................3
Condensed Consolidated Statements of Operations for
the Three Months and Six Months Ended June 30, 2006
and 2005 (unaudited).................................................4
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 2006 and 2005 (unaudited)..............5
Notes to Consolidated Financial Statements................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........21
Item 4. Controls and Procedures..............................................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .........22
Item 6. Exhibits ............................................................22
Signatures....................................................................23
Exhibit 31.1..................................................................24
Exhibit 31.2..................................................................25
Exhibit 32.1..................................................................26
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Condensed Consolidated Balance Sheets
June 30, December 31,
2006 2005
Assets (unaudited) *
Current assets:
Cash and equivalents $ 79,000 $ 64,000
Accounts receivable - trade, net 898,000 907,000
Inventory, net 1,170,000 919,000
Deferred tax assets 537,000 516,000
Net assets of discontinued operation (Note 2) 39,761,000 30,524,000
Other current assets 145,000 71,000
------------ ------------
Total current assets 42,590,000 33,001,000
------------ ------------
Property and equipment, net 355,000 342,000
------------ ------------
Other assets:
Intangible assets, net 104,000 103,000
Deposits 52,000 43,000
------------ ------------
Total assets $ 43,101,000 $ 33,489,000
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 897,000 $ 353,000
Bank debt - current 1,234,000 554,000
Accrued expenses 174,000 302,000
Net liabilities of discontinued operation (Note 2) 23,806,000 15,339,000
Current portion of capital lease obligations 66,000 66,000
------------ ------------
Total current liabilities 26,177,000 16,614,000
Deferred tax liabilities 26,000 26,000
Capital lease obligations, less current portion -- 39,000
------------ ------------
Total liabilities 26,203,000 16,679,000
------------ ------------
Commitments
Stockholders' equity:
Common stock 78,000 78,000
Preferred stock -- --
Additional paid-in capital 21,768,000 21,760,000
Treasury stock (1,195,000) (1,195,000)
Accumulated deficit (3,753,000) (3,833,000)
------------ ------------
Total stockholders' equity 16,898,000 16,810,000
------------ ------------
Total liabilities and stockholders' equity $ 43,101,000 $ 33,489,000
============ ============
* These numbers were derived from the audited financial statements for the year
ended December 31, 2005 and adjusted for discontinued operations. See
accompanying notes.
3
ARC Wireless Solutions, Inc.
Condensed Consolidated Statements of Operations
Three Months Ended June 30, Six Months Ended June 30,
2006 2005 2006 2005
------------- ------------- ------------- -------------
(unaudited) (unaudited)
Sales, net $ 1,824,000 $ 1,691,000 $ 3,373,000 $ 2,777,000
Cost of sales 1,430,000 930,000 2,559,000 1,662,000
------------- ------------- ------------- -------------
Gross profit 394,000 761,000 814,000 1,115,000
Operating expenses:
Selling, general and administrative expenses 760,000 643,000 1,486,000 1,245,000
------------- ------------- ------------- -------------
Income (loss) from operations (366,000) 118,000 (672,000) (130,000)
Other income (expense):
Interest expense, net (33,000) (44,000) (60,000) (71,000)
Other income -- 1,000 -- 61,000
------------- ------------- ------------- -------------
Total other income (expense) (33,000) (43,000) (60,000) (10,000)
------------- ------------- ------------- -------------
Loss from continuing operations before income taxes (399,000) 75,000 (732,000) (140,000)
(Provision) benefit for income taxes (37,000) -- 17,000 --
------------- ------------- ------------- -------------
Income (loss) from continuing operations (436,000) 75,000 (715,000) (140,000)
Discontinued Operations (Note 2)
Income from operations of the discontinued component 547,000 140,000 869,000 261,000
Income taxes, discontinued component (61,000) (8,000) (74,000) (15,000)
------------- ------------- ------------- -------------
Net Income (Loss) $ 50,000 $ 207,000 $ 80,000 $ 106,000
============= ============= ============= =============
Net income (loss) per share - continuing operations
- Basic and Diluted $ (.003) * $ (.005) $ (.001)
============= ============= ============= =============
Net income (loss) per share - discontinued
operations - Basic and Diluted $ .003 $ .001 $ .005 $ .002
============= ============= ============= =============
Weighted average shares - Basic 154,319,700 154,017,000 154,310,300 153,955,000
============= ============= ============= =============
Weighted average shares - Diluted 154,407,000 154,048,000 154,422,800 154,105,000
============= ============= ============= =============
See accompanying notes.
* Less than $.001 per share
4
ARC Wireless Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30,
2006 2005
----------- -----------
(unaudited)
Operating activities
Income (loss) from continuing operations $ (715,000) $ (140,000)
Adjustments to reconcile loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization 74,000 109,000
Provision for doubtful accounts --
Non-cash expense for issuance of stock and options 8,000 54,000
Deferred taxes (21,000) --
Changes in operating assets and liabilities:
Accounts receivable, trade 9,000 114,000
Inventory (251,000) 81,000
Prepaids and other current assets (74,000) (43,000)
Other assets (9,000) --
Accounts payable and accrued expenses 417,000 (172,000)
----------- -----------
Net cash provided by (used in) continuing operations (562,000) 3,000
Net cash provided by discontinued operations 1,208,000 2,132,000
----------- -----------
Net cash provided by operating activities 646,000 2,135,000
----------- -----------
Investing activities
Patent acquisition costs (9,000) (3,000)
Purchase of plant and equipment (78,000) (18,000)
----------- -----------
Net cash used in investing activities, continuing operations (87,000) (21,000)
----------- -----------
Financing activities
Net advances from line of credit 679,000 229,000
Net repayment of line of credit and capital lease obligations (40,000) (30,000)
----------- -----------
Net cash provided by financing activities, continuing operations 639,000 199,000
----------- -----------
Net repayment of line of credit and bank debt, discontinued
operations (1,183,000) (2,232,000)
----------- -----------
Net cash used in financing activities, discontinued operations (1,183,000) (2,232,000)
----------- -----------
Net cash used in financing activities (544,000) (2,033,000)
----------- -----------
Net change in cash 15,000 81,000
Cash, beginning of period 64,000 74,000
----------- -----------
Cash, end of period $ 79,000 $ 155,000
=========== ===========
Supplemental cash flow information:
Cash paid for interest, continuing operations $ 60,000 $ 71,000
Cash paid for interest, discontinuing operations $ 65,000 $ 70,000
Cash paid for taxes, continuing operations $ -- $ --
Cash paid for taxes, discontinued operations $ 233,000 $ --
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2006
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2005.
The Company operated in three business segments which are identified as
Distribution, Manufacturing and Cable offering a wide variety of wireless
component and network solutions to service providers, systems integrators, value
added resellers, businesses and consumers, primarily in the United States. The
Distribution segment is classified as a Discontinued Operation, see Note 2, as
it is being held for sale.
Operating results for the three months and six months ended June 30, 2006 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2006 or any future period.
Reclassifications - Amendment to Form 10-Q
The report on Form 10-Q/A has been filed to modify the disclosure of
discontinued operations in the consolidated statements of cash flows. The
changes in this Form 10-Q/A from the Form 10-Q for the period ended June 30,
2006, which was previously filed, have no effect on financial condition, gross
profit, income (loss) from operations or net income.
Certain balances in prior year consolidated financial statements have been
reclassified in order to conform to the current year presentation. The
reclassifications had no effect on financial condition, gross profit, income
(loss) from operations or net income.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such
differences may be material to the financial statements.
Consolidation Policy
The accompanying unaudited condensed consolidated financial statements include
the accounts of ARC Wireless Solutions, Inc. ("ARC" or the "Company") 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.
Share Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R) ("SFAS 123(R)") related to accounting for share-based
payments and, accordingly, the Company is now recording compensation expense for
share-based awards based upon an assessment of the grant date fair value for
stock options and restricted stock awards. Prior to 2006, share based
compensation was accounted for in accordance with Accounting Principles Board
Opinion No. 25. We are using the modified prospective method of adoption, which
allows us to apply SFAS 123(R) on a going-forward basis rather than restating
prior periods.
6
Stock compensation expense for stock options is recognized on a straight-line
basis over the vesting period of the award. The Company accounts for stock
options as equity awards.
The following table summarizes share-based compensation expense recorded in
general and administrative expenses during each period presented:
Three Months Ended Six Months Ended
June 30, 2006 June 30, 2006
------------- -------------
Stock options $ -- $4,000
------ ------
Total share-based compensation expense $ -- $4,000
====== ======
Prior to January 1, 2006 the Company followed APB Opinion No. 25 and related
interpretations in accounting for its stock options and grants since the
alternative fair market value accounting provided for under Statement of
Financial Accounting Standards (SFAS) No. 123 ("SFAS No. 123") required use of
grant valuation models that were not developed for use in valuing employee stock
options and grants. Under APB Opinion No. 25, if the exercise price of the
Company's stock grants and options equals or exceeds the fair value of the
underlying stock on the date of grant, no compensation expenses are recognized.
If compensation cost for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, then the Company's net loss
and per share amounts for the three months and six months ended June 30, 2005,
would have been adjusted to the pro forma amounts indicated below:
Three Months Six Months
Ended June 30, Ended June 30,
2005 2005
------------- -------------
Net income as reported $ 207,000 $ 106,000
Add: stock based compensation included in reported net loss -- --
Deduct: Stock-based compensation cost under SFAS 123 (12,000) (16,000)
------------- -------------
Pro forma net income $ 195,000 $ 90,000
============= =============
Pro forma basic and diluted net loss per share:
Pro forma shares used in the calculation of pro forma net
income per common share- basic 154,017,000 153,955,000
Pro forma shares used in the calculation of pro forma net
income per common share- diluted 154,048,000 154,105,000
Reported net income per common share - basic and diluted $ .001 $ .001
Pro forma net income per common share - basic and diluted $ .001 $ .001
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company had accounted for
grants subsequent to December 31, 1994 under a method specified by SFAS 123.
Options granted were estimated using the Black-Scholes valuation model.
7
Stock option activity was as follows:
Number of Weighted Average
Shares Exercise Price ($)
---------- ------------------
Balance at January 1, 2006 2,600,000 0.15
Granted 250,000 0.13
Exercised --
---------- ----------
Forfeited or expired (250,000) 0.15
---------- ----------
Balance at June 30, 2006 2,600,000 0.15
========== ==========
The following table presents information regarding options outstanding as of
June 30, 2006:
Weighted average contractual remaining term - options outstanding 1.18 years
Aggregate intrinsic value - options outstanding -
Options exercisable 2,350,000
Weighted average exercise price - options exercisable $.15
Aggregate intrinsic value - options exercisable -
Weighted average contractual remaining term - options exercisable 1.18 years
There was no intrinsic value for options outstanding or options exercisable
since no options were exercised during the six ended June 30, 2006.
The following weighted average assumptions were used:
Three and Six Three and Six
Months Ended Months Ended
June 30, 2006 June 30, 2005
------------- -------------
Volatility .751 1.024
Expected life of options (in years) 2 2
Dividend Yield 0.00% 0.00%
Risk free interest rate 6.00% 4.00%
Per share value of options granted $.06 $.09
As of June 30, 2006, future compensation costs related to nonvested stock
options is $14,500. Management anticipates that this cost will be recognized
over a weighted average period of 1.18 years.
Note 2. Discontinued Operations
On July 28, 2006, ARC Wireless Solutions, Inc (the "Company") executed a Stock
Purchase Agreement ("Purchase Agreement") with BlueCoral Limited ("BlueCoral"),
an Irish Company, for the sale of its wholly-owned subsidiary, Winncom
Technologies Corp. ("Winncom") to BlueCoral for $17 million in cash, which is
currently being held in escrow per the terms of the Stock Purchase Agreement
("Purchase Agreement").
8
Under the terms of the Purchase Agreement, before the sale of Winncom can be
completed, a number of conditions must be satisfied or waived. In addition to
breaches of the Purchase Agreement, these conditions include, among other
matters, the following:
|X| the Company's stockholders must approve the sale of Winncom at the
annual meeting;
|X| the delivery of certificates by both the Company and BlueCoral; and
|X| the delivery of the full purchase price ($17,000,000) to the Company.
This business segment, Distribution, has been accounted for as a discontinued
operation, as an asset held for sale, and accordingly the net assets and
liabilities have been segregated from continuing operations in the accompanying
consolidated balance sheets for all periods presented and the results of
operations have been excluded from continuing operations in the accompanying
consolidated financial statements of operations and cash flows for all periods
presented.
The net assets and liabilities of the discontinued operations of the
distribution segment included in the accompanying consolidated balance sheets at
June 30, 2006 and December 31, 2005 are as follows:
June 30, 2006 December 31, 2005
------------- -----------------
Current assets:
Cash and equivalents $ 8,714,000 $ 103,000
Accounts receivable - trade, net 5,989,000 6,798,000
Accounts receivable - vendors, net 488,000 766,000
Inventory, net 5,217,000 5,188,000
Construction in progress 8,103,000 5,900,000
Other current assets 183,000 730,000
----------- -----------
Total current assets 28,694,000 19,485,000
Property and equipment, net 113,000 90,000
Other assets:
Goodwill, net 10,824,000 10,824,000
Deposits 130,000 125,000
----------- -----------
Total assets $39,761,000 $30,524,000
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 5,408,000 $10,060,000
Bank debt - current 2,744,000 1,459,000
Accrued expenses 485,000 455,000
Billings in excess of recognized income 15,169,000 896,000
----------- -----------
Total current liabilities $23,806,000 12,870,000
Bank debt, less current portion -- 2,469,000
----------- -----------
Total liabilities $23,806,000 $15,339,000
=========== ===========
9
Information related to the discontinued operations for the three months and six
months ended June 30, 2006 and 2005 are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Sales, net $ 8,672,000 $ 6,417,000 $ 16,072,000 $ 13,407,000
Contract revenue 7,287,000 -- 10,090,000 --
------------ ------------ ------------ ------------
Total revenue 15,959,000 6,417,000 26,162,000 13,407,000
------------ ------------ ------------ ------------
Cost of sales 7,497,000 5,344,000 13,859,000
Cost of contract revenue 6,777,000 -- 9,370,000
------------ ------------ ------------ ------------
Total cost of goods sold 14,274,000 5,344,000 23,229,000 11,276,000
------------ ------------ ------------ ------------
Gross profit 1,685,000 1,073,000 2,933,000 2,131,000
Operating expenses:
Selling, general and administrative expenses
1,136,000 945,000 2,101,000 1,927,000
------------ ------------ ------------ ------------
Income from operations 549,000 128,000 832,000 204,000
Other income (expense):
Interest expense, net (27,000) (28,000) (65,000) (69,000)
Other income 25,000 40,000 102,000 126,000
------------ ------------ ------------ ------------
Total other income (expense) (2,000) 12,000 37,000 57,000
------------ ------------ ------------ ------------
Income before income taxes 547,000 140,000 869,000 261,000
(Provision) Benefit for income taxes (61,000) (8,000) (74,000) (15,000)
------------ ------------ ------------ ------------
Net Income $ 486,000 $ 132,000 $ 795,000 $ 246,000
============ ============ ============ ============
Approximately $9.3 million and $14 million, respectively, of the total sales for
the three months and six months ended June 30, 2006 represented foreign sales in
Eastern Europe which includes Russia, Kazakhstan and Uzbekistan. The increase in
foreign sales is largely due to the long term construction contract in
Kazakhstan.
Approximately $1.7 million and $2.9 million, respectively, of the total sales
for the three months and six months ended June 30, 2005 represented foreign
sales in Eastern Europe which includes Russia, Kazakhstan and Uzbekistan.
On October 1, 2003 our subsidiary Winncom, executed a new $4,000,000
line-of-credit agreement with a bank with interest at prime plus .5% (8.25% at
March 31, 2006) due April 30, 2007 and converted $500,000 of the balance
outstanding under the line of credit at September 30, 2003 into a 36-month term
loan with monthly principal payments of $13,888 plus interest at prime plus .75%
(8.50% at March 31, 2006). The term loan will become due on October 26, 2006.
Substantially all of the assets of Winncom are collateral on the line of credit
and the term loan.
The October 1, 2003 line of credit agreement contains several covenants, which,
among other things, require that Winncom maintain certain financial ratios as
defined in the agreement. In addition, the agreement limits the payment of
management fees by Winncom to the Company, and also limits dividends and the
purchase of property and equipment. As of June 30, 2006 Winncom was in
compliance with these covenants.
10
In September 2005, Winncom entered into a one-year Line of Credit Agreement with
Kazkommertsbank for $2.3 million with an annual interest rate of 13% for the
purpose of funding a small portion of the Kazakhtelecom project, specifically
project engineering, laying of fiber optic cable and telecommunication equipment
purchases necessary to be completed before winter to avoid project delays. The
Line of Credit Agreement was only entered into after Kazakhtelecom agreed to
fully guarantee the repayment of Winncom's borrowings under the Line of Credit
Agreement. The Line of Credit Agreement is only collateralized by the guarantee
of Kazakhtelecom and Kazakhtelecom will repay the Line of Credit borrowings
either from the proceeds of the permanent project financing or from its own
capital. In September 2005, Winncom was advanced $1,334,000 under the Line of
Credit Agreement and that balance still remains at June 30, 2006 and December
31, 2005.
June 30, December 31,
2006 2005
---------- ----------
Bank line of credit - Winncom $1,368,000 $2,469,000
Foreign bank line of credit - Winncom 1,334,000 1,334,000
Bank term loan - Winncom 42,000 125,000
---------- ----------
2,744,000 3,928,000
Less current portion 2,744,000 1,459,000
---------- ----------
Long-term portion $ -- $2,469,000
========== ==========
In October 2004, Winncom entered into a "Frame" Agreement (Agreement of
Understanding) with Joint Stock Company Kazakhtelecom ("Kazakhtelecom"),
Kazakhstan's national telecommunications operator for the Republic of
Kazakhstan, that gives Winncom the right, subject to Winncom obtaining 100%
financing for the project upon terms and conditions acceptable to Kazakhtelecom,
and subject to a number of other matters, to undertake, on a turnkey basis,
development of a modern telecommunications infrastructure to be located on the
left bank of the City of Astana, Kazakhstan. With several competing bids,
Winncom was awarded the contract after several months of negotiations. The total
cost of the project is for a total of approximately $55,000,000.
The first phase of the contract is expected to be completed in 2006 and is
expected to generate revenues of approximately $28 million of which $2.6 million
has already been recognized in 2005.
The Company follows the percentage-of-completion method of accounting for long
term contract revenue. Contracts are considered complete upon completion of all
essential contract work, including support for integrated testing and customer
acceptance.
Under the percentage-of-completion method, income is recognized on contracts as
work progresses based on the relationship between total contract revenues and
total estimated contract costs. The percentage of work completed is determined
by comparing the accumulated labor costs incurred to date with management's
current estimate of total labor costs to be incurred at contract completion.
Revenue is recognized based on applying the percentage against total of contract
costs. At June 30, 2006 a significant amount of equipment was purchased and
shipped to the contract site the uninstalled portion of the equipment was
excluded from the calculation of accumulated costs in measuring contract
progress and recognizable contract revenue.
Contract costs include all direct material and equipment, subcontractor costs,
and labor costs and those indirect costs related to contract performance.
Revisions in profit estimates during the period of a contract are reflected in
the accounting period in which the revised estimates are made on the basis of
the stage of completion at the time. If estimated total costs on a contract
indicate a loss, the entire amount of the estimated loss is provided for
currently.
11
Billings in excess of costs and estimated earnings on uncompleted contracts
represents billings to customers in excess of earned revenue and advances on
contracts.
Total contract revenue recognized for the three months and six months ended June
30, 2006 was $7,287,000 and $10,090,000, respectively. No contract revenue was
recorded for the three months and six months ended June 30, 2005.
The following amounts relate to the aggregate of contracts in progress as of
June 30, 2006 and December 31, 2005.
June 30, December 31,
2006 2005
------------ ------------
Costs incurred to date $ 19,769,000 $ 8,196,000
Contract costs recognized in 2005 (2,296,000) --
Contract costs recognized in 2006 (9,370,000) (2,296,000)
------------ ------------
Construction in progress $ 8,103,000 $ 5,900,000
============ ============
Amounts billed $ 27,891,000 $ 3,528,000
Revenue recognized in 2005 (2,632,000) (2,632,000)
Revenue recognized in 2006 (10,090,000) --
------------ ------------
Billings in excess of recognized income $ 15,169,000 $ 896,000
============ ============
12
Note 3. Earnings Per Share
SFAS 128 provides for the calculation of Basic and Dilutive earnings (loss) per
share. Basic earnings (loss) per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings (loss) per share
reflects the potential dilution of securities that could share in the earnings
of the entity. For periods where the Company has incurred a net loss, stock
options and stock warrants 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 those periods.
The following table represents a reconciliation of the shares used to calculate
basic and diluted earnings per share for the respective periods indicated:
Three Months Ended Six Months Ended
June 30, 2006 June 30, 2005 June 30, 2006 June 30, 2005
------------- ------------- ------------- -------------
Numerator: Net income (loss) from
continuing operations $ (436,000) $ 75,000 $ (715,000) $ (140,000)
============ ============ ============ =============
Numerator: Net income from discontinued
operations $ 486,000 $ 132,000 $ 795,000 $ 246,000
============ ============ ============ =============
Denominator:
Denominator for basic earnings per share
- weighted average shares 154,319,700 154,017,000 154,310,300 153,955,000
Effect of dilutive securities
Employee stock options 88,000 31,000 112,500 150,000
------------ ------------ ------------ -------------
Denominator for diluted earnings per
share - adjusted weighted average shares
and assumed conversion 154,407,700 154,048,000 154,422,800 154,105,000
============ ============ ============ =============
Basic earnings (loss) per share, continuing
operations $ (.003) * $ (.005) $ (.001)
============ ============ ============ =============
Diluted earnings (loss) per share,
continuing operations $ (.003) * $ (.005) $ (.001)
============ ============ ============ =============
Basic earnings per share, discontinued
operations $ .003 $ .001 $ .005 $ .002
============ ============ ============ =============
Diluted earnings per share, discontinued
operations $ .003 $ .001 $ .005 $ .002
============ ============ ============ =============
* Less than $.001 per share
13
Note 4. Inventory
Inventory is valued at the lower of cost or market using standard costs that
approximate average cost. Inventories are reviewed periodically and items
considered to be slow-moving or obsolete are reduced to estimated net realizable
value through an appropriate reserve. Inventory consists of the following:
June 30, December 31,
2006 2005
----------- -----------
Raw materials $ 1,153,000 $ 954,000
Work in progress 173,000 129,000
Finished goods 471,000 416,000
----------- -----------
1,797,000 1,499,000
Inventory reserve (627,000) (580,000)
----------- -----------
Net inventory $ 1,170,000 $ 919,000
=========== ===========
Note 5. Revolving Bank Loan Agreements
The Company entered into a financing agreement (the "WFBC Facility") with Wells
Fargo Business Credit, Inc. ("WFBC"), on December 9, 2003. The financing
agreement was for a term of one year and was renewable for additional one-year
terms. The WFBC Facility provided for the sale of accounts receivable by the
Company to WFBC at a 1% discount for the first 15 days and an additional .055 of
1% per day until the account receivable is paid in full. Sales of accounts
receivable and advances under the WFBC Facility were subject to conditions and
restrictions, including, without limitation, accounts receivable eligibility
restrictions, verification, and approval. Obligations under the WFBC Facility
were collateralized by substantially all of the assets of the Company. Advances
under the WFBC Facility were made at the sole discretion of WFBC, even if the
accounts receivable offered by ARC for sale to WFBC satisfied all necessary
conditions and restrictions. WFBC was under no obligation to purchase accounts
receivable from the Company or to advance any funds or credit to the Company
under the WFBC Facility. This financing agreement was terminated on May 10,
2005.
On May 10, 2005 the Company entered into a new $1.5 million revolving
line-of-credit agreement (the "Credit Facility") with Citywide Banks. The new
Credit Facility has a maturity of one year, with interest at 2% over prime
(10.25% at June 30, 2006), contains covenants to maintain certain financial
statement ratios, and is collateralized by essentially all of the assets of ARC
and its wholly owned subsidiary, Starworks Wireless Inc.("Starworks"), but
excluding Winncom Technologies Corp. The borrowing base is calculated on a
percentage of trade accounts receivable and inventory for ARC and Starworks
combined. As of June 30, 2006 and December 31, 2005, ARC was in compliance with
these covenants. The balance outstanding on the revolving line of credit at June
30, 2006 and December 31, 2005 was $1,234,000 and $554,000, respectively.
Note 6. Equity Transactions
During the quarter ended June 30, 2006, the Company recorded the issuance of
29,629 shares of common stock to a director for outstanding obligations for
accrued directors' fees in the amount of $4,000.
For the quarter ended March 31, 2005, the Company recorded the issuance of 3,332
shares of common stock to directors for outstanding obligations for accrued
directors' fees in the amount of $500. In addition, during the quarter ended
March 31, 2005, 20,000 shares of common stock were cancelled in a dispute
regarding shares issued for consulting fees in 2001.
In May 2005 the Company contributed 407,488 shares of common stock, valued at
$57,000, into the ARC Wireless Solutions, Inc. 401(k) Plan as an employer
matching contribution for the Plan year 2004.
14
Note 7. Recent Accounting Pronouncements
On February 23, 2006, the FASB issued Staff Position No. FAS 123(R)-4,
Classification of Options or Similar Instruments Issued as Employee Compensation
That Allow for Cash Settlement Upon the Occurrence of a Contingent Event ("FSP
No. FAS 123(R)-4"). FSP No. FAS 123(R)-4 requires that an award of stock options
or similar instruments that otherwise meet the criteria for equity
classification, but contains a cash settlement feature that can require the
entity to settle the award in cash only upon the occurrence of a contingent
event that is outside the employee's control, should be classified as a
liability only when the event is probable of occurring. FSP No. FAS 123(R)-4 is
effective for the Company's first reporting period beginning after February 3,
2006. The Company's management does not believe that the adoption of FSP No. FAS
123(R)-4 will have a material effect on the Company's financial position, cash
flows, or results of operations.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments ("SFAS 155"), which amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities .
SFAS 155 simplifies the accounting for certain derivatives embedded in other
financial instruments by allowing them to be accounted for as a whole if the
holder elects to account for the whole instrument on a fair value basis. The
statement also clarifies and amends certain other provisions of SFAS No. 133 and
SFAS No. 140. SFAS 155 is effective for all financial instruments acquired,
issued, or subject to a remeasurement event occurring in fiscal years beginning
after September 15, 2006. We do not expect the adoption of SFAS 155 to have an
impact on our results of operations or financial condition.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets--an amendment to FASB Statement No. 140 ("SFAS 156"). SFAS 156
requires that all separately recognized servicing rights be initially measured
at fair value, if practicable. In addition, this statement permits an entity to
choose between two measurement methods (amortization method or fair value
measurement method) for each class of separately recognized servicing assets and
liabilities. This new accounting standard is effective January 1, 2007. We do
not expect the adoption of SFAS 156 to have an impact on our results of
operations or financial condition.
In June 2006, the FASB ratified the consensus reached by the EITF on EITF Issue
No. 05-01, Accounting for the Conversion of an Instrument That Becomes
Convertible Upon the Issuer's Exercise of a Call Option ("EITF 05-01"). The EITF
consensus applies to the issuance of equity securities to settle a debt
instrument that was not otherwise currently convertible but became convertible
upon the issuer's exercise of call option when the issuance of equity securities
is pursuant to the instrument's original conversion terms. The adoption of EITF
05-01 is not expected to have an impact on our results of operations or
financial condition.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes--an interpretation of FASB Statement No. 109 ("FIN 48"). This
interpretation clarifies the application of SFAS 109 by defining a criterion
than an individual tax position must meet for any part of the benefit of that
position to be recognized in an enterprise's financial statements and also
provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. FIN 48 is effective for
our fiscal year commencing May 1, 2007. At this time, we have not completed our
review and assessment of the impact of adoption of FIN 48.
15
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 two reportable segments that are separate business units that
offer different products as follows: antenna manufacturing and cable products.
Each segment consists of a single operating unit and the accounting policies of
the reporting segments are the same as those described in the summary of
significant accounting policies. Intersegment sales and transfers are recorded
at cost plus an agreed upon intercompany profit on intersegment sales and
transfers. Due to the pending sale of Winncom, which is the Distribution
segment, is no longer classified as an operating segment but is classified as
discontinued operations in the accompanying consolidated financial statements.
Financial information regarding the Company's two continuing operating segments
for the three months ended June 30, 2006 and 2005 are as follows:
Manufacturing Cable Corporate Total
------------- ----------- ----------- -----------
Net Sales 2006 $ 1,722,000 $ 189,000 $ (87,000) $ 1,824,000
2005 1,677,000 100,000 (86,000) 1,691,000
Net earnings (Loss) from continuing 2006 (211,000) 17,000 (242,000) (436,000)
operations 2005 284,000 (4,000) (205,000) 75,000
Earnings (Loss) from continuing 2006 (174,000) 17,000 (242,000) (399,000)
operations before income taxes 2005 284,000 (4,000) (205,000) 75,000
Identifiable Assets 2006 4,049,000 207,000 (916,000) 3,340,000
2005 3,190,000 183,000 (930,000) 2,443,000
Financial information regarding the Company's two continuing operating segments
for the six months ended June 30, 2006 and 2005 are as follows:
Manufacturing Cable Corporate Total
------------- ----------- ----------- -----------
Net Sales 2006 $ 3,227,000 $ 339,000 $ (193,000) $ 3,373,000
2005 2,769,000 161,000 (153,000) 2,777,000
Net earnings (Loss) from continuing 2006 (256,000) 13,000 (472,000) (715,000)
operations 2005 256,000 (16,000) (380,000) (140,000)
Earnings (Loss) from continuing 2006 (273,000) 13,000 (472,000) (732,000)
operations before income taxes 2005 256,000 (16,000) (380,000) (140,000)
Identifiable Assets 2006 4,049,000 207,000 (916,000) 3,340,000
2005 3,190,000 183,000 (930,000) 2,443,000
Corporate represents the operations of the parent Company, including segment
eliminations.
16
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Continuing Operations For the Three Months Ended June 30, 2006 and
2005
Total revenues were $1.824 million and $1.691 million for the three months
period ended June 30, 2006 and June 30, 2005, respectively. The increase in
revenues during the three months ended June 30, 2006 compared to the three
months ended June 30, 2005 is attributable to 1) an increase in revenues from
our Wireless Communications Solutions Division from $1.677 million for the three
months ended June 30, 2005 to $1.721 million for the three months ended June 30,
2006; and 2) an increase in revenues from our subsidiary, Starworks, from
$100,000 for the three months ended June 30, 2005 to $189,000 for the three
months ended June 30, 2006. Revenues from the Wireless Communication Solutions
Division in the first and second quarter of 2005 were reduced primarily as a
result of management's decision to withhold shipments and minimize the Company's
risk to a significant customer whose credit privileges were suspended due to
delinquent payments. The customer had a recapitalization of its company and
shipments were reinstated in the third quarter of 2005.
Gross profit margin was 22% and 45% for the three months ended June 30, 2006 and
June 30, 2005, respectively. The decrease in gross margin for the three months
ended June 30, 2006 as compared to the three months ended June 30, 2005 is
primarily the result of 1) lower margins at the Wireless Communications
Solutions Division due to significant increases in component costs including
aluminum, copper and plastic as well as additional labor costs associated with
the introduction and manufacturing of several new products and product lines.
The Company has taken steps in the third quarter of 2006 to improve its gross
margin by shifting production of certain product lines to China through our new
subsidiary, ARC Wireless Hong Kong Limited.
Selling, general and administrative expenses (SG&A) increased by $117,000 for
the three months ended June 30, 2006 compared to June 30, 2005 with $63,000 of
the increase due to salaries and wages, including costs associated with the
organization of ARC Wireless Hong Kong Limited. Other increases in SG&A costs
are audit fees, directors fees and outside engineering services. SG&A as a
percent of total revenues increased from 38% for the three months ended June30,
2005 to 42% for the three months ended June 30, 2006. Salaries and wages,
including commissions, remain the largest component of SG&A constituting 59% and
60% of the total SG&A for the three months ended June 30, 2006 and June 30,
2005, respectively.
Net interest expense was $33,000 for the three months ended June 30, 2006
compared to $44,000 for the three months ended June 30, 2005. Although the
average balance outstanding on all lines of credit and capital lease obligations
was $1.2 million for the three months ended June 30, 2006 compared to $667,000
for the three months ended June 30, 2005, the interest rate that we were charged
in 2006 was nearly half of what was being charged by the factoring of trade
accounts receivable in 2005, which terminated in May 2005 when we established a
new revolving bank line of credit.
The Company had a net loss from continuing operations of $436,000 for the three
months ended June 30, 2006 as compared to net income from continuing operations
of $75,000 for the three months ended June 30, 2005. While overall revenues
increased by $133,000 from 2005 to 2006, there was a decrease in gross margin
from 45% in 2005 to 22% in 2006, an increase in SG&A expenses of $118,000. In
addition, in 2006, the provision for income taxes of $37,000 was due to a
decrease in deferred income tax assets.
Results of Discontinued Operations for the Three Months Ended June 30, 2006 and
June 30, 2005 (See Note 2, Discontinued Operations for the detailed operating
results of the discontinued operations)
Winncom had a 148% increase in revenues comparing the three months ended June
30, 2006 to the three months ended June 30, 2005. The increase of nearly $9.5
million is the result of a 35% increase in its distribution business revenues at
its historical gross margin of approximately 13.5% and a $7.3 million increase
in its long term contract revenue associated with the Kazakhstan project for
17
which there was no corresponding revenue for the same period in 2005. The margin
recognized on the long term construction contract was approximately 7% for the
three months ended June 30, 2006. Because the gross margin on the long term
contract is lower then the gross margin for normal distribution revenues, while
revenues increased 148% comparing 2006 to 2005, the increase in gross margin was
57%.
Operating expenses increased $191,000 or 20% comparing 2006 to 2005, with
substantially all of the increase due to an increase in salaries and wages.
Operating expenses as a percentage of revenue substantially decreased from 15%
for the three months ended June 30, 2005 to 7% for the three months ended June
30, 2006.
Interest expense increased slightly from $27,000 for the three months ended June
30, 2005 to $28,000 for the three months ended June 30, 2006. Although the
average balance outstanding on revolving lines of credit and other bank debt
decreased in 2006 compared to 2005, the prime interest rate increased from 6% to
8% during the period June 30, 2005 to June 30, 2006 and the interest rate on the
foreign bank debt is 13%, while no such debt existed for the three months ended
June 30, 2005.
Other income primarily consists of purchase discounts which were less in 2006
than in 2005 due to a cutback in vendor discounts by one of Winncoms largest
vendors.
The increase in the provision for income taxes for the three months ended June
30, 2006 compared to June 30, 2005 is primarily the result of an increase in
pretax net income from discontinued operations, some of which is offset by
losses from continuing operations.
The increase in the net income from discontinued operations from $132,000 for
the three months ended June 30, 2005 to $486,000 for the three months ended June
30, 2006 is primarily due to the increase in revenues and in particular, the
increase in the contract revenue.
Results of Continuing Operations For the Six Months Ended June 30, 2006 and June
30, 2005
Total revenues were $3.4 million and $2.8 million for the six-month period ended
June 30, 2006 and June 30, 2005, respectively. The increase in revenues during
the six months ended June 30, 2006 compared to the six months ended June 30,
2005 is attributable to 1) an increase in revenues from our Wireless
Communications Solutions Division from $2.7 million for the six months ended
June 30, 2005 to $3.2 million for the six months ended June 30, 2006; and 2) an
increase in revenues from our subsidiary, Starworks, from $160,000 for the six
months ended June 30, 2005 to $340,000 for the six months ended June 30, 2006.
Revenues from the Wireless Communication Solutions Division in the first and
second quarter of 2005 were reduced primarily as a result of management's
decision to withhold shipments and minimize the Company's risk to a significant
customer whose credit privileges were suspended due to delinquent payments. The
customer had a recapitalization of its company and shipments were reinstated in
the third quarter of 2005.
Gross profit margin was 24% and 40% for the six months ended June 30, 2006 and
2005, respectively. The decrease in gross margin for the six months ended June
30, 2006 as compared to the six months ended June 30, 2005 is primarily the
result of 1) lower margins at the Wireless Communications Solutions Division due
to significant increases in component costs including aluminum, copper and
plastic as well as additional labor costs associated with the introduction and
manufacturing of several new product and product lines to a change in product
mix, competitive pricing pressures and the costs associated with the
introduction and manufacturing of several new products. The Company has taken
steps in the third quarter of 2006 to improve its gross margin by shifting
production of certain product lines to China through our new subsidiary, ARC
Wireless Hong Kong Limited.
Selling, general and administrative expenses (SG&A) increased by $233,000 for
the six months ended June 30, 2006 compared to June 30, 2005 with $136,000 of
the increase due to salaries and wages, including costs associated with the
organization of ARC Wireless Hong Kong Limited. Other increases in SG&A costs
18
are audit fees, directors fees and outside engineering services. SG&A as a
percent of total revenues decreased from 45% for the six months ended June30,
2005 to 44% for the six months ended June 30, 2006. Salaries and wages,
including commissions, remain the largest component of SG&A constituting 59% and
60% of the total SG&A for the six months ended June 30, 2006 and 2005,
respectively.
Net interest expense was $60,000 for the six months ended June 30, 2006 compared
to $71,000 for the six months ended June 30, 2005. Although the average balance
outstanding on all lines of credit and capital lease obligations was $1 million
for the six months ended June 30, 2006 compared to $600,000 for the six months
ended June 30, 2005, the interest rate that we were charged in 2006 was nearly
half of what was being charged by the factoring of trade accounts receivable in
2005, which terminated in May 2005 when we established a new revolving bank line
of credit.
Other income for the six months ended June 30, 2005 included a gain on sale of
assets of $61,000 and there were no gains in 2006.
The Company had a net loss from continuing operations of $715,000 for the six
months ended June 30, 2006 as compared to a net loss from continuing operations
of $140,000 for the six months ended June 30, 2005. While overall revenues
increased by $600,000 from 2005 to 2006, there was a decrease in gross margin
from 40% in 2005 to 24% in 2006, an increase in SG&A expenses of $233,000 and a
$61,000 decrease in other income. In addition, in 2006, the benefit for income
taxes of $21,000 was due to an increase in deferred income tax assets.
Results of Discontinued Operations For the Six Months Ended June 30, 2006 and
June 30, 2005 (See Note 2, Discontinued Operations for the detailed operating
results of the discontinued operations)
Winncom had a 95% increase in revenues comparing the six months ended June 30,
2006 to the six months ended June 30, 2005. The increase of nearly $12.8 million
is the result of a 20% increase in its distribution business at its historical
gross margin of approximately 13.5% and a $10.1 million increase in its long
term contract revenue associated with the Kazakhstan project for which there was
no corresponding revenue for the same period in 2005. The margin recognized on
the long term construction contract was approximately 7% for the six months
ended June 30, 2006. Because the gross margin on the long term contract is lower
then the gross margin for normal distribution revenues, while revenues increased
95% comparing 2006 to 2005, the increase in gross margin was 38%.
Operating expenses increased $174,000 or 9% comparing 2006 to 2005, with
substantially all of the increase due to an increase in salaries and wages.
Operating expenses as a percentage of revenue substantially decreased from 14%
for the six months ended June 30, 2005 to 8% for the six months ended June 30,
2006.
Interest expense decreased slightly from $69,000 for the six months ended June
30, 2005 to $65,000 for the six months ended June 30, 2006. Although the average
balance outstanding on revolving lines of credit and other bank debt decreased
in 2006 compared to 2005, the prime interest rate increased from 6% to 8% From
June 30, 2005 to June 30, 2006 and the interest on the foreign bank debt was 13%
and no such debt existed for the six months ended June 30, 2005.
Other income primarily consists of purchase discounts which were less in 2006
than in 2005 due to a cutback in vendor discounts by one of Winncoms' largest
vendors.
The increase in the provision for income taxes for the six months ended June 30,
2006 compared to June 30, 2005 is primarily the result of an increase in pretax
net income of the discontinued operations partially offset by losses from
continuing operations.
19
The increase in the net income from discontinued operations from $246,000 for
the six months ended June 30, 2005 to $794,000 for the six months ended June 30,
2006 is primarily due to the increase in revenues and in particular, the
increase in the contract revenue.
Financial Condition
The net cash used in operating activities from continuing operations was
$562,000 for the six months ended June 30, 2006, and net cash provided by
operating activities from continuing operations was $3,000 for the six months
ended June 30, 2005. The net cash used in operating activities from continuing
operations in 2006 was primarily due to the net loss incurred for the six months
ended June 30, 2006. The net cash from continuing operations in 2005 was
primarily due to a decrease in trade accounts receivables and inventory offset
by decreases in trade accounts payable and other accrued expenses. In addition,
in determining net cash from continuing operations, the net loss in 2005 is
offset by non cash deductions of depreciation and the expense associated with
the issuance of common stock and common stock options.
The net cash used in investing activities from continuing operations was $87,000
for the six months ended June 30, 2006 compared to $21,000 for the six months
ended June 30, 2005, primarily the result of expenditures for patents and
equipment.
For the six months ended June 30, 2006, the Company was able to draw upon its
line of credit by nearly $679,000, resulting in the net cash provided by
financing activities for continuing operations. For the six months ended June
30, 2005 the Company was able to draw upon its line of credit by nearly
$229,000, resulting in the net cash provided by financing activities for
continuing operations. The draws on the lines of credit in 2006 and 2005 helped
fund operating losses.
The Company's working capital at June 30, 2006, excluding net assets and
liabilities from discontinued operations was $458,000 compared to $1.2 million
at December 31, 2005. The decrease as of June 30, 2006 is primarily due to the
net loss from continuing operations.
We entered into a financing agreement (the "WFBC Facility") with Wells Fargo
Business Credit, Inc. ("WFBC"), on December 9, 2003. The financing agreement was
for a term of one year and was renewable for additional one-year terms. The WFBC
Facility provided for the sale of accounts receivable by the Company to WFBC at
a 1% discount for the first 15 days and an additional .055 of 1% per day until
the account receivable is paid in full. Sales of accounts receivable and
advances under the WFBC Facility were subject to conditions and restrictions,
including, without limitation, accounts receivable eligibility restrictions,
verification, and approval. Obligations under the WFBC Facility were
collateralized by substantially all of the assets of the Company. Advances under
the WFBC Facility were made at the sole discretion of WFBC, even if the accounts
receivable offered by ARC for sale to WFBC satisfied all necessary conditions
and restrictions. WFBC was under no obligation to purchase accounts receivable
from the Company or to advance any funds or credit to the Company under the WFBC
Facility. This financing agreement was terminated on May 10, 2005.
On May 10, 2005 the Company entered into a new $1.5 million revolving
line-of-credit agreement (the "Credit Facility") with Citywide Banks. The new
Credit Facility has a maturity of one year, with interest at 2% over prime
(10.25% at June 30, 2006), contains covenants to maintain certain financial
statement ratios, and is collateralized by essentially all of the assets of ARC
and its wholly owned subsidiary, Starworks Wireless Inc.("Starworks"), but
excluding Winncom Technologies Corp. The borrowing base is calculated on a
percentage of trade accounts receivable and inventory for ARC and Starworks
combined. As of June 30, 2006 and December 31, 2005, ARC was in compliance with
these covenants. The balance outstanding on the revolving line of credit at June
30, 2006 and December 31, 2005 was $1,234,000 and $554,000, respectively.
20
Management believes that current working capital and available borrowings on new
and existing bank lines of credit, together with proceeds from the sale of
Winncom, will be sufficient to allow the Company to maintain its operations
through December 31, 2006 and into the foreseeable future.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical fact included in this Quarterly Report,
including "Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation", regarding our financial position, business strategy,
plans and objectives of our management for future operations and capital
expenditures, and other matters, other than historical facts, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements and the assumptions upon which the
forward-looking statements are based are reasonable, we can give no assurance
that such expectations will prove to have been correct.
Additional statements concerning important factors that could cause actual
results to differ materially from our expectations were disclosed in Item 1A,
"Risk Factors" on our Form 10-K for the year ended December 31, 2005. There have
been no material changes to the Company's risk factors from those disclosed in
the Company's 2005 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have not used derivative financial instruments.
We are exposed to market risk through interest rates related to our notes
payable to the banks which has a variable interest rate equal to the existing
bank prime rate (8.25% as of June 30, 2006) plus two percent. The prime interest
rate increased from 7% to 8.25% between December 31, 2005 and June 30, 2006. An
increase in the bank's prime interest rates on the various notes payable by 1%
would increase our yearly interest expense by approximately $12, assuming
borrowed amounts remain outstanding at the average balance for the six months
ended June 30, 2006. Our management believes that fluctuation in interest rates
in the near term will not materially affect our consolidated operating results,
financial position or cash flow.
Item 4. Controls and Procedures
The Company maintains a set of disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the reports
filed by the Company under the Securities Exchange Act of 1934, as amended is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. As of the end of the quarterly period covered by
this report, the Company carried out an evaluation, under the supervision of the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Rule
13a-15 of the Exchange Act. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective.
There have been no significant changes in the Company's internal controls or
other factors that could significantly affect those controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in various legal proceedings of a
nature considered normal in the course of its operations. These are principally
accounts receivable collections. While it is not feasible to predict or
determine the final outcome of these proceedings, management has reserved as an
allowance for doubtful accounts that portion of the accounts receivable it
estimates will be uncollectible.
Item 1A. Risk Factors
Additional statements concerning important factors that could cause actual
results to differ materially from our expectations were disclosed in Item 1A,
"Risk Factors" of our Form 10-K for the fiscal year ending December 31, 2005.
There have been no material changes from the risk factors previously disclosed
in our Form 10-K for the fiscal year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 15, 2005, the Company recorded the issuance of 3,332 shares of common
stock to directors for accrued directors' fees in the amount of $500. These
shares were issued pursuant to exemptions from registration set forth in Section
4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder.
In May 2006, the Company recorded the issuance of 29,629 shares of common stock
to a director for outstanding obligations for accrued directors' fees in the
amount of $4,000. These shares were issued pursuant to exemptions from
registration set forth in Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder.
Item 6. Exhibits
Exhibit No. Description
----------- -----------
31.1 and 31.2 Certifications of the Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
22
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 17, 2006 By: /s/ Randall P. Marx
-------------------
Randall P. Marx
Chief Executive Officer
Date: August 17, 2006 By: /s/ Monty R. Lamirato
---------------------
Monty R. Lamirato
Chief Financial Officer
23