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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the Fiscal Year Ended December 31, 2007.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
ARC Wireless Solutions, Inc.
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(Exact name of registrant as specified in its charter)
Utah
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(State or other jurisdiction of incorporation or organization)
000-18122 87-0454148
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(Commission File Number) (IRS Employer Identification Number)
10601 West 48th Avenue
Wheat Ridge, Colorado, 80033-2660
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(Address of principal executive offices including zip code)
(303) 421-4063
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
(None)
Securities registered pursuant to Section 12(g) of the Exchange Act:
$.0005 par value common stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes No _X_
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 13(d) of the Act.
Yes No _X_
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ___
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1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this form, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. To the best of registrants' knowledge, there are no
disclosures of delinquent filers required in response to Item 405 of Regulation
S-K.
Yes X No ___
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of " large accelerated filer", "accelerated filer" and "small
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ]
Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes____ No X
As of June 29, 2007, the last business day of the Registrant's most recently
completed second quarter, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $9,961,000. This calculation
is based upon the average of the bid and ask price of $7.00 of the stock on June
30, 2006 as reported by NASDAQ. Without asserting that any director or executive
officer of the registrant, or the beneficial owner of more than five percent of
the registrant's common stock, is an affiliate, the shares of which they are the
beneficial owners have been deemed to be owned by affiliates solely for this
calculation.
Issuer's revenues for its most recent fiscal year: $8,048,000
The number of shares of the registrant's $.0005 par value common stock
outstanding as of February 29, 2008 was 3,090,838
2
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ARC Wireless Solutions, Inc.
Form 10-K for the Year Ended December 31, 2007
Table of Contents
Page No.
PART I
Item 1. Business.................................................................................... 4
Item 1A. Risk Factors................................................................................ 11
Item 1B. Unresolved Staff Comments................................................................... 13
Item 2. Properties.................................................................................. 13
Item 3. Legal Proceedings........................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......................................... 14
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ............................................................. 14
Item 6. Selected Consolidated Financial Data........................................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operation................................................................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 25
Item 8. Financial Statements and Supplementary Data................................................. 25
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................................ 25
Item 9A. Controls and Procedures..................................................................... 25
Item 9B. Other Information........................................................................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 27
Item 11. Executive Compensation...................................................................... 31
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters......................................................................... 41
Item 13. Certain Relationships and Related Transactions.............................................. 43
Item 14. Principal Accountant Fees and Services...................................................... 43
Part IV
Item 15. Exhibits, Financial Statement Schedules..................................................... 44
Signatures ............................................................................................ 46
3
PART I
Item 1. Business
Overview
Our Company
ARC Wireless Solutions, Inc. (referred to as "ARC Wireless," the "Company,"
"we," "us" and "our") is a provider of high quality, timely, cost effective
wireless network component and wireless network solutions. Our Wireless
Communications Solutions Division designs, develops, manufactures, markets and
sells a diversified line of antennas and related wireless communication systems,
including cellular base station, mobile, cellular, conformal and flat panel
antennas. Winncom Technologies Corp, our prior wholly-owned subsidiary
("Winncom"), which was sold effective October 31, 2006, specialized in
marketing, distribution and service of wireless component and network solutions
in support of both voice and data applications, both domestically and
internationally. Starworks Wireless Inc., our wholly-owned subsidiary
("Starworks"), specializes in the design, marketing and distribution of cable in
the United States, primarily through original equipment manufacturing (OEMs) and
third-party distributors, retailers and the Internet. We negotiate and manage
our contract manufacturing relationships through our wholly-owned subsidiary,
ARC Wireless Hong Kong Limited ("ARCHK").
Principal Products
Principal products of our Wireless Communications Solutions Division
include the following:
Cellular Base Station Antennas
------------------------------
Included in the acquisition of certain commercial assets from Ball
Aerospace & Technology Corp. ("BATC") in 2001 was the right to use BATC's
technology in the manufacturing of the line of base station antennas, which
consists of various models used in several frequency bands for cellular systems.
These cellular systems include several protocols and technologies such as AMPS,
GSM, PCS, GPRS, 2.5G and 3G. Our base station antennas have been deployed in
some of the Cingular (now AT&T), Telefonica and Qwest mobile phone carrier
networks as well as other carrier networks across the United States and Latin
America. We have supplied our base station antenna products both directly to the
carriers and through other channels, such as OEMs and distributors. Our base
station antenna products have been supplied to Alcatel, Bechtel, General
Dynamics, Tessco, Domital and Sprint North Supply.
Portable Antennas
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Our portable antennas are unique, yet flexible antenna systems that are
used to increase the antenna gain and product performance for a variety of
wireless devices. Typically, the product can be connected to a radio or cellular
phone or can be installed either directly in or on a computer or other device.
We market two primary portable antenna designs, the Freedom Antenna(R) and the
"Blade" antenna. The Freedom Antenna(R) is a unique broadband, patented antenna
designed to work with cellular phones and other mobile wireless devices in a
frequency range of 800 MHz to 3 GHz. The "Blade" Antenna is a smaller more
compact design that uses the same patented technology as the Freedom Antenna(R).
It is a passive device that attaches to cell phones, PDA's, laptop air cards and
other devices in the 800 MHz to 3 GHz frequency range and can be used at home or
while working or traveling that boosts wireless signals . The main design
parameter of our mobile antennas is flexibility, creating an antenna that will
function in several wireless applications or installations without requiring
modification of the fundamental design of the antenna. We market the portable
antenna systems along with our existing commercial wireless products to existing
and new customers.
4
Conformal Antennas
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A conformal antenna is one that is constructed so that it conforms
technically and physically to its product environment. We first introduced and
patented the disguised decal conformal antenna. This product, introduced in 1989
and originally only for conventional automobile cellular phones, has been
expanded as an alternative to many conventional wire type antennas and has been
expanded to be used for numerous mobile applications, including domestic and
international cellular and law enforcement frequencies, passive repeaters,
vehicle tracking and GPS. The antenna is approximately 3 1/2"x 3 1/2"x 1/10" and
typically installs on the inside of the vehicle so that it is not detectable
from the outside of the vehicle. Several derivative products of this antenna
design have been developed for OEMs and other special applications.
Global Positioning System (GPS) Antennas
----------------------------------------
We have developed proprietary, flat GPS antenna systems that integrate with
a GPS receiver. GPS receivers communicate with a constellation of globe-orbiting
satellites that will identify longitude and latitude coordinates of a location.
These satellite systems have been used for years by the military, civilian and
commercial boats, planes, for surveying, recreational hikers, and more recently
in vehicle tracking and asset management. Accurate to within several feet, there
are several types of GPS systems, some of which are the size of a cellular phone
and are very easy to use. We are currently marketing our GPS antenna products on
an OEM basis for the purposes of fleet management, asset management and vehicle
tracking systems.
We have also developed a proprietary, patented, amplified GPS/Cellular
combination antenna that integrates with a GPS receiver. We currently are
selling this product to fleet and asset management companies on a worldwide
basis. Conventional GPS antenna systems are mounted on the exterior of a vehicle
or other asset; however our product can be mounted on the interior of an
automobile or truck, protecting the antenna from weather, theft and vandalism.
Flat Panel Antennas
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Our flat panel antennas are flat antennas that are used for Wi-Fi(R) and
WiMAX(TM) and related technologies. The antenna design typically incorporates a
group of constituent antennas, all of which are equidistant from the center
point. These types of antennas are used to receive and/or transmit data, voice
and, in some cases, video from radio transmitters. We have developed, patented
and sold various versions of these antennas to private, commercial and
governmental entities. We have added several flat panel antenna designs
including, 3.5 GHz, 4.9 GHz and 5.8 GHz.
Other Antennas
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We are pursuing many new business opportunities for our antennas by
continuing to broaden and adapt existing technologies. We have designed and
currently manufacture antennas varying in frequencies up to 6GHz. These antennas
use our newly developed antenna designs to provide inconspicuous installation.
In most cases, our antennas are designed to be manufactured using our
proprietary design footprints. This allows us to better utilize our engineering,
technical and production staff, as well as existing tools, dies and radomes for
more than one product.
Test Range
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The Company has an antenna test range for the purpose of testing RF
antennas with a frequency range up to 6GHz. The antennas test range consists of
a Scientific Atlanta Model 2095 Microwave Measurement System and 40 foot indoor
anechoic test chamber. From time to time, the Company may rent the test range to
other companies interested in testing the performance of their finished wireless
product.
5
Principal products of our former Winncom subsidiary include the following:
Unlicensed wireless products using frequencies that require a license to
manufacture, but not a license to use, licensed wireless products requiring a
Federal Communication Commission ("FCC") license to operate on a specific
frequency in a geographic area, VoIP solutions for enterprise and residential
markets, customer premise equipment (CPE) and base station antenna solutions as
well as a full range of antennas for point-to-point and point-to-multi-point
applications, a complete line of high-performance voice and data infrastructure
and security products, and a wide range of copper, coaxial and fiber cables and
cable assembly products as well as lightning arrestors that are used in the
installation, extension and protection of wireless end-to-end systems.
Principal products of our Starworks subsidiary include the following:
Cable and Related Components
----------------------------
We design and market coaxial cable and related components through our
Starworks subsidiary. Starworks originally provided pre-packaged components,
primarily using cable, to the direct-to-home satellite dish industry. To
increase sales and customer satisfaction, the satellite programming industry
began offering professional installation with the purchase of a home satellite
dish, limiting the sales of pre-packaged components. Starworks has transformed
its business to provide installers and other OEM customers with components for
various wireless installations. Starworks' primary focus is no longer specific
to just the satellite industry but to the wireless industry in general, offering
bulk cable, jumper cables consisting of certain lengths of cable with connectors
pre-installed and related components. For the foreseeable future, management has
determined to minimize efforts to sell cable through its Starworks subsidiary so
that it can focus on higher margin products through its Wireless Communications
Solutions Division. However, the Company will continue to purchase cable through
its cable subsidiary for its own use while it is seeking a suitable overseas
cable manufacturer for its cable distribution business.
Foreign Sales:
Direct export sales by the Company to customers outside North America were
approximately 13% of Company's sales for the fiscal year ended December 31,
2007. The Company does not own, or directly operate any manufacturing operations
in foreign countries.
Marketing and Distribution
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Our Wireless Communications Solutions Division markets its commercial
line of antennas directly to distributors, installers and retailers of antenna
accessories. Current distribution consists of several domestic and international
distributors, including several hundred active retail dealers. The Wireless
Communications Solutions Division also markets our diversified proprietary
designs to our existing and potential customers in the commercial, government
and retail market places. Potential customers are identified through trade
advertising, phone contacts, trade shows, and field visits. We provide
individual catalog and specification brochures describing existing products. The
same brochures are utilized to demonstrate our capabilities to develop related
products for OEM and other commercial customers. Our web site,
www.arcwireless.net, includes information about our products and background as
well as financial and other shareholder-oriented information. The web site,
among other things, is designed to encourage both existing and potential
customers to view us as a potential source for diversified wireless solutions.
Inquiries through the web site are pursued by our in-house and outside sales
personnel. To help customers get answers quickly about our products, we have
established a toll-free telephone number administered by our customer service
personnel from 8:00 a.m. to 5:00 p.m. Mountain Time. Many of our products are
also marketed internationally. We also have numerous international distributors
marketing our products in several countries. We are currently negotiating with
various international manufacturers to manufacture our proprietary products.
This process can save duty and freight costs making us more competitive.
6
Winncom was a value added distributor that supported distribution of
products with internal sales, technical support, system design and feasibility
studies, installation and training.
Production
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The Wireless Communications Solutions Division currently produces most of the
customized items that we use to manufacture our products excluding cable,
connectors and other generic components. We believe that this control over the
production process allows us to be more competitive, efficient and more
responsive to customers and allows us to take advantage of more opportunities in
the wireless communications market.
The manufacturing of the majority of our products and components is currently in
China under the supervision of our wholly-owned subsidiary, ARC Wireless Hong
Kong Limited.
Research And Development
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Research and development ("R&D") costs are charged to operations when incurred
and are included in operating expenses. Except for salaries of engineering
personnel and contract engineering involved in R&D, other R&D costs have not
been material in 2007, 2006 and 2005. We spent approximately $512,000, $363,000
and $315,000 on R&D in 2007, 2006 and 2005, respectively. Our R&D personnel
develop products to meet specific customer, industry and market needs that we
believe compete effectively against products distributed by other companies.
Quality assurance programs are implemented into each development and
manufacturing project, and we enforce strict quality requirements on components
received from other manufacturing facilities.
Financial Information About Industry Segments
- ---------------------------------------------
The Company had three reportable segments that were separate business units that
offered different products as follows: distribution of wireless communication
products, antenna manufacturing and cable products. Effective October 31, 2006,
the distribution business was sold and is reported as discontinued operations in
the accompanying consolidated financial statements. Please see Notes 2 and 11 to
our consolidated financial statements, included in this report.
Employees
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At December 31, 2007, we had 41 full time employees including 20 in
manufacturing and distribution, 5 in sales and customer support, 7 in
engineering and product development, and 9 in management and administration. Our
employees are not represented by any collective bargaining agreement and we have
never experienced a work slowdown or strike.
Competition
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The market for wireless network components is highly competitive, and our
current and proposed products compete with products of larger companies that are
better financed, have established markets, and maintain larger sales
organizations and production capabilities. In marketing our products, we have
encountered competition from other companies, both domestic and international.
At the present time, our market share of the overall wireless network component
market is small. Our antenna products are designed to be unique and in some
cases are patented. Our products normally compete with other products
principally in the areas of price and performance. However, we believe that our
products work as well as or better than competing products and usually sell for
the same price or less. Additionally, we have demonstrated to our customers and
potential customers that we are a more reliable source than some competitors and
believe this is a distinct competitive advantage.
7
Government Regulations
- ----------------------
We are subject to government regulation of our business operations in general,
and the telecommunications industry also is subject to regulation by federal,
state and local regulatory and governmental agencies. Under current laws and the
regulations administered by the FCC, there are no federal requirements for
licensing antennas that only receive (and do not transmit) signals. We believe
that our antennas that are also used to transmit signals are in compliance with
current laws and regulations. Current laws and regulations are subject to change
and our operations may become subject to additional regulation by governmental
authorities. We can be significantly impacted by a change in either statutes or
rules.
Patents
- -------
We currently hold 14 U.S. patents, which will remain valid until their
individual specific expiration dates. Kevin O. Shoemaker, our former Chief
Scientist, is the inventor of record for a patent that was valid through the
year 2008 for micro strip antennas and multiple radiator array antennas. Mr.
Shoemaker also is the inventor of record for a patent for a serpentine planar
broadband antenna that expires in 2011. In addition, Mr. Shoemaker and Mr.
Randall P. Marx, our Chief Executive Officer, are inventors of record for a
patent covering the process used to manufacture certain of our flat planar
antennas, which expires in 2016. Mr. Shoemaker is the inventor of record for a
patent, which expires in 2018, covering creating antennas from coaxial cable,
and Mr. Shoemaker and Mr. Marx are also the inventors of record for a patent for
a conformal antenna for a satellite dish, which expires in 2013, as well as for
a patent for conformal antenna assemblies, which expires in 2016. Mr. Shoemaker
and Mr. Marx each have permanently assigned to us all rights to these patents.
The former president of our subsidiary Starworks, David E. McConnell, is the
inventor of record for a patent for a coaxial cable connector, which will expire
in 2017, all rights to which are owned by the Company as a result of the
acquisition of Starworks on September 29, 2000.
In addition, Dr. Mohamed Sanad, a former Principal Consulting Engineer, is the
inventor of record for a patent that was designed for remote wireless metering
and that will expire in 2019. He is also the inventor of another patent used for
remote wireless metering as well as mobile data collection, which will expire in
2019. Dr. Sanad has permanently assigned to us all of the rights to these
patents.
Raymond L. Lovestead, one of our former engineers, is the inventor of record for
our low cross-polarization microstrip patch radiator patent, which will expire
in 2021. Mr. Lovestead has permanently assigned to the Company all patent and
other rights in the products covered by this patent application and all other
products that have been developed while employed by us.
Dr. Donald A. Huebner, and Mr. Lovestead are the inventors of record for our
Ultra-Broadband Thin Planar antenna patent, which is used for our Freedom
Antenna(R) and will expire in 2022. Dr. Huebner is also one of our Directors.
Dr. Huebner has permanently assigned to the Company all patent and other rights
in the products covered by this utility patent.
Steven C. Olson, our Chief Technology Officer, is the inventor of record for our
Partially Shared Antenna Aperture patent, which will expire in 2023 and which is
currently used in some of our fixed wireless access antennas.
Per the terms of the asset purchase agreement with BATC (see page 12), we have
also filed a utility patent application with Mr. Jeffrey A. Godard, currently an
engineer with BATC, and Mr. Olson as inventors of record, both of whom have
permanently assigned to us all patent and other rights to any commercial
products covered by this utility patent application. This patent application for
our Microstrip Fed Log antenna has been granted and will expire in 2022.
8
Mr. Olson is also the inventor for the technology used for our DUALBASE(TM)
antenna. Mr. Olson has permanently assigned to us all patent and other rights in
the products covered by this utility patent, and all other products that have
been and will be developed while employed by us. This patent application for our
Omni-Dual Band Antenna & System has been granted and will expire in 2024.
We also have the exclusive commercial licensing rights to the following patents,
which were included as part of the asset purchase agreement to acquire certain
commercial assets from BATC in 2001: US6,121,929, US5,905,465, US6,239,751 and
US6,414,636.
In addition to the above referenced patents, we have filed one provisional
patent application.
We currently have seven trademarks, ANTENNAS AMERICA(R), AIRBASE(R),
DUALBASE(R), UNIPAK(R), FREEDOM ANTENNA(R), EXSITE(R), OMNIBASE(R) and PARITY(R)
that are registered marks. We also have in use the following trademarks, ARC
VLPA, ARC ATLAS, FREEDOM BLADE and FREEDOM CRUISE.
We seek to protect our proprietary products, information and technology through
reliance on confidentiality provisions, and, when practical, the application of
patent, trademark and copyright laws. We cannot assure that these applications
will result in the issuance of patents, trademarks or copyrights of our
products, information or technology.
History
- -------
We were organized under the laws of the State of Utah on September 30, 1987 for
the purpose of acquiring one or more businesses. Our prior name was Westflag
Corporation, which was formerly Westcliff Corporation. In January 1989, we
completed our initial public offering of 210,900 units at $2.00 per unit,
resulting in net proceeds of approximately $363,000. Each unit consisted of one
share of common stock, one Class A Warrant and one Class B Warrant. All the
Class A and Class B Warrants expired without exercise and no longer exist. In
February 2007, we effected a one-for-fifty reverse split so that each fifty
outstanding shares of common stock prior to the reverse split became one share
after the reverse split. In April 1989, we effected a one-for-four reverse split
so that each four outstanding shares of common stock prior to the reverse split
became one share after the reverse split. Unless otherwise indicated, all
references in this Annual Report to the number or prices of shares of our common
stock or the units described above have been adjusted for the effect of the 2007
one-for-fifty reverse split and the 1989 one-for-four reverse split.
On April 12, 1989, we merged with Antennas America, Inc., a Colorado corporation
that had been formed in September 1988 and had developed an antenna design
technique that would permit the building of flat (as compared to parabolic)
antenna systems. Pursuant to the merger, Antennas America, Inc. was merged into
us, all the issued and outstanding stock of Antennas America, Inc. was converted
into 839,040 of our shares, and our name was changed to Antennas America, Inc.
In October 2000, we changed our name to ARC Wireless Solutions, Inc. from
Antennas America, Inc.
On May 24, 2000, we purchased, through our former subsidiary, Winncom
Technologies Corp. ("Winncom"), all the outstanding shares of Winncom
Technologies, Inc. The acquisition was accounted for as a purchase, and
accordingly, the operations for Winncom have been included in the Company's
consolidated statement of operations from May 24, 2000 (the date of acquisition)
forward until the effective date of our sale of Winncom on October 31, 2006. We
paid $12.7 million in aggregate consideration, consisting of $3.7 million in
cash, a $1.5 million non-interest bearing promissory note payable 90 days from
the closing date, a $1.5 million non-interest bearing promissory note payable
180 days from the closing date and $6.0 million in shares of our restricted
common stock (138,920 shares). The notes were paid in full by September 2000,
with an $85,000 negotiated early payment reduction. Winncom was sold effective
October 31, 2006 for $17 million (see Note 2 to the consolidated financial
statements).
9
On September 29, 2000, we purchased, through our subsidiary, Starworks, the
outstanding shares of Starworks Technology, Inc. (a/k/a The Kit Company). The
acquisition was accounted for as a purchase. We paid $2.3 million in aggregate
consideration in 2000, consisting of $0.8 million in cash and $1.5 million in
shares of our restricted common stock (39,180 shares). As a result of a
settlement agreement reached with the former shareholders of Starworks
Technology, Inc. in December 2001, 29,189 shares of our common stock were
returned to us and we received an option to purchase the remaining 10,000 shares
of common stock at $7.50 per share, which we exercised in January 2002.
On August 21, 2001, we purchased certain commercial assets of the wireless
communications product line from Ball Aerospace & Technology Corp. ("BATC"), a
subsidiary of Ball Corporation, for $925,000. Subsequent to the purchase, a
physical inventory was taken of the assets purchased and in accordance with the
purchase agreement Ball refunded approximately $85,000 of the original purchase
price as a result of there being less inventory than that listed in the purchase
agreement. The assets purchased consisted primarily of raw materials inventory,
finished goods inventory, production tooling equipment, testing equipment and an
exclusive license agreement to use patents related to the wireless
communications antenna products for commercial purposes.
Disclosure Regarding Forward-Looking Statements And Risk Factors
- ----------------------------------------------------------------
Forward-Looking Statements.
- ---------------------------
This Annual Report on Form 10-K 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 Annual Report, including
without limitation under "Item 1: Business - Principal Products", "Marketing and
Distribution", "Production", "Research and Development", "Competition",
"Governmental Regulations" and "Patents", and "Item 7: Management's Discussion
and Analysis of Financial Condition and Results of Operation", regarding our
financial position, business strategy, plans and objectives of our management
for future operations and capital expenditures, and other matters, other than
historical facts, are forward-looking statements. Although we believe that the
expectations reflected in such forward-looking statements and the assumptions
upon which the forward-looking statements are based are reasonable, we can give
no assurance that such expectations will prove to have been correct.
Additional statements concerning important factors that could cause actual
results to differ materially from our expectations are disclosed in the
following "Risk Factors" section and elsewhere in this Annual Report. In
addition, the words "believe", "may", "will", "when", "estimate", "continue",
"anticipate", "intend", "expect" and similar expressions, as they relate to us,
our business or our management, are intended to identify forward-looking
statements. All written and oral forward-looking statements attributable to us
or persons acting on our behalf subsequent to the date of this Annual Report are
expressly qualified in their entirety by the following Risk Factors.
Item 1A. Risk Factors.
- ----------------------
In addition to the other information contained in this Annual Report, the
following Risk Factors should be considered when evaluating the forward-looking
statements contained in this Annual Report:
10
1. We have a history of prior losses and there is no assurance that our
operations will be profitable in the future. From inception in September
1987 through the fiscal year ended December 31, 1992, and again for the
years ended December 31, 1998 through the fiscal year ended December 31,
2001 and for the fiscal years ended December 31, 2003, 2006 and 2007, we
incurred losses from operations. We operated profitably during each of the
fiscal years ended December 31, 1993 through 1997 and again for the fiscal
years ended December 31, 2002, 2004 and 2005. Profits for some of these
years were marginal, and we cannot be assured that our operations in the
future will be profitable. See the financial statements included in Item 15
of this Annual Report on Form 10-K.
2. Our industry encounters rapid technological changes and there is no
assurance that our research and development activities can timely lead to
new and improved products when the market demands them. We do business in
the wireless communications industries. This industry is characterized by
rapidly developing technology. Changes in technology could affect the
market for our products and necessitate additional improvements and
developments to our products. We cannot predict that our research and
development activities will lead to the successful introduction of new or
improved products or that we will not encounter delays or problems in these
areas. The cost of completing new technologies to satisfy minimum
specification requirements and/or quality and delivery expectations may
exceed original estimates that could adversely affect operating results
during any financial period.
3. We rely on the protection of patents and certain manufacturing practices to
protect our product designs and there is no assurance that these measures
will be successful. We attempt to protect our product designs by obtaining
patents, when available, and by manufacturing our products in a manner that
makes reverse engineering difficult. These protections may not be
sufficient to prevent our competitors from developing products that perform
in a manner that is similar to or better than our products. Competitors'
successes may result in decreased margins and sales of our products.
4. We face intense competition in our industry and there is no assurance that
we will be able to adequately compete with our larger competitor. The
communications and antenna industries are highly competitive, and we
compete with substantially larger companies. These competitors have larger
sales forces and more highly developed marketing programs as well as larger
administrative staffs and more available service personnel. The larger
competitors also have greater financial resources available to develop and
market competitive products. The presence of these competitors could
significantly affect any attempts to develop our business.
5. The Company Depends On Third-Party Contract Manufacturers For A Majority Of
Its Manufacturing Needs. We have transitioned a majority of our production
to China and are dependent on efficient workers for these functions. If the
Company's manufacturers are unable to provide us with adequate supplies of
high-quality products on a timely and cost-efficient basis, the Company's
operations would be disrupted and its net revenue and profitability would
suffer. Moreover, if the Company's third-party contract manufacturers
cannot consistently produce high-quality products that are free of defects,
the Company may experience a higher rate of product returns, which would
also reduce its profitability and may harm the Company's reputation and
brand.
The Company does not currently have any agreements with any of its contract
manufacturers, and such manufacturers could stop manufacturing products for
the Company at any time. Although the Company believes that it could locate
alternate contract manufacturers if any of its manufacturers terminated
their business, the Company's operations could be impacted until alternate
manufacturers are found.
6. The success of our business is highly dependent on key employees. We are
highly dependent on the services of our executive management, including
Randall P. Marx, our Chief Executive Officer. The loss of the services of
any of our executive management could have a material adverse effect on us.
11
7. We may incur significant costs in complying with new governmental
regulations that affect our industry, and this may require us to divert
funds we use for the development of our business and product. We are
subject to government regulation of our business operations in general.
Certain of our products are subject to regulation by the Federal
Communications Commission ("FCC") because they are designed to transmit
signals. Because current regulations covering our operations are subject to
change at any time, and despite our belief that we are in substantial
compliance with government laws and regulations, we may incur significant
costs for compliance in the future.
8. We have not paid any cash dividends with respect to our shares, and it is
unlikely that we will pay any cash dividends on our shares in the
foreseeable future. We currently intend that any earnings that we may
realize will be retained in the business for further development and
expansion.
9. We have significant sales concentrated in a few customers. The
concentration of the Company's business with a relatively small number of
customers may expose us to a material adverse effect if one or more of
these large customers were to experience financial difficulty or were to
cease being a customer for non-financial related issues.
10. The Company May Make Future Acquisitions, Which Will Involve Numerous
Risks.
o diversion of management's attention;
o the effect on the Company's financial statements of the
amortization of acquired intangible assets;
o the cost associated with acquisitions and the integration of
acquired operations; and
o assumption of unknown liabilities, or other unanticipated events
or circumstances.
Any of these risks could materially harm the Company's business, financial
condition and results of operations. There can be no assurance that any business
that the Company acquires will achieve anticipated revenues or operating
results.
11. Other Risks. In addition, there are other risks, which if realized, in
whole or in part, could have a material adverse effect on our business,
financial condition and/or results of operations, including, without
limitation:
o intense competition, regionally and internationally, including
competition from alternative business models, such as
manufacturer-to-end-user selling, which may lead to reduced
prices, lower sales or reduced sales growth, lower gross margins,
extended payment terms with customers, increased capital
investment and interest costs, bad debt risks and product supply
shortages;
o termination of a supply or services agreement with a major
supplier or customer or a significant change in supplier terms or
conditions of sale;
o the continuation or worsening of the severe downturn in economic
conditions (particularly purchases of technology products) and
failure to adjust costs in a timely fashion in response to a
sudden decrease in demand;
o losses resulting from significant credit exposure to reseller
customers and negative trends in their businesses;
o reductions in credit ratings and/or unavailability of adequate
capital;
12
o failure to attract new sources of business from expansion of
products or services or entry into new markets;
o inability to manage future adverse industry trends;
o future periodic assessments required by current or new accounting
standards resulting in additional charges; and
o unstable economic and political conditions in China. Any adverse
change in the economic conditions or government policies in China
could have a material adverse effect on our business.
Available Information.
- ----------------------
We make available free of charge on our website at www.arcwireless.net, our
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K (including exhibits and supplementary schedules) and amendments to
those reports, filed or furnished under Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as soon as reasonably practicable after these reports are
electronically filed with, or furnished to, the Securities Exchange Commission.
Item 1B. Unresolved Staff Comments
- ----------------------------------
None
Item 2. Properties
- ------------------
Our principal offices are located in Wheat Ridge, Colorado, where we lease
approximately 50,000 square feet of office, production and warehouse space for
our corporate office, engineering and limited manufacturing of antennas and for
use by each of our segments. This lease commenced on July 1, 2003 and expires on
June 30, 2010.
In addition, we lease approximately 1,700 square feet of corporate office space
in Hong Kong on a month to month basis for our subsidiary ARC Wireless Hong Kong
Limited.
Item 3. Legal Proceedings
- ------- -----------------
The Company and its subsidiaries are involved in various legal proceedings of a
nature considered normal in the course of its operations, principally accounts
receivable collections. While it is not feasible to predict or determine the
final outcome of these proceedings, management has reserved as an allowance for
doubtful accounts for that portion of the receivable it estimates will be
uncollectible. No litigation exists at December 31, 2007 or at the date of this
report that management believes will have a material impact on the financial
position or operations of the Company.
13
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
- ------------------------------------------------------------------------------
and Issuer Purchases of Equity Securities
- -----------------------------------------
Our common stock was quoted on the OTC Bulletin Board (the "OTCBB") under the
trading symbol "ARCS" until February 11, 2007. On February 12, 2007, our common
stock began trading under the symbol "ARCW" on the OTCBB pursuant to the
1-for-50 reverse stock split described below. On April 10, 2007, our common
stock ceased trading on the OTCBB, and began trading on the NASDAQ Capital
Markets Exchange (the "NASDAQ-CM"). Because trading in our shares is so limited,
prices can be highly volatile.
On February 9, 2007, we announced a 1-for-50 reverse stock split of our issued
and outstanding common stock to be effective as of February 12, 2007 (the
"Effective Date"). Pursuant to the reverse stock split, each 50 shares of the
Company's issued and outstanding common stock were reclassified and combined
into one share of the Company's common stock as of the Effective Date. The
number of shares of the Company's common stock authorized remained at 250
million shares, without any change in par value per common share, and the number
of authorized shares of the Company's preferred stock remained at two million.
As of the Effective Date, the exercise or conversion price, as well as the
number of shares issuable under each of the Company's outstanding stock option
agreements, were proportionately adjusted to reflect the reverse stock split. In
addition, the number of shares authorized for issuance under the Company's
equity compensation plans, were proportionately reduced as of the Effective Date
to reflect the reverse stock split.
The table below represents the high and low bid information during each of the
quarters in the past two fiscal years during which our common stock was traded
on the OTCBB (from January 1, 2006 to April 9, 2007 and the high and low sales
process for our common stock since it has been traded on the NASDAQ-CM (April
10, 2007 through the present). These over-the-counter quotations for the period
when our common stock was traded on the OTCBB (January 1, 2006 to April 9, 2007)
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions. The prices have been adjusted
for the one-for-fifty reverse stock split that was effective on February 12,
2007.
Common Stock
------------
Quarter Ended High Bid Low Bid
- ------------- -------- -------
March 31, 2006 $8.00 $5.00
June 30, 2006 $9.00 $6.00
September 30, 2006 $7.50 $4.50
December 31, 2006 $6.50 $5.00
March 31, 2007 $5.00 $4.51
High Sales Price Low Sales Price
---------------- ---------------
June 30, 2007 $6.20 $4.67
September 30, 2007 $5.71 $4.80
December 31, 2007 $6.44 $4.31
14
On February 29, 2008, the closing sales price for our common stock was $4.88 and
the approximate number of our shareholders of record was 407. We have not
declared or paid any cash dividends on our common stock since our formation and
do not presently anticipate paying any cash dividends on our common stock in the
foreseeable future.
Recent Sales Of Unregistered Securities
- ---------------------------------------
During the year ended December 31, 2007, we recorded the issuance of 2,990
shares of common stock to directors for outstanding obligations for directors'
fees in the amount of $15,000.
On March 12, 2007 and May 9, 2007, the Company granted 2,500 and 5,000 options,
respectively, to outside directors with an exercise price of $4.80 and $5.47,
respectively. Each option has a two year term and vest 20% for each meeting
attended by the respective director. As the result of changes to the Outside
Directors compensation plan, effective October 1, 2007, options granted but not
yet vested prior to October 1, 2007 will expire.
These issuances were granted based on exemptions from registration under the
Securities Act of 1933, as amended (the "Securities Act"), and applicable state
laws pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation
D. These issuances qualified for this exemption from registration because (i)
the Company did not engage in any general solicitation or advertising to market
the securities; (ii) all the Company's reports filed under the Securities
Exchange Act of 1934 were made available to the recipients; (iii) each recipient
was provided the opportunity to ask questions and receive answers from the
Company regarding the offering; (iv) the securities were issued to persons with
knowledge and experience in financial and business matters so that he or she is
capable of evaluating the merits and risks of an investment in the Company; and
(v) the recipients received "restricted securities" that include a restrictive
legend on the certificate.
Equity Compensation Plan Information.
- -------------------------------------
Securities authorized for issuance under our equity compensation plans as of
December 31, 2007 are as follows:
Equity Compensation Plan Table
- -------------------------------------- ------------------------- -------------------------- ------------------------
Number of securities to Weighted average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance
warrants and rights warrants and rights
- -------------------------------------- ------------------------- -------------------------- ------------------------
(a) (b) (c)
- -------------------------------------- ------------------------- -------------------------- ------------------------
Equity compensation plans approved
by security holders 54,500 $7.34 260,000
- -------------------------------------- ------------------------- -------------------------- ------------------------
Equity compensation plans not
approved by security holders 0 - -
- -------------------------------------- ------------------------- -------------------------- ------------------------
Total 54,500 $7.34 260,000
- -------------------------------------- ------------------------- -------------------------- ------------------------
Share Performance Graph
- -----------------------
The following graph compares the total shareholder return, on our common stock
for the five-year period from December 31, 2002 through December 31, 2007 with
that of the NASDAQ Composite Index, and a peer group (the "Peer Group") of four
companies selected by us in good faith, whose primary business includes the
manufacture and sale of antennas and distribution of wireless communication
products. The members of the Peer Group are Tech Data Corp., Ingram Micro Inc.,
Phazar Corp. and EMS Technologies Inc. This graph assumes that on December 31,
2002 $100 was invested in our common stock in the NASDAQ Index and in the Peer
15
Group, and assumes reinvestment of all dividends. Note that historic stock price
performance does not necessarily indicate future stock price performance.
[GRAPHIC OMITTED]
16
Item 6. Selected Consolidated Financial Data
- ------------------------------------------------
The following table sets forth selected consolidated financial data for each of
the Company's last five fiscal years. The results of operations for any period
are not necessarily indicative of the results to be expected for any future
period.
Selected Annual Consolidated Data
For the Years Ended December 31,
----------------------------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
Revenues $ 8,048,000 $ 6,470,000 $ 6,736,000 $ 6,449,000 $ 5,618,000
Gross profit 2,781,000 1,449,000 2,730,000 2,509,000 1,828,000
Income (loss) from continuing
operations (703,000) (1,606,000) 573,000 (320,000) (729,000)
Income from discontinued operations
-- 864,000 719,000 1,008,000 444,000
Net income (loss) $ (703,000) $ (742,000) $ 1,292,000 $ 688,000 $ (285,000)
Earnings (loss) per share:
Basic and diluted continuing
operations $ (.23) $ (.52) $ .19 $ (.11) $ (.24)
Earnings (loss) per share:
Basic and diluted discontinued
operations -- $ .28 $ .23 $ .33 $ .15
Earnings (loss) per share:
Basic and diluted $ (.23) $ (.24) $ .42 $ .22 $ (.09)
-----------------------------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
Cash and cash equivalents $ 14,941,000 $ 15,720,000 $ 64,000 $ 321,000 $ 227,000
Working capital 14,993,000 15,679,000 16,387,000 7,289,000 7,049,000
Total assets 17,912,000 17,975,000 33,489,000 22,493,000 22,740,000
Total liabilities 2,492,000 1,888,000 16,679,000 7,031,000 7,968,000
Stockholders' equity 15,420,000 $ 16,087,000 $ 16,810,000 $ 15,462,000 $ 14,772,000
17
The following table sets forth selected unaudited consolidated financial data for each of the Company's last eight fiscal quarters:
2007
-----------------------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Net sales $ 2,391,000 $ 1,986,000 $ 2,089,000 $ 1,581,000
Gross profit 946,000 624,000 800,000 411,000
Income (loss) from continuing
operations (338,000) (173,000) 106,000 (298,000)
Income from discontinued operations
----------- ----------- ----------- -----------
Net income (loss) $ (338,000) $ (173,000) $ 106,000 $ (298,000)
Earnings (loss) per share:
Basic and diluted continuing
operations $ (.10) $ (.06) $ .03 $ (.10)
Earnings (loss) per share:
Basic and diluted discontinued
operations -- -- -- --
Net income (loss) per share $ (.10) $ (.06) $ .03 $ (.10)
2006
-----------------------------------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Net sales $ 1,260,000 $ 1,837,000 $ 1,824,000 $ 1,549,000
Gross profit 167,000 468,000 394,000 420,000
Income (loss) from continuing
operations (560,000) (331,000) (436,000) (279,000)
Income from discontinued operations
(72,000) $ 141,000 486,000 309,000
Net income (loss) $ (632,000) $ (190,000) $ 50,000 $ 30,000
Earnings (loss) per share:
Basic and diluted continuing
operations $ (.19) $ (.10) $ (.14) $ (.09)
Earnings (loss) per share:
Basic and diluted discontinued
operations $ (.02) $ .04 $ .16 $ .10
Net income (loss) per share $ (.21) $ (.06) $ .02 $ .01
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Financial Condition
At December 31, 2007, we had approximately $14.9 million in working capital,
which is a decrease of approximately $800,000 from working capital at December
31, 2006 of $15.7 million.
We had total assets of $17,912,000 as of December 31, 2007 as compared with
$17,975,000 as of December 31, 2006. The slight decrease is a result of a
reduction in cash to fund operating losses in 2007.
Liabilities increased from $1,865,000 at December 31, 2006 to $2,409,000 at
December 31, 2007 primarily as a result of an increase in our line of credit
borrowing from $830,000 at December 31, 2006 to $1,436,000 at December 31, 2007.
18
Management believes that current working capital and renewed bank line of credit
will be sufficient to allow the Company to maintain its operations through
December 31, 2007 and into the foreseeable future.
Off-Balance Sheet Arrangements
- -------------------------------
We do not have any off-balance sheet arrangements. Contractual Obligations as of
December 31, 2007 are as follows:
- ----------------------------------- --------------- ---------------------------------------------------------------
Payments Due By Period
- ----------------------------------- --------------- ---------------------------------------------------------------
Less than 1 More than 5
Total Year 1-3 Years 3-5 Years Years
- ----------------------------------- --------------- -------------- ---------------- -------------- ----------------
Lines of credit $ 1,435,000 $1,435,000 - - -
- ----------------------------------- --------------- -------------- ---------------- -------------- ----------------
Long-term debt - - - - -
- ----------------------------------- --------------- -------------- ---------------- -------------- ----------------
Capital lease obligations (1) $ 108,000 $ 86,000 $ 22,000 - -
- ----------------------------------- --------------- -------------- ---------------- -------------- ----------------
Operating leases $ 939,000 $ 258,000 $ 434,000 - -
- ----------------------------------- --------------- -------------- ---------------- -------------- ----------------
Purchase obligations (2) $ 808,000 $ 808,000 - - -
- ----------------------------------- --------------- -------------- ---------------- -------------- ----------------
(1) Obligation includes future payments of both principal and interest.
(2) Purchase obligations include agreements to purchase goods or services that
are enforceable and legally binding and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction.
Purchase obligations exclude agreements that are cancelable without penalty and
intercompany purchase obligations.
Results of Continuing Operations for the Year Ended December 31, 2007 compared
to the Year Ended December 31, 2006
Total revenues were $8,048,000 and $6,470,000 for the years ended December 31,
2007 and 2006, respectively. The 24% increase in revenues during the year ended
December 31, 2007 compared to the year ended December 31, 2006 is attributable
to increased revenues from our Wireless Communications Solutions Division,
partially offset by a decrease of $266,000 in revenues from our subsidiary,
Starworks. For the foreseeable future, management has determined to minimize
efforts to sell cable through its Starworks subsidiary so that it can focus on
higher margin products through its Wireless Communications Solutions Division.
However, the Company will continue to purchase cable through its cable
subsidiary for its own use while it is seeking a suitable overseas cable
manufacturer for its cable distribution business.
Gross profit margins were 34.6% and 22.4% for the years ended December 31, 2007
and 2006, respectively. The 50% increase in gross profit margin is primarily the
result of lower operating costs resulting from our efforts in successfully
transitioning most of our production to China through our Hong Kong subsidiary,
ARC Wireless Hong Kong Limited ("ARCHK"), as well as reducing overhead from our
U.S. operations.
Selling, general and administrative expenses (SG&A) increased by $1,059,000 for
the year ended December 31, 2007 compared to the year ended December 31, 2006.
Approximately $132,000 of the increase was related to costs (salaries, outside
services and rent) associated with operating our ARCHK subsidiary, and $83,000
represents the addition of previously allocated overhead to Winncom due to the
sale of Winncom in 2006, whereby those costs were not allocated in 2007. Other
increases in SG&A costs comparing 2007 to 2006, except for those of ARCHK,
include; the increase in the allowance for bad debts ($395,000) salaries and
benefits ($329,000), outside consulting services ($72,000), the 401(k) employer
contribution ($68,000) and stock listing and shareholder meeting costs
($69,000). The significant increase in bad debt expense in 2007 was due to the
19
filing of bankruptcy protection by a significant customer. Based on information
available to us, we elected to reserve the entire amount pending settlement of
the matter in 2008. SG&A as a percent of total revenues increased from 48% for
the year ended December 31, 2006 to 52% for the year ended December 31, 2007.
Salaries and wages, including commissions, remains the largest component of
SG&A, constituting 46% and 52% of the total SG&A for the years ended December
31, 2007 and 2006, respectively. The increase in salaries and wages in 2007 are
primarily due to increased sales and engineering personnel to support the
increases in revenue over 2006.
Net interest expense was $24,000 for the year ended December 31, 2007 compared
to $124,000 for the year ended December 31, 2006. The decrease is due to the
Company significantly reducing the need to use our available line of credit as a
result of cash proceeds from the sale of Winncom in 2006. Most of the interest
expense for 2007 is related to capitalized leases.
Other income for the year ended December 31, 2007 primarily represents interest
income on funds invested from the sale of Winncom of $675,000, and gain on debt
settlements of $30,000. Interest income on funds invested from the sale of
Winncom for 2006 was $100,000.
The benefit for income taxes in 2006 represents an increase in deferred income
taxes, whereas the benefit for income taxes in 2007 represents a refund of state
income taxes.
The Company had a net loss from continuing operations of $703,000 for the year
ended December 31, 2007 compared to a net loss from continuing operations of
$1,606,000 for the year ended December 31, 2006. The primary reasons for the
reduction in the net loss are; 1) the increase in sales of $1,578,000, 2) the
increase in gross profit margin of $1,250,000, 3) the increase in interest
income of $570,000 from the proceeds from the sale of Winncom, and 4) the
increase of $30,000 gain on debt settlements, partially offset by an increase on
SG&A of $1,059,000 as discussed above.
Results of Continuing Operations for the Year Ended December 31, 2006 compared
to the Year Ended December 31, 2005
Total revenues decreased 4% from $6.74 million for the year ended December 31,
2005 to $6.47 million for the year ended December 31, 2006. The $270,000
decrease in revenues during the year ended December 31, 2006, is primarily
attributable to $350,000 decrease in revenues from the Wireless Communications
Solutions Division offset by an $80,000 increase in revenue from Starworks
(cable sales). Sales of the base station product line continued to decline from
2005 to 2006.
Gross profit margins were 22% and 41%, respectively for the years ended December
31, 2006 and 2005. The decrease in gross margin for the year ended December 31,
2006 was as a result of; 1) lower margins at the Wireless Communications
Solutions Division due to (1) 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
involving a change in product mix; (2) competitive pricing pressures, and (3)
the costs associated with the introduction and manufacturing of several new
products. The Company took 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 $541,000 for
the year ended December 31, 2006 compared to the year ended December 31, 2005.
Approximately $25,000 of the increase is due to increases in salaries and wages,
and the remaining increase is due to costs associated with the organization of
ARC Wireless Hong Kong Limited ($77,000), as well as increases in audit fees
($60,000), legal fees ($95,000, incurred in connection with the sale of
Winncom), investor relations ($60,000), directors fees ($30,000), SOX 404
compliance cost ($30,000), shareholder meeting ($60,000) and outside engineering
services. SG&A as a percent of revenue increased from 38% for the year ended
20
December 31, 2005 to 57% for the year ended December 31, 2006. Salaries and
wages, while remaining fairly constant from 2005 to 2006, remains the largest
component of SG&A, constituting 52% and 62% of the total for the years ended
December 31, 2006 and 2005, respectively.
Net interest expense was $124,000 for the year ended December 31, 2006 compared
to $123,000 for the year ended December 31, 2005. Even though the prime interest
rate increased 2% in 2006, interest expense remained about the same as 2005.
While the average monthly balance outstanding on the line of credit and capital
leases was $600,000 in 2005 compared to $700,000 in 2006, the interest rate on
borrowed funds in 2005 through accounts receivable factoring was nearly twice
the rate paid on the line of credit financing, which terminated in May 2005 when
we established a new revolving bank line of credit.
Other income (expense) in 2006 includes a loss on the disposition of Winncom of
$187,000, for which there was no similar item in 2005 and interest income of
$99,000 on the funds invested from the sale of Winncom on October 31, 2006, also
for which there was no similar item in 2005.
We had an income tax benefit of $267,000 for the year ended December 31, 2006
compared to an income tax benefit of $475,000 for the year ended December 31,
2005. The income tax benefit in 2006 is comprised of three items; 1) utilization
of net operating losses to offset prior years taxes paid resulting in a refund
of $135,000; 2) an offset to Winncom's federal income tax liability, reported in
discontinued operations, computed on a separate return basis through its date of
disposition, October 31, 2006; and 3) a valuation allowance against deferred
income taxes. The 2005 income tax benefit is comprised of net deferred tax
assets. Management estimated that in the fourth quarter of 2005 that due to the
likelihood of continued profitability the valuation allowance on its net
deferred tax assets of approximately $490,000 was no longer considered
necessary.
The Company had a net loss of $1,606,000 from continuing operations for the year
ended December 31, 2006 as compared to net income from continuing operations of
$573,000 for the year ended December 31, 2005. As discussed in the previous
paragraphs, the gross margin declined by nearly 46% resulting in a gross margin
loss of approximately $1.2 million, an increase in SG&A of $541,000 and a loss
on the sale of Winncom of $187,000, all contributing to the net loss in 2006.
Results of Discontinued Operations for the Year Ended December 31, 2006 compared
to the Year ended December 31, 2005 (See Note 2, Discontinued Operations for the
detailed operating results of the discontinued operations) The results of
operations of Winncom for 2006 are for ten months only as Winncom was sold on
October 31, 2006.
Winncom had a 50% increase in revenues comparing the year ended December 31,
2005 to the year ended December 31, 2006. The increase of nearly $16.4 million
is primarily the result of a $17.9 million increase in its long term contract
revenue associated with the Kazakhstan project over 2005. The margin recognized
on the long term construction contract was approximately 7% for the period ended
December 31, 2006. Because the gross margin on the long term contract is lower
than the gross margin for normal distribution revenues, the increase in gross
margin was only 6%, even though revenues increased by 50% from 2005 to 2006.
SG&A expenses increased $122,000, or 3% comparing 2006 to 2005, due to an
increase of $150,000 in inventory reserve and an increase of $225,000 in bad
debt expense and the remainder attributable to increases in salaries and wages.
Operating expenses as a percentage of revenue substantially decreased from 12%
for 2005 to 8% for 2006 primarily because the long term contract, while it had
very low margins, added little to the operating expenses.
Interest expense decreased from $161,000 in 2005 to $110,000 in 2006. The
decrease in interest expense is the result of a decrease in the average balance
outstanding on revolving lines of credit and other bank debt from 2005 to 2006
even though the prime interest rate increased from 6.25% in 2005 to 8.25% in
2006. The interest on the foreign bank debt was 13% for 2006, and no such debt
existed for 2005.
21
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 Winncom's largest
vendors.
The increase in the provision for income taxes for the year ended December 31,
2006 compared to the year ended December 31, 2005 is primarily the result of an
increase in net income before taxes.
The increase in the net income from discontinued operations from $719,000 for
the year ended December 31, 2005 to $864,000 for the year ended December 31,
2006 is primarily due to the increase in revenues and in particular, the
increase in the contract revenue.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are summarized in Note 1 of our
consolidated financial statements set forth in this Annual Report on Form 10-K.
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.
Allowance for doubtful accounts: We continuously monitor payments from our
customers and maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. When we
evaluate the adequacy of our allowances for doubtful accounts, we take into
account various factors including our accounts receivable aging, customer
credit-worthiness, historical bad debts, and geographic risk. If the financial
condition of our customers was to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. As of
December 31, 2007, our net accounts receivable balance was $1,173,000.
Inventory: Inventory is stated at the lower of cost or net realizable value.
Cost is based on a first-in, first-out basis. We review net realizable value of
inventory in detail on an on-going basis, with consideration given to
deterioration, obsolescence, and other factors. If actual market conditions are
less favorable than those projected by management, and our estimates prove to be
inaccurate, additional write-downs or adjustments to recognize additional cost
of sales may be required. As of December 31, 2007, our inventory balance was
$1,179,000.
Goodwill and other long-lived assets: We review the value of our long-lived
assets, including goodwill, for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not
be fully recoverable or that the useful lives of these assets are no longer
appropriate. As of December 31, 2007, we had $106,000 of intangible assets
remaining on the balance sheet, the value of which we believe is realizable
based on market capitalization and estimated future cash flows.
Income Taxes: The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109)
which utilizes the asset and liability method of computing deferred income
taxes. The objective of the asset and liability method is to establish deferred
tax assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities at
enacted tax rates expected to be in effect when such amounts are realized or
settled. The current and deferred tax provision is allocated among members of
the consolidated group of the separate income tax return basis. As of December
31, 2007 the Company recorded a valuation allowance against deferred taxes of
$717,000.In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes, or FIN 48, which prescribes a recognition threshold
and measurement process for recording in the financial statements uncertain tax
positions taken or expected to be taken in a tax return. Additionally, FIN 48
22
provides guidance on the de-recognition, classification, accounting in interim
periods and disclosure requirements for uncertain tax positions. Only tax
positions that meet the more likely than not recognition threshold at the
effective date may be recognized upon adoption of FIN 48. We adopted FIN 48 as
of January 1, 2007. The adoption of FIN 48 did not impact our consolidated
financial condition, consolidated results of operations or consolidated cash
flows.
Revenue Recognition - Percentage of Completion: Starting in 2005, the Company
commenced a long term construction contract and the Company follows the
percentage-of-completion method of accounting for 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 costs incurred to date with management's current
estimate of total costs to be incurred at contract completion. Revenue is
recognized on the basis of actual costs incurred plus the portion of income
earned. Contract costs include all direct material, 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.
Billings in excess of costs and estimated earnings on uncompleted contracts
represents billings to customers in excess of earned revenue and advances on
contracts.
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 from other sources.
However, future events are subject to change and the best estimates and
assumptions routinely require adjustment. Our major operating assets are trade
and vendor accounts receivable, inventory, property and equipment and intangible
assets. Our reserve for doubtful accounts of $453,000 should be adequate for any
exposure to loss in our accounts receivable as of December 31, 2007. We have
also established reserves for slow moving and obsolete inventories and believe
the current reserve of $704,000 is adequate. We depreciate our property and
equipment over their estimated useful lives and we have not identified any items
that are impaired.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which enhances existing guidance for measuring assets and
liabilities using fair value. SFAS 157 provides a single definition of fair
value, together with a framework for measuring it, and requires additional
disclosure about the use of fair value to measure assets and liabilities. SFAS
157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted market prices in active markets. Under the
standard, fair value measurements would be separately disclosed by level within
the fair value hierarchy. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. SFAS 157 does not require any new fair value measurements
for existing assets and liabilities on the Company's balance sheet as of the
date of adoption. As such, the Company does not expect any impact to its
financial statements as of the January 1, 2008 adoption date.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements No. 87, 88, 106, and 132(R) ("SFAS 158"), which requires the
recognition of the funded status of benefit plans in the balance sheet. SFAS 158
also requires certain gains and losses that are deferred under current pension
accounting rules to be recognized in accumulated other comprehensive income, net
of tax effects. These deferred costs (or income) will continue to be recognized
23
as a component of net periodic pension cost, consistent with current recognition
rules. For entities with no publicly traded equity securities, the effective
date for the recognition of the funded status is for fiscal years ending after
June 15, 2007. In addition, the ability to measure the plans' benefit
obligations, assets and net period cost at a date prior to the fiscal year-end
date is eliminated for fiscal years ending after December 15, 2008. The adoption
of the recognition element of SFAS 158 had no effect on the Company's financial
statements. The adoption of the measurement date element of SFAS 158 is not
expected to have a material impact on the Company's financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets and
liabilities to be carried at fair value. Under SFAS 159, a company may elect to
use fair value to measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts payable,
guarantees, issued debt and other eligible financial instruments. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company has
elected not to adopt SFAS 159.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"), which replaces SFAS 141. SFAS 141R establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired in
connection with a business combination. The Statement also establishes
disclosure requirements that will enable users to evaluate the nature and
financial effect of the business combination. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of an entity's first fiscal year that begins after December 15, 2008.
The Company is currently evaluating the potential impact, if any, of the
adoption of SFAS 141R on the Company's financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 requires that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This Statement is
effective as of the beginning of an entity's first fiscal year beginning after
December 15, 2008. The Company has not yet determined the impact, if any, that
SFAS 160 will have on its financial statements.
On March 19, 2008, The Financial Accounting Standards Board (FASB) issued FASB
Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities. The new standard is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. It is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The Company has not yet determined
the impact, if any, that SFAS 161 will have on its financial statements.
Item 7A. 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 line of
credits which have variable interest rates equal to the existing bank prime rate
(7.50% as of December 31, 2007) plus one and one-half percent. The prime
interest rate decreased from 8.25% to 7.50% in 2007. A decrease in the bank's
prime interest rate on our line of credit by an additional 1.25% in 2008 would
decrease our yearly interest expense by approximately $5,000, assuming borrowed
amounts remain outstanding at 2007 average monthly levels.
24
In addition, we are exposed to market risk on interest rates earned on excess
funds from proceeds from the sales of Winncom. The excess funds are invested in
short term money market securities and a reduction in the interest rate of 1%
would reduce our interest income by $150,000 based on the average amount
invested in 2007. 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 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Information regarding Financial Statements and Supplementary Data appears on
pages F-1 through F-25 under the caption "Consolidated Balance Sheets,"
"Consolidated Statements of Operations," "Consolidated Statements of
Shareholders' Equity," "Consolidated Statements
of Cash Flows" and "Notes to Consolidated Financial Statements."
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
None
Item 9A. Controls and Procedures
- ---------------------------------
a) Disclosure Controls and Procedures.
The Company has established disclosure controls and procedures to ensure that
material information relating to the Company is made known to the officers who
certify the Company financial reports and to other members of senior management
and the Board of Directors. Based on their evaluation, the Company's principal
executive officer and principal financial officer have concluded that disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) were effective as of December 31, 2007 to
ensure that information required to be disclosed in the reports that it files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
Management's Annual Report on Internal Control Over Financial Reporting.
The Company's management is responsible for establishing and maintaining
adequate control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles.
Our internal control over financial reporting includes those policies and
procedures that:
o Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations
of the Company's management and directors; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
25
Under the supervision and with the participation of the Company's management,
including our principal executive officer and our principal financial officer,
the Company conducted an evaluation of the effectiveness of its internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the "COSO Framework"). Based on this evaluation under the COSO
Framework, the Company's management concluded that its internal control over
financial reporting was effective as of December 31, 2007.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
(b) Changes in Internal Control over Financial Reporting.
There was no change in the Company's internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, the
Company's control over financial reporting.
The evaluation of our disclosure controls included a review of whether there
were any significant deficiencies in the design or operation of such controls
and procedures, material weaknesses in such controls and procedures, any
corrective actions taken with regard to such deficiencies and weaknesses and any
fraud involving management or other employees with a significant role in such
controls and procedures.
Our management does not expect that our disclosure controls and procedures and
our internal control over financial reporting will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the controls
system are met. The design of any system of controls is based in part upon
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions.
Item 9B Other Information
- --------------------------
None
26
PART III
Item 10. Directors, Executive Officers and Corporate Governance
- ----------------------------------------------------------------
Directors and Executive Officers.
Our directors and executive officers are as follows:
- ----------------------------------------------------
Name Age Position with the Company Director Since
---- --- ------------------------- --------------
Randall P. Marx 55 Chief Executive Officer, Secretary, Director 1990
Donald A. Huebner 62 Director 1998
Robert E. Wade 61 Director 2005
Sigmund A. Balaban 66 Director 1994
Richard L. Anderson 59 Executive Vice President -
Monty R. Lamirato 52 Chief Financial Officer, Treasurer -
Steven C. Olson 51 Chief Technology Officer -
Randall P. Marx. Mr. Marx became our Chief Executive Officer in February 2001
and has served as Director since May 1990. Mr. Marx served with the Company as
Chief Executive Officer from November 1991 until July 2000, as Treasurer from
December 1994 until June 30, 2000 and as Director of Acquisitions from July 2000
until February 2001. From 1983 until 1989, Mr. Marx served as President of THT
Lloyd's Inc., Lloyd's Electronics Corp. and Lloyd's Electronics Hong Kong Ltd.,
international consumer electronics companies. Lloyd's Electronics had domestic
revenues of $100 million and international revenues of $30 million with over 400
employees worldwide. As CEO and President of THT Lloyd's Inc., a $10 million
electronics holding company, Mr. Marx supervised the purchase of the Lloyd's
Electronics business from Bacardi Corp. in 1986. As CEO and President of Lloyd's
Electronics, Mr. Marx was directly responsible for all domestic and
international operations including marketing, financing, product design and
manufacturing with domestic offices in New Jersey and Los Angeles and
international offices in Hong Kong, Tokyo and Taipei. Mr. Marx currently serves
as a member of the Board of Directors of InfoSonics Corporation, an entity
subject to the reporting requirements of the Securities Exchange Act of 1934.
Donald A. Huebner. Dr. Huebner was our Chief Scientist from July 2000 to January
2002 and has been a consulting engineer to the Company from January 2002 to the
present. He has served as a Director of the Company since 1998. Dr. Huebner
served as Department Staff Engineer with Lockheed Martin Astronautics in Denver,
Colorado from 1986 to July 2000. In this capacity, Dr. Huebner served as
technical consultant for phased array and spacecraft antennas as well as other
areas concerning antennas and communications. Prior to joining Lockheed Martin,
Dr. Huebner served in various capacities with Ball Communication Systems and
Hughes Aircraft Company. Dr. Huebner also served as a part-time faculty member
in the electrical engineering departments at the University of Colorado at
Boulder, California State University at Northridge, and University of
California, Los Angeles ("UCLA"). Dr. Huebner also has served as consultant to
various companies, including as a consultant to the Company from 1990 to the
27
present. Dr. Huebner received his Bachelor of Science in Electrical Engineering
from UCLA in 1966 and his Masters of Science in Electrical Engineering from UCLA
in 1968. Dr. Huebner received his Ph.D. from UCLA in 1972 and a Masters in
Telecommunications from the University of Denver in 1996. Dr. Huebner is a
member of a number of professional societies, including the Antennas and
Propagation Society and Microwave Theory and Technique Society of the Institute
of Electrical and Electronic Engineers.
Robert E. Wade. Mr. Wade became a Director in December 2005. A former bank
director, Mr. Wade currently serves as a member of the boards of directors of
mutual funds: Franklin Mutual Series Fund Inc. since 1996, Franklin Managed
Trust and Franklin Value Investors Trust since 2004, and the US Templeton Funds
since 2006. In March of 2005, Mr. Wade was named Chairman of the Board of
Franklin Mutual Series Fund Inc., having previously served as Chairman of its
Audit Committee.. He has also been a director of El Oro and Exploration Co. plc.
since 2003. Mr. Wade is a practicing attorney in New Jersey.
Sigmund A. Balaban. Mr. Balaban has served as Director since December 1994. Mr.
Balaban had served as Senior Vice President / Corporate Secretary, of Fujitsu
General America, Inc. of Fairfield, New Jersey, from 2000 until July of 2001
when he retired. Mr. Balaban was Vice President, Credit of Teknika Electronics
from 1986 to 1992 and was Senior Vice President and General Manager of Teknika
Electronics from 1992 to 2000. In October 1995, Teknika Electronics changed its
name to Fujitsu General America, Inc. Fujitsu General America, Inc., which is a
subsidiary of Fujitsu General, Ltd., a Japanese multiline manufacturer. Mr.
Balaban currently serves as a member of the Board of Directors of Double Eagle
Petroleum Co., an entity subject to the reporting requirements of the Securities
Exchange Act of 1934.
Richard L. Anderson. Mr. Anderson has been our Executive Vice President since
November, 2007. Mr. Anderson served as a director of the Company from December,
1994 to June, 2000. Mr. Anderson served as Vice President of Administration with
the Company from January, 1996 to June, 2000. Prior to being named Executive
Vice President, Mr. Anderson held the position of Director Corporate
Development. Prior to joining the Company, from 1990 to 1995 Mr. Anderson was an
independent financial contractor underwriting residential and commercial real
estate first mortgage credit packages. From 1985 to 1990, Mr. Anderson served as
Senior Vice President, Administration of Westline Mortgage Corporation, a
subsidiary of BankWestern Federal Savings. Prior to 1985, Mr. Anderson served as
Vice President, Human Resources for Midland Federal Savings.
Monty R. Lamirato. Mr. Lamirato has been our Chief Financial Officer and
Treasurer since June 2001. Prior to joining the Company Mr. Lamirato served as
the VP Finance for GS2.Net, Inc, an application service provider, from November
2000 to May 2001, and from June 1999 to October 2000 he served as VP Finance for
an e-commerce retailer. From November 1993 to June 1999, Mr. Lamirato was
President and Shareholder of Monty R. Lamirato, PC, a business consulting firm.
Mr. Lamirato has been a certified public accountant in the State of Colorado
since 1978.
Steven C. Olson. Mr. Olson serves as our Chief Technology Officer. Prior to
joining the Company in August 2001, Mr. Olson was employed at Ball Aerospace for
14 years, including the last five years as Director of Engineering for Ball's
Wireless Communications Solutions Division. In this capacity Mr. Olson led the
development of new technologies, resulting in industry leading antenna solutions
for the wireless communications market. Before the Ball Wireless Communications
unit was formed, Mr. Olson developed Ball's high performance, low cost
AirBASE(R) antenna technology, specifically for use in its future commercial
wireless business. He received his Bachelors and Masters of Science degrees in
Electrical Engineering from the University of Utah in 1984 and 1985,
respectively.
28
Audit Committee of the Board of Directors
- -----------------------------------------
The audit committee consists of three independent directors, Mr. Sigmund A.
Balaban, who is chairman of the committee, Mr. Robert E. Wade and Dr. Donald A.
Huebner. The responsibilities of the audit committee include overseeing our
financial reporting process, reporting the results of the Committee's activities
to the board, retaining and ensuring the independence of our auditors, approving
services to be provided by our auditors, reviewing our periodic filings with the
independent auditors prior to filing, and reviewing and responding to any
matters raised by the independent auditors in their management letter.
Audit Committee Financial Expert
- --------------------------------
The board of directors has determined that at least one member of the audit
committee, who is also independent, Mr. Sigmund A. Balaban, is an audit
committee financial expert.
Audit Committee Charter
- -----------------------
Our Board of Directors has adopted a written charter for the Audit Committee.
The Audit Committee will review and assess the adequacy of the Audit Committee
charter annually.
Compensation Committee
- ----------------------
The Board of Directors currently has a Compensation Committee, consisting of Mr.
Robert E. Wade, the chairman of the Compensation Committee, Dr. Donald A.
Huebner and Mr. Sigmund A. Balaban. The Compensation Committee has a charter
which is located on the Company's website at www.arcwireless.net.
Nominating Committee: Nominating Policies and Procedures
- --------------------------------------------------------
The Company does not currently have a standing nominating committee of the Board
of Directors because it believes that the nominating functions should be
relegated to the full Board of Directors.
On October 31, 2006, the Board of Directors adopted certain Nominating Policies
and Procedures (the "Nominating Policy"), which are attached hereto as Exhibit
99.1. It is the policy of the Board of Directors that each nominee for election
to the Board, regardless of whether such nominee is recommended by a shareholder
of the Company, the Board or any other person, shall be approved by a majority
of the independent directors of the Board.
In general, the Board believes that certain minimum qualifications must be met
by each candidate for the Board, as well as meeting any applicable independence
standards required by the SEC and federal securities laws. The Board believes
that candidates and nominees must reflect a Board that is comprised of directors
(i) a majority of whom are independent (as determined under any applicable
director qualification standards); (ii) who are of high integrity; (iii) who
have qualifications that will increase the overall effectiveness of the Board;
and (iv) who meet other requirements as may be required by applicable rules,
such as financial literacy or financial expertise with respect to Board members
who sit on the audit committee. In evaluating the qualifications of the
candidates, the Board considers many factors, including issues of leadership
ability, career success, character, judgment, independence, background, age,
expertise, diversity and breadth of experience, length of service, other
commitments and the like.
Under the Nominating Policy, the Board shall consider recommendations for
candidates to the Board from shareholders holding no less than 1% of the
Company's common stock, which stock has been continuously held by such
shareholder for at least twelve (12) months prior to the date of the submission
of the recommendation (an "Eligible Shareholder"). Candidate nominees
recommended by Eligible Shareholders (hereinafter referred to as "Shareholder
Candidates") will be evaluated by the Board on the same basis as candidates that
may be identified by the Board, management or, if the Board permits, a search
firm. For the Shareholder Candidate to be considered by the Board, the Eligible
29
Shareholder and the Shareholder Candidate must comply with certain procedures as
set forth in the Nominating Policy. Recommendations for Shareholder Candidate(s)
to the Board of Directors from an Eligible Shareholder must be directed in
writing to ARC Wireless Solutions, Inc., Attn: Corporate Secretary, at the
Corporation's principal offices at 10601 West 48th Avenue, I-70 Frontage Road
North, Wheat Ridge, Colorado 80033-2660. The specific recommendations should
include the information set forth in the adopted Nominating Policy, which are
attached hereto as Exhibit 99.1 and incorporated herein by reference.
For a recommendation of a Shareholder Candidate to be properly brought before
the Board by an Eligible Shareholder, the Eligible Shareholder must have given
timely notice thereof in writing to the Secretary of the Corporation. To be
timely, an Eligible Shareholder's notice must be delivered to the Corporate
Secretary not less than one hundred and twenty (120) days prior to the first
(1st) anniversary of the preceding year's annual meeting. In the event that the
date of the annual meeting is advanced by more than thirty (30) days or delayed
by more than sixty (60) days from the anniversary date of the preceding year's
annual meeting, the notice by the Eligible Shareholder must be delivered not
later than the close of business on the later of the sixtieth (60th) day prior
to such annual meeting or the tenth (10th) day following the day on which public
announcement of the date of such annual meeting is first made.
The Secretary of the Corporation will provide a copy of the Nominating Policies
and Procedures upon a request in writing from the Eligible Shareholder. The full
description of the foregoing policies has also been attached hereto as Exhibit
99.1, and is incorporated herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Act of 1934, as amended (the "Exchange Act")
requires our directors, executive officers and holders of more than 10% of our
common stock to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of common stock and other
equity securities of ours. We believe that during the year ended December 31,
2007, our officers, directors and holders of more than 10% of our common stock
complied with all Section 16(a) filing requirements. In making these statements,
we have relied upon the written representation of our directors and officers and
our review of the monthly statements of changes filed with us by our officers
and directors.
Code of Ethics
- --------------
The Company endeavors to adhere to provide assurances to outside investors and
interested parties that the Company's officers, directors and employees adhere
to a reasonably responsible code of ethics and as such, we have adopted a Code
of Ethics, which was amended on November 7, 2006, that applies to all officers,
directors and employees of the Company.
Corporate Governance Documents
- ------------------------------
On the Company's Corporate Governance Web site at
www.arcwireless.net/investor_relations, shareholders can access the Company's
Audit Committee Charter, Compensation Committee Charter and Code of Ethics for
members of the Board of Directors and officers. Copies of these documents, as
well as additional copies of this Annual Report on Form 10-K, are available to
shareholders without charge upon request to the Corporate Secretary at the
Company's principal address.
Item 11. Executive Compensation
Compensation Discussion and Analysis
This Compensation Discussion and Analysis addresses the aspects of our
compensation programs and explains our compensation philosophy, policies and
practices with respect to our named executive officers, including our chief
30
executive officer, chief financial officer, executive vice-president and chief
technology officer, which we collectively refer to as our named executive
officers, or NEOs.
Oversight of Executive Compensation Program
- -------------------------------------------
The Compensation Committee of our Board of Directors oversees our executive
compensation programs. Each member of the Compensation Committee is an
"independent director" as defined by the federal securities laws and in Rule
4200(a)(14) of the Nasdaq Stock Market, Inc. The Compensation Committee met 3
times during 2007, and works closely with executive management, primarily our
chief executive officer ("CEO"), in assessing compensation levels. The
Compensation Committee is empowered to advise management and make
recommendations to the Board of Directors with respect to the compensation and
other employment benefits of executive officers and key employees of the
Company. The Compensation Committee also administers the Company's compensation
plans for executive officers and employees.
The Compensation Committee regularly reviews the Company's compensation programs
to ensure that remuneration levels and incentive opportunities are competitive
and reflect performance. Factors taken into account in assessing the
compensation of individual officers include the officer's performance and
contribution to the Company, experience, strategic impact, external equity or
market value, internal equity or fairness, and retention priority. The various
components of the compensation programs for executive officers are discussed
below in Elements of Executive Compensation Program.
Objectives of Executive Compensation and What the Programs are Designed to
Reward
The Company's executive compensation program is designed to integrate
compensation with the achievement of our short-term and long-term business
objectives and to assist us in attracting, motivating and retaining the highest
quality executive officers and rewarding them for superior performance.
Different programs are geared to short-term and longer-term performance with the
goal of increasing stockholder value over the long term.
We believe that the compensation of our executive officers should reflect their
success in attaining key operating objectives, such as growth or maintenance of
market position, development of new products and marketplaces, meeting
established goals for operating earnings and earnings per share, maintenance and
development of customer relationships and long-term competitive advantage. We
also believe that executive compensation should reflect achievement of
individual goals established for specific executive officers, as well as
specific achievements by such individuals over the course of the year such as
development of specific products or customer relationships or agreements or
executing or integrating acquisitions and strategic arrangements. We believe
that the performance of the executives in managing our Company, considered in
light of general economic and specific Company, industry and competitive
conditions, should be the basis for determining their overall compensation. We
also believe that their compensation should not generally be based on the
short-term performance of our stock, whether favorable or unfavorable, but
rather that the price of our stock will, in the long-term, reflect our operating
performance, and ultimately, the management of the Company by our executives.
Compensation Consultants
- ------------------------
In determining competitive levels of compensation, the Compensation Committee
considers publicly available information regarding the compensation of executive
officers of other comparable U.S. investor-owned companies and information
available from studies periodically performed by compensation consultants for
the Company. The Compensation Committee also considers recommendations made by
the CEO regarding compensation for other NEOs and key employees.
31
Elements of Executive Compensation Program
- ------------------------------------------
Compensation elements include:
o base salary;
o annual cash or equity incentive awards;
o long-term equity incentive compensation; and
o other health, welfare and pension benefits.
Base Salary
- -----------
Base salary is designed to provide competitive levels of base compensation to
our executives based on their experience, duties and scope of responsibilities.
We pay base salaries because it provides a base compensation that is required to
recruit and retain executives of the quality that we must employ to ensure the
success of our Company. Our executive base salaries are typically adjusted in
accordance with the NEO's employment agreement on an annual basis.
Annual Cash or Equity Incentive Awards
- --------------------------------------
Annual incentive compensation is designed to provide competitive levels of
compensation based on experience, duties and scope of responsibilities.
Incentive awards are influenced by the Company's profitability and achievement
of planned profitability, as well as other factors. The Compensation Committee
uses the annual incentive compensation to motivate and reward the NEOs for the
achievement and over-performance of our critical financial and strategic goals.
Long-Term Equity Incentive Compensation
- ---------------------------------------
Long-term equity awards were granted to our executives from our 1997 Stock
Option and Compensation Plan, ("1997 Plan") until September 2007, when the
shareholders of the Company approved the new 2007 Stock Incentive Plan (the
"2007 Plan"). The Compensation Committee granted awards under the 1997 Plan and
the 2007 Plan in order to align the interests of the NEOs with our stockholders,
and to motivate and reward the NEOs to increase the stockholder value of the
Company over the long term. The Compensation Committee does not have a regular
schedule for awarding equity-based compensation and the timing of such awards is
subject to the discretion of the Compensation Committee but generally is awarded
as part of entering into employment agreements. We do not backdate options or
grant options retroactively or stock options with a so-called "reload" feature.
In addition, we do not plan to coordinate grants of options so that they are
made before the announcement of favorable information, or after the announcement
of unfavorable information.
Compensation paid to each executive officer, including a stock bonus, was based
on the Compensation Committee's review and consideration of aggregate levels of
compensation paid to executives of comparable companies and the individual
qualitative contributions and performance of each executive officer. In 2007,
the Compensation Committee issued a stock option award of 40,000 shares to Steve
C. Olson, our Chief Technology Officer.
Other Health, Welfare and Retirement Benefits
- ---------------------------------------------
Health and Welfare Benefits
- ---------------------------
All full-time employees, including our NEOs, may participate in our health and
welfare benefit programs, including medical, dental and vision care coverage,
disability insurance and life insurance. We provide these benefits to meet the
health and welfare needs of employees and their families.
32
Retirement Benefits
Our employees, including the NEO's, are eligible to participate in our 401(k)
contributory defined contribution plan ("401(k) Plan"). Each employee may make
before-tax contributions of up to 25% of their base salary up to current
Internal Revenue Service limits. We provide this plan to help our employees save
some amount of their cash compensation for retirement in a tax efficient manner.
The Company may make discretionary matching contributions, however in 2006 the
Company did not provide participants with a matching contribution. Commencing
January 1, 2007, the Company amended its 401(k) Plan to make a Safe Harbor
Contribution of 3% of a participant's cash compensation.
Pension Benefits and Nonqualified Deferred Compensation
We do not currently provide pension arrangements or post-retirement health
coverage for our executives or employees, although we may consider such benefits
in the future. In addition, we do not provide any nonqualified defined
contribution or other deferred compensation plans, although we may consider such
benefits in the future.
Employment Agreements and Other Post-Employment Payments
All of our NEOs are currently parties to employment agreements, which provide
for salaries and certain bonus payments as well as rights to certain payments
upon termination for cause.
These employment agreements also have change of control provisions that would
require payments in the event of termination of employment, which are described
in greater detail below.
Tax Implications of Executive Compensation
- ------------------------------------------
We do not currently intend to award compensation that would result in a
limitation on the deductibility of a portion of such compensation pursuant to
Section 162(m) of the Internal Revenue Code of 1986, as amended, other than
awards that may be made under the 1997 Plan; however, we may in the future
decide to authorize other compensation in excess of the limits of Section 162(m)
if it determines that such compensation is in the best interests of the Company.
Although deductibility of compensation is preferred, tax deductibility is not a
primary objective of our compensation programs. We believe that achieving our
compensation objectives set forth above is more important than the benefit of
tax deductibility and we reserve the right to maintain flexibility in how we
compensate our executive officers that may result in limiting the deductibility
of amounts of compensation from time to time.
Compensation Committee Report
- -----------------------------
The Compensation Committee has reviewed and discussed the Compensation
Discussion and Analysis with management and, based on the review and
discussions, the Compensation Committee recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in the Company's
Annual Report on Form 10-K.
Robert E. Wade, Chairman
Sigmund A. Balaban
Donald A. Huebner
33
Summary Compensation Table for 2007
- ----------------------- ------- ---------- ---------- ---------- ---------- -------------- -------------- ------------- ---------
Change in
Pension
Non-Equity Value and
Incentive Nonqualified
Stock Option Plan Deferred All Other
Name and Principal Salary Bonus Awards Awards Compensation Compensation Compensation Total
Position Year ($) ($) ($)(2) ($)(2) ($) Earnings ($) ($) ($)
- ----------------------- ------- ---------- ---------- ---------- ---------- -------------- -------------- ------------- ---------
Randall P. Marx,
Chair, Chief 2007 250,000 25,000 - - - - 8,250 283,250
Executive Officer, 2006 245,000 - - - - - - 245,000
Secretary
- ----------------------- ------- ---------- ---------- ---------- ---------- -------------- -------------- ------------- ---------
- ----------------------- ------- ---------- ---------- ---------- ---------- -------------- -------------- ------------- ---------
Monty R. Lamirato,
Chief Financial 2007 160,000 - - - - - 4,800 164,800
Officer, Treasurer 2006 155,000 - - - - - - 155,000
- ----------------------- ------- ---------- ---------- ---------- ---------- -------------- -------------- ------------- ---------
- ----------------------- ------- ---------- ---------- ---------- ---------- -------------- -------------- ------------- ---------
Steven C. Olson, 2007 200,000 7,500 - 6,000 - - 6,225 219,725
Chief Technology 2006 175,000 - - - - - - 175,000
Officer
- ----------------------- ------- ---------- ---------- ---------- ---------- -------------- -------------- ------------- ---------
- ----------------------- ------- ---------- ---------- ---------- ---------- -------------- -------------- ------------- ---------
Richard A. Anderson, 2007 120,000 - - - - - 3,750 123,750
Executive Vice
President
- ----------------------- ------- ---------- ---------- ---------- ---------- -------------- -------------- ------------- ---------
- ----------------------- ------- ---------- ---------- ---------- ---------- -------------- -------------- ------------- ---------
Gregory E. Raskin,
former President (1) 2006 321,000 - - - 108,000 - - 429,000
- ----------------------- ------- ---------- ---------- ---------- ---------- -------------- -------------- ------------- ---------
(1) Mr. Gregory E. Raskin resigned effective October 31, 2006,
commensurate with the sale of our wholly-owned subsidiary, Winncom
Technologies Inc. Under Mr. Raskin's employment agreement, he was
eligible to receive a cash bonus based upon certain pre-determined
net-income objectives. As a result of meeting these objectives, Mr.
Raskin earned $108,000 as a cash bonus during fiscal year 2006.
(2) The amounts in columns (e) and (f) reflect the dollar amounts
recognized in each of 2007 and 2006 for financial statement reporting
purposes in accordance with FAS 123R with respect to stock awards and
stock options granted in each such year, and the dollar amount
required to be recognized in each such year in accordance with FAS
123R. These options were granted pursuant to the 2007 Stock Incentive
Plan described above.
Grants of Plan-Based Awards
- ----------------------- ------- -------------------------------- ----------- ------------- -------------- ------------
All
Other All Other
Stock Option
Estimated Future Payouts Under Awards: Awards:
Equity Incentive Plan Awards Number of Number of
Name and Principal ------------------------------- Shares of Securities Exercise or Grant Date
Position Grant Threshold Target Maximum Stock or Underlying Base Price of Fair Value
Date $ $ $ Units4 Options Option Awards of Awards
(#) (#) ($/Sh) ($)
- ----------------------- ------- -------------------------------- ----------- ------------- -------------- ------------
Randall P. Marx,
Chair, Chief
Executive Officer,
Secretary - - - - - - - -
- ----------------------- ------- ---------- ---------- ---------- ----------- ------------- -------------- ------------
- ----------------------- ------- ---------- ---------- ---------- ----------- ------------- -------------- ------------
Monty R. Lamirato,
Chief Financial
Officer, Treasurer - - - - - - - -
- ----------------------- ------- ---------- ---------- ---------- ----------- ------------- -------------- ------------
- ----------------------- ------- ---------- ---------- ---------- ----------- ------------- -------------- ------------
Steven C. Olson,
Chief Technology
Officer 9/21/07 - - - - 40,000(1) $5.40 $134,000
- ----------------------- ------- ---------- ---------- ---------- ----------- ------------- -------------- ------------
34
(1) These options we granted pursuant to the 2007 Stock Incentive Plan.
There were no stock Equity Incentive Plan awards granted to the executive
officers with respect to the year ended December 31, 2007. In addition, no
options were exercised by the executive officers during the year ended December
31, 2007.
Outstanding Equity Awards at Fiscal Year-End
- --------------------------------------------
The following table sets forth information on outstanding option and stock
awards held by the named executive officers as of December 31, 2007, including
the number of shares underlying both exercisable and unexercisable portions of
each stock option as well as the exercise price and the expiration date of each
outstanding option.
- --------------------------------------------------------------------------------------------------------------------
Option Awards Stock Awards
- --------------------------------------------------------------------------------------------------------------------
(d) (j)
Equity (i) Equity
Incentive (g) (h) Equity Incentive
(c) Plan Number Market Incentive Plan Plan Awards
(b) Number Awards: of Value Awards: Market or
Number of Number Shares of Shares Number of Payout Value
of Securities of or Units or Units Unearned of Unearned
Securities Underlying Securities of Stock of Stock Shares, Units Shares, Units
Underlying Unexercised Underlying (e) That That or Other or Other
Unexercised Options Unexercised Option (f) Have Have Rights That Rights That
Options (#) Unearned Exercise Option Not Not Have Not Have Not
(a) (#) Unexercisable Options Price Expiration Vested Vested Vested Vested
Name Exercisable (1) (#) ($) Date (2)(3) ($) (#) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Randall P.
Marx - - - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Monty R.
Lamirato - - - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Steven C.
Olson 8,000 (a) 32,000(a) - $5.40 9/21/2017 - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
(a) These options were granted pursuant to the 2007 Equity Incentive Plan.
The options vests at a rate of 20% per year with vesting dates of
12/31/07, 12/31/08, 12/31/09, 12/31/10, 12/31/11. These total 40,000
options are reported in the Summary Compensation and the Grant of Plan
Based Awards Table
No options were exercised and no stock vested in 2006.
Director Compensation for the Year Ended December 31, 2007
The table below summarizes the compensation paid by the Company to non-employee
directors for the year ended December 31, 2007:
35
Director Compensation for the Year Ended December 31, 2007
- -------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
- -------------------------------------------------------------------------------------------------------------------------------
Change in
Pension Value
Non-Equity and
Fees Incentive Nonqualified
Earned Stock Option Plan Deferred All Other
Cash Awards Awards Compensation Compensation Compensation Total
Name(1) ($) ($)(2) ($)(3) ($) Earnings ($) ($)
- -------------------------------------------------------------------------------------------------------------------------------
Randall P. Marx
(1) - - - - - - -
- -------------------------------------------------------------------------------------------------------------------------------
Sigmund A. Balaban 30,000 - 6,500 - - - 36,500
- -------------------------------------------------------------------------------------------------------------------------------
Robert E. Wade 4,500 15,000 6,500 - - - 26,000
- -------------------------------------------------------------------------------------------------------------------------------
Donald A. Huebner 7,750 - 4,900 - - - 12,650
- -------------------------------------------------------------------------------------------------------------------------------
(1) Randall P. Marx is the Company's Chairman of the Board, Chief Executive
Officer and thus receives no compensation for his services as a director.
The compensation received by Mr. Marx as an employee of the Company is
shown in the Summary Compensation Table.
(2) Reflects the dollar amount recognized and expensed for financial statement
reporting purposes for the year ended December 31, 2007 in accordance with
FAS 123R, and thus may include amounts from awards granted in and prior to
2007. For Mr. Wade, the amount represents the Director fees earned that
were paid by issuance of common stock at fair market value rather than
cash.
(3) Reflects the dollar amount recognized for financial statement reporting
purposes for the year ended December 31, 2007 in accordance with FAS 123R,
and thus includes amounts from options granted in and prior to 2007. In
2007, the fair value of the awards granted to each director was as follows:
Sigmund A. Balaban: $4,400; Robert E. Wade: $4,400; Donald A Huebner:
$6,500. For more information used in the calculations of these amounts, see
Note 1 to our audited consolidated financial statements for the year ended
December 31, 2007, included in this Form 10-K. As of December 31, 2007,
each director had the following number of options outstanding: Sigmund A.
Balaban: 4,500; Robert E. Wade: 4,500 and Donald A. Huebner: 2,000.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was an officer or former officer of the
Company or had any material relationship or transactions with the Company and no
officer of the Company sits on the compensation committee or other body that has
the power to establish the compensation of any member of the Compensation
Committee.
2007 Stock Incentive Plan
The following paragraphs provide a summary of the principal features of the 2007
Plan and its operation.
Shares Available for Issuance
- -----------------------------
The 2007 Plan provides that no more than 300,000 shares of our common stock may
be issued for awards. If there is any change in the Company's common stock by
reason of any stock exchange, merger, consolidation, reorganization,
recapitalization, stock dividend, reclassification, split-up, combination of
shares or otherwise, then the Board, or any Option Committee, shall make
proportionate adjustments to the maximum number and kind of securities (i)
available for issuance under the 2007 Plan; (ii) available for issuance as
incentive stock options or non-qualified stock options; (iii) that may be
subject to awards received by any participant; (iv) that may be subject to
different types of awards; (v) that are subject to any outstanding award; and
(vi) the price of each security.
36
The 2007 Plan provides that shares covered by an award will not count against
the shares available for issuance under the 2007 Plan until they are actually
issued and delivered to a participant. If an award granted under the 2007 Plan
lapses, expires, terminates or is forfeited, surrendered or canceled without
having been fully exercised or without the issuance of all the shares subject to
the award, the shares covered by such award will again be available for use
under the 2007 Plan.
Eligibility
- -----------
Awards may be made to any employee, officer, director of the Company and its
related companies or other persons who provide services to the Company and its
related companies.
Administration
- --------------
The 2007 Plan will be administered by the Option Committee, which shall consist
of the Board or a committee of the Board as the Board may from time to time
designate.
Types of Awards
- ---------------
Stock Options. The Option Committee may grant either incentive stock options,
which comply with Section 422 of the Internal Revenue Code, or nonqualified
stock options. The Option Committee sets option exercise prices and terms,
except that the exercise price of an incentive stock option may be no less than
100% of the fair market value of the shares on the date of grant. At the time of
grant, the Option Committee in its sole discretion will determine when stock
options are exercisable and when they expire, except that the term of a stock
option cannot exceed ten years.
Restricted Stock Awards. The Option Committee may grant awards of restricted
stock under the 2007 Plan. These shares may be subject to restrictions on
transferability, risk of forfeiture and other restrictions as determined by the
Option Committee. As a condition to a grant of an award of restricted stock, the
Option Committee may require or permit a participant to elect that any cash
dividends paid on a share of Restricted Stock be automatically reinvested in
additional shares of restricted stock or applied to the purchase of additional
awards under the 2007 Plan. Unless otherwise determined by the Option Committee,
stock distributed in connection with a stock split or stock dividend, and other
property distributed as a dividend, shall be subject to restrictions and a risk
of forfeiture to the same extent as restricted stock with respect to which such
stock or other property has been distributed.
Restricted Stock Unit Awards. The Option Committee may grant awards of
Restricted Stock Units under the 2007 Plan. A "Restricted Stock Unit" is a grant
valued in terms of common stock, but common stock is not issued at the time of
grant. After participants who receive awards of Restricted Stock Units satisfy
applicable vesting requirements, the Company will distribute shares or the cash
equivalent of the number of shares used to value the Unit. If the participant
does not meet the requirements prior to the end of the vesting period, the Units
will be forfeited to the Company. Vesting requirements may be met by the passage
of time or by either Company or individual performance. Restricted Stock Units
shall be subject to such restrictions (which may include a risk of forfeiture)
as determined by the Option Committee, which restrictions may lapse at the
expiration of the deferral period or at other times determined by the Option
Committee.
Amendment and Termination of the 2007 Plan
- ------------------------------------------
The Board of Directors or the Option Committee may amend, alter or discontinue
the 2007 Plan, except that if any applicable statute, rule or regulation
requires shareholder approval with respect to any amendment of the 2007 Plan,
then to the extent so required, shareholder approval will be obtained. No
amendment may impair the right of a participant under an outstanding agreement.
As proposed, the 2007 Plan would terminate on August 2, 2017.
37
Federal Income Tax Consequences
- -------------------------------
The following is a summary of the material United States federal income tax
consequences to us and to recipients of certain awards under the 2007 Plan. The
summary is based on the Internal Revenue Code and the U.S. Treasury regulations
promulgated thereunder in effect as of the date of this Proxy Statement, all of
which may change with retroactive effect. The summary is not intended to be a
complete analysis or discussion of all potential tax consequences that may be
important to recipients of awards under the 2007 Plan.
Nonqualified Stock Options. A recipient will not have any income at the time a
nonqualified stock option is granted, nor will the Company be entitled to a
deduction at that time. When a nonqualified stock option is exercised, the
recipient generally will recognize ordinary income (whether the option price is
paid in cash or by surrender of shares of Company stock), in an amount equal to
the excess of the fair market value of the shares to which the option exercise
pertains over the option price.
Incentive Stock Options. A recipient will not have any income at the time an
incentive stock option ("ISO") is granted. Furthermore, a recipient will not
have regular taxable income at the time the ISO is exercised. However, the
excess of the fair market value of the shares at the time of exercise over the
option price will be a preference item that could create an alternative minimum
tax liability for the recipient. If a recipient disposes of the shares acquired
on exercise of an ISO after the later of two years after the grant of the ISO or
one year after exercise of the ISO, the gain recognized by the recipient (i.e.,
the excess of the proceeds received over the option price), if any, will be
long-term capital gain eligible for favorable tax rates under the Internal
Revenue Code. Conversely, if the recipient disposes of the shares within two
years of the grant of the ISO or within one year of exercise of the ISO, the
disposition will generally be a "disqualifying disposition", and the recipient
will recognize ordinary income in the year of the disqualifying disposition
equal to the lesser of (i) the excess of the fair market value of the stock on
the date of exercise over the option price and (ii) the excess of the amount
received for the shares over the option price. The balance of the gain or loss,
if any, will be long-term or short-term capital gain, depending on how long the
shares were held.
Restricted Stock and Restricted Stock Units. With respect to a grant of
restricted stock or Restricted Stock Units. Instead, the participant will
recognize ordinary income at the time of vesting or payout equal to the fair
market value (on the vesting or payout date) of the shares or cash received
minus any amount paid. For restricted stock only, a participant instead may
elect to be taxed at the time of grant.
The Company generally will be entitled to a tax deduction in connection with an
award under the 2007 Plan in an amount equal to the ordinary income realized by
a participant at the time the participant recognizes such income, provided that
the deduction is not disallowed by Section 162(m) or otherwise limited by the
Internal Revenue Code.
In 2007, options to purchase a total of 40,000 shares were granted to an officer
at an exercise price of $5.40. No options were granted to directors in 2007 from
this Plan.
1997 Stock Option and Compensation Plan
- ---------------------------------------
In November 1997, the Board of Directors approved our 1997 Stock Option and
Compensation Plan (the "Plan"). Pursuant to the Plan, options were authorized to
be granted to purchase an aggregate of 100,000 shares of our common stock to key
employees, directors, and other persons who have or are contributing to our
success. On November 9, 2004, the shareholders approved amendments to the 1997
Stock Option and Compensation Plan to allow for an aggregate of 200,000 options
to be granted under "the Plan". The options granted pursuant to the Plan could
have been incentive options qualifying for beneficial tax treatment for the
recipient or they could have been non-qualified options. The Plan was
administered by an option committee that determined the terms of the options
subject to the requirements of the Plan, except that the option committee did
38
not administer the Plan with respect to automatic grants of options to our
directors who were not our employees. The option committee could have been the
entire Board or a committee of the Board. The 1997 Stock Option and Compensation
Plan expired in November 2007.
Through May 24, 2000, directors who were not also our employees ("Outside
Directors") automatically received options to purchase 5,000 shares pursuant to
the Plan at the time of their election as an Outside Director. These Outside
Directors options were not exercisable at the time of grant. Options to purchase
1,000 shares became exercisable for each meeting of the Board of Directors
attended by each Outside Director on or after the date of grant of the options
to that Outside Director, but in no event earlier than six months following the
date of grant. The exercise price for options granted to Outside Directors was
equal to the closing price per share of our common stock on the date of grant.
All options granted to Outside Directors expired five years after the date of
grant. On the date that all of an Outside Director's options became exercisable,
options to purchase an additional 5,000 shares, which were exercisable no
earlier than six months from the date of grant, were automatically granted to
that Outside Director. On May 24, 2000, the Board of Directors voted to (1)
decrease the amount of options automatically granted to Outside Directors from
5,000 to 500 options, and (2) decrease the amount of exercisable options from
1,000 to 100 per meeting. The term of the Outside Director option granted in the
future was lowered from five years to two years. The other terms of the Outside
Director options did not change. On July 5, 2002, the Board of Directors voted
to (1) increase the amount of options automatically granted to Outside Directors
from 500 to 2,500 options, and (2) increase the amount of exercisable options
from 100 to 500 per meeting. The other terms of the Outside Director options did
not change.
The Company granted a total of 7,500 options to Outside Directors under the Plan
during 2007 at exercise prices ranging from $4.80 to $5.47 per share. The
Company granted a total of 5,000 options to Outside Directors under the Plan
during 2006 at an exercise price of $6.50 per share. The Company granted a total
of 5,000 options to Outside Directors under the Plan during 2005 at exercise
prices ranging from $5.50 to $7.50 per share.
As of December 31, 2007, there were 11,000 exercisable options outstanding
related to the grants to Outside Directors.
In addition to Outside Directors grants, the Board of Directors may grant
incentive options to our key employees pursuant to the Plan. In 2007 and 2006,
the Board did not grant any options to employees under the Plan. In 2005, the
Board granted a total of 2,000 options under the Plan to employees with an
exercise price of $7.50.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
- ------------------------------------------------------------------------
Effective February 1, 2008, the Company's Board of Directors approved an
employment agreement between the Company and Randall P. Marx, the Company's
Chief Executive Officer, effective as of January 31, 2008. Mr. Marx has served
as the Company's Chief Executive Officer from November 1991 to July 2000 and
from February 2001 to the present. The employment agreement was recommended to
the Board by the Compensation Committee. The agreement provides for annual
compensation of $250,000 in 2007, $275,000 in 2008 and $300,000 in 2009, with 5%
annual increases if the agreement is extended. The agreement may be extended by
mutual consent on an annual basis for 2010, 2011 and 2012. Mr. Marx received a
bonus of $25,000 for 2007, and will be eligible to receive a bonus in 2008 and
subsequent years, ranging from $50,000 to $300,000, if certain net income goals
are achieved.
Effective November 1, 2007, the Company entered into a two year employment
agreement with Mr. Monty R. Lamirato as the Company's Chief Financial Officer,
which he has served since June 2001. The agreement provides for annual
compensation of $165,000 in the first year and $175,000 in the second year. We
previously entered into a written employment agreement with Mr. Lamirato,
effective July 1, 2005 for the period July 1, 2005 through June 30, 2007, at an
39
annual base salary of $155,000. In addition, Mr. Lamirato was eligible to earn a
bonus of $15,000 in 2005 and 2006 if certain net profit goals are achieved. Mr.
Lamirato did not earn a bonus for 2006 but earned a bonus of $15,000 for 2005.
Effective November 1, 2007, the Company entered into a five year employment
agreement with Mr. Steven C. Olson, as President and Chief Technology Officer of
the Company's Wireless Communications Solutions Division. Mr. Olson has been
with the Company since 2001. The agreement provides for annual base compensation
of $200,000 in 2007, increasing annually to $245,000 in 2011. Mr. Olson shall
also be entitled to bonuses ranging from $5,000 to $100,000 annually contingent
upon the Wireless Communications Solutions Division achieving certain net income
targets. Mr. Olson earned a bonus of $7,500 for 2007. We previously entered into
a written employment agreement with Mr. Olson, effective August 22, 2004. The
employment agreement was for the period August 22, 2004 through August 22, 2007
at an annual base salary of $175,000. Mr. Olson also was eligible to earn
bonuses, upon achieving certain gross margin objectives, over the term of the
agreement. Mr. Olson did not receive a bonus in 2006, but earned a bonus of
$49,000 in 2005. Mr. Olson also received options to purchase 10,000 shares of
our common stock at a price of $6.00 per share from August 22, 2004 through
August 22, 2007. Mr. Olson also received options to purchase 40,000 shares of
our common stock on August 21, 2007. These options vest at a rate of 20% per
year with vesting dates of 12/31/07, 12/31/08, 12/31/09, 12/31/10, and 12/31/11.
Effective November 1, 2007, the Company entered into a three year employment
agreement with Mr. Richard L. Anderson, as the Company's Executive Vice
President. Mr. Anderson has been with the Company since 1994. The agreement
provides for annual compensation of $120,000.
The following tables show the potential payments upon termination or a change of
control of the Company for each of the named executive officers.
- ------------------------------------------------ -------------- ------------------ -------------- --------------------
Scenario Mr. Marx Mr. Lamirato Mr. Olson Mr. Anderson
- ------------------------------------------------ -------------- ------------------ -------------- --------------------
If early retirement occurred at December 31,
2007 - - - -
- ------------------------------------------------ -------------- ------------------ -------------- --------------------
If termination for cause occurred at December
31, 2007 - - - -
- ------------------------------------------------ -------------- ------------------ -------------- --------------------
If termination without cause occurred at
December 31, 2007 $492,000 $124,000 $200,000 $150,000
- ------------------------------------------------ -------------- ------------------ -------------- --------------------
If "change in control" occurred at December
31, 2007 $492,000 $248,000 $200,000 $120,000
- ------------------------------------------------ -------------- ------------------ -------------- --------------------
If death or disability occurred as of December
31, 2007 - - - -
- ------------------------------------------------ -------------- ------------------ -------------- --------------------
We have no compensatory plan or arrangement that results or will result from the
resignation, retirement, or any other termination of an executive officer's
employment with us or from a change-in-control or a change in an executive
officer's responsibilities following a change-in-control, except that the 2007
Stock Incentive Plan and 1997 Stock Option and Compensation Plan provides for
vesting of all outstanding options in the event of the occurrence of a
change-in-control.
40
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table summarizes certain information as of February 29, 2008 with
respect to the beneficial ownership of our common stock by each director, by all
executive officers and directors as a group, and by each other person known by
us to be the beneficial owner of more than five percent of our common stock ( as
stated previously, the number of shares and any exercise prices have been
adjusted for a one-for-fifty reverse split implemented on February 12, 2007):
Number of Shares
Name and Address of Beneficial Owner Beneficially Owned (1) Percent of Class
------------------------------------ ---------------------- ----------------
Randall P. Marx 167,165(2) 5.4%
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Sigmund A. Balaban 31,015(3) 1.0%
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Donald A. Huebner 3,934(4) *
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Robert E. Wade 85,181(7) 2.75%
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Steve C. Olson 9,751(6) *
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Richard L. Anderson 31,005(8) 1.0%
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Monty R. Lamirato 1,423(5) *
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Paul J. Rini 308,922 9.99%
7376 Johnnycake Rd
Mentor, Ohio 44060
41
Number of Shares
Name and Address of Beneficial Owner Beneficially Owned (1) Percent of Class
------------------------------------ ---------------------- ----------------
Hudson River Investments, Inc. 242,134 7.83%
Skelton Building, Main Street.
POB 3139 Road Town
Tortola, British Virgin Islands
Evansville Limited 326,461 10.56%
c/o Quadrant Management Inc.
40 West 57th Street, 20th Floor
New York, NY 10019
All officers and directors as a group (six persons) 329,474 (2)(3)(4)(5)(6)(7)(8) 10.6%
* Less than one percent.
(1) "Beneficial ownership" is defined in the regulations promulgated by the
U.S. Securities and Exchange Commission as having or sharing, directly or
indirectly (1) voting power, which includes the power to vote or to direct
the voting, or (2) investment power, which includes the power to dispose or
to direct the disposition, of shares of the common stock of an issuer. The
definition of beneficial ownership includes shares underlying options or
warrants to purchase common stock, or other securities convertible into
common stock, that currently are exercisable or convertible or that will
become exercisable or convertible within 60 days. Unless otherwise
indicated, the beneficial owner has sole voting and investment power.
(2) Includes 163,816 shares directly held by Mr. Marx, 1,980 shares in his ARC
Wireless 401(k) account, 800 shares held by his spouse's IRA and 570 shares
owned beneficially through a 50% ownership of an LLC. This does not include
shares owned and warrants owned by the Harold and Theora Marx Living Trust,
of which Mr. Marx's father is the trustee, as Mr. Marx disclaims beneficial
ownership of these shares. This also does not include 3,100 shares owned by
Warren E. Spencer Living Trust, of which Mr. Marx's mother-in-law is
trustee, as Mr. Marx disclaims beneficial ownership of these shares.
(3) Includes 29,015 shares directly held by Mr. Balaban and Outside Director
options granted under the 1997 Stock Option and Compensation Plan to
purchase 2,000 shares at $5.47 per share until May 9, 2009 which are
currently exercisable.
(4) Includes 1,934 shares directly held by Dr. Huebner and Outside Director
options granted under the 1997 Stock Option and Compensation Plan to
purchase 2,000 shares at $4.80 per share until March 12, 2009 which are
currently exercisable.
(5) Consists of 1,423 shares in Mr. Lamirato's ARC Wireless 401(k) account.
(6) Consists of 1,751 shares in Mr. Olson's ARC Wireless 401(k) account and
options to purchase 8,000 shares at $5.41 per share until September 21,
2017, granted under the 2007Stock Incentive Plan which are currently
exercisable.
(7) Includes 82,181 shares directly held by Mr. Wade, 1,000 shares held by his
spouse and options to purchase 2,000 shares at $5.47 per share until May 9,
2009, granted under the 1997 Stock Option and Compensation Plan and all of
which are currently exercisable.
(8) Includes 31,005 shares directly held by Mr. Anderson.
Please refer to Item 5 herein for a description of Equity Compensation Plan
Information
42
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Other than the employment agreements describe above under the subheading
"Employment Contracts and Termination of Employment and Change-In-Control
Arrangements", there have been no transactions involving the Company and any
director, officer of 5% or greater shareholder, or any of their respective
family members, involving a dollar amount in excess of $120,000.
We are currently subject to corporate governance standards defining the
independence of our directors imposed by the NASDAQ Capital Market's
requirements for independent directors (NASDAQ Marketplace Rule 4200). Under
this definition, we have determined that Sigmund A. Balaban, Robert E. Wade and
Dr. Donald A. Huebner currently qualify as independent directors. For a
description of Messrs. Balaban, Wade and Huebner, please refer to Item 10
herein.
Item 14. Principal Accountant Fees and Services
- -----------------------------------------------
The Audit Committee reviews and determines whether specific projects or
expenditures with our independent registered public accounting firm (auditor),
HEIN & ASSOCIATES LLP potentially affect their independence. The Audit
Committee's policy requires that all services the Company's independent
registered public accounting firm (auditor) may provide to the Company,
including audit services and permitted audit-related services, be pre-approved
in advance by the Audit Committee. In the event that an audit or non-audit
service requires approval prior to the next scheduled meeting of the Audit
Committee, the auditor must contact the Chairman of the Audit Committee to
obtain such approval. Any approval will be reported to the Audit Committee at
its next scheduled meeting.
Audit Fees
The following table sets forth the aggregate fees billed to us by HEIN &
ASSOCIATES LLP for the years ended December 31, 2007, 2006 and 2005:
2007 2006 2005
---- ---- ----
Audit fees $ 78,000 (1) $140,000 (1) $110,000 (1)
Audit-related fees -- (2) -- (2) -- (2)
Tax fees 22,000 (3) 14,000 (3) 10,000 (3)
All other fees --
------------------------------------------
Total audit and non-audit fees $100,000 $154,000 $120,000
==========================================
(1) Includes fees for professional services rendered for the audit of our
annual financial statements and review of our Annual Report on Form 10-K
for the year 2007, 2006 and 2005 and for reviews of the financial
statements included in our quarterly reports on Form 10-Q for the first
three quarters of fiscal 2007, 2006 and 2005 and related SEC registration
statements.
(2) Includes fees billed for professional services rendered in fiscal 2007,
2006 and 2005, in connection with acquisition planning and due diligence.
(3) Includes fees billed for professional services rendered in fiscal 2007,
2006 and 2005, in connection with tax compliance (including U.S. federal
and state returns) and tax consulting.
43
Item 15. Exhibits, Financial Statement Schedules
- -------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Financial Statements
Report of Independent Registered Public Accounting Firm........................F-1
Consolidated Balance Sheets at December 31, 2007 and 2006......................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2007, 2006 and 2005........................................F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2007, 2006 and 2005....................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005........................................F-5
Notes to Consolidated Financial Statements.....................................F-6
(2) Financial Statement Schedules
Report of Independent Registered Public Accounting Firm on Schedule
Schedule II
-----------
Consolidated Valuation Accounts
------------------------------- --------------- --------------- --------------- ------------ -------------
Balance, Charges to Write-offs, Balance,
Beginning of Cost and Net of Sale of End of
Year Expenses Recoveries Winncom Year
------------------------------- --------------- --------------- --------------- ------------ -------------
Allowance for Doubtful
Accounts
------------------------------- --------------- --------------- --------------- ------------ -------------
Years Ended December 31,
------------------------------- --------------- --------------- --------------- ------------ -------------
2007 $ 31,000 422,000 $ 453,000
------------------------------- --------------- --------------- --------------- ------------ -------------
2006 $ 385,000 558,000 (51,000) (861,000) $ 31,000
------------------------------- --------------- --------------- --------------- ------------ -------------
2005 $ 502,000 233,000 (350,000) $ 385,000
------------------------------- --------------- --------------- --------------- ------------ -------------
-------------------------------- --------------- --------------- -------------- ------------ -------------
Balance, Charges to
Beginning of Cost and Sale of Balance,
Year Expenses Write-offs Winncom End of Year
-------------------------------- --------------- --------------- -------------- ------------ -------------
Inventory Valuation
-------------------------------- --------------- --------------- -------------- ------------ -------------
Years Ended December 31,
-------------------------------- --------------- --------------- -------------- ------------ -------------
2007 $ 694,000 10,000 $ 704,000
-------------------------------- --------------- --------------- -------------- ------------ -------------
2006 $ 799,000 266,000 (13,000) (358,000) $ 694,000
-------------------------------- --------------- --------------- -------------- ------------ -------------
2005 $ 712,000 87,000 - $ 799,000
-------------------------------- --------------- --------------- -------------- ------------ -------------
44
(3) Exhibits.
---------
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1 Amended and Restated Articles of Incorporation dated October 11, 2000 (1)
3.2 Bylaws of the Company as amended and restated on March 25, 1998 (2)
10.1 Agreement between and among Winncom Technologies Inc., Winncom Technologies Corp. and the
Company dated May 24, 2000 (3)
10.2 Stock Purchase Agreement, by and among Bluecoral limited, Winncom Technologies Corp. and the
Company dated as of July 28, 2006 (4)
10.3 Escrow Agreement, dated July 28, 2006, by and among the Company, Bluecoral Limited and
Consumer Title Services, LLC (4)
10.4 Employment Agreement effective January 31, 2008 between the Company and Randall P. Marx (5)
10.5 Employment Agreement effective November 1, 2007 between the Company and Monty R. Lamirato (6)
10.6 Employment Agreement effective November 1, 2007 between the Company and Steve C. Olson (6)
10.7 Employment Agreement effective November 1, 2007 between the Company and Richard L. Anderson (6)
14.1 Amended and Restated Code of Ethics (7)
21.1 Subsidiaries of the Registrant
31.1 Officers' Certifications of Periodic Report pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Officers' Certifications of Periodic Report pursuant to Section 906 of Sarbanes-Oxley Act of
2002
99.1 Nominating Policies and Procedures
- ---------------------------
(1) Incorporated by reference from the Company's Form 10-KSB for December 31, 2000 filed on April 2, 2001.
(2) Incorporated by reference from the Company's Form 10-KSB for December 31, 1997 filed on March 31, 1998.
(3) Incorporated by reference from Exhibit 2.1 of the Company's Form 8-K filed on June 8, 2000.
(4) Incorporated by reference from the Company's Form 8-K/A filed on August 2, 2006.
(5) Incorporated by reference from the Company's Form 8-K filed on February 7, 2008.
(6) Incorporated by reference from the Company's Form 8-K filed on November 8, 2007.
(7) Incorporated by reference from the Company's Form 8-K filed on November 13, 2006
45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
ARC Wireless Solutions, Inc.
Date: March 27, 2008 By: /s/ Randall P. Marx
----------------------------------------
Randall P. Marx, Chief Executive Officer
Date: March 27, 2008 By: /s/ Monty R. Lamirato
----------------------------------------
Monty R. Lamirato, Chief Financial Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.
Date Signatures
- ---- ----------
March 27, 2008 /s/ Sigmund A. Balaban
-------------------------------------------
Sigmund A. Balaban, Director
March 27, 2008 /s/ Robert E. Wade
-------------------------------------------
Robert E. Wade, Director
March 27, 2008 /s/ Donald A. Huebner
-------------------------------------------
Donald A. Huebner, Director
46
Reports of Independent Registered Public Accounting Firm
The Board of Directors
ARC Wireless Solutions, Inc.
Wheat Ridge, Colorado
We have audited the consolidated balance sheets of ARC Wireless Solutions, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of operations, changes in stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2007. Our audits also
included the consolidated financial statement schedule listed in the index at
Item 15. These consolidated financial statements and the consolidated financial
statement schedule, are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and consolidated financial statement schedules based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ARC Wireless
Solutions, Inc. and subsidiaries at December 31, 2007 and 2006, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
We were not engaged to examine management's assertions about the effectiveness
of ARC Wireless Solutions, Inc internal control over financial reporting as of
December 31, 2007 included in management's Annual Report on Internal Control
over Financial Reporting included in Item 9A of this Report on Form 10-K and,
accordingly, we do not express an opinion thereon.
/s/ Hein & Associates LLP
Denver, Colorado
March 20, 2008
F-1
ARC Wireless Solutions, Inc.
Consolidated Balance Sheets
December 31, December 31,
2007 2006
-----------------------------------
Assets
Current assets:
Cash and cash equivalents $ 14,941,000 $ 15,720,000
Accounts receivable - trade, net 1,173,000 620,000
Inventory, net 1,179,000 788,000
Other current assets 109,000 416,000
-----------------------------------
Total current assets 17,402,000 17,544,000
-----------------------------------
Property and equipment, net 365,000 297,000
Other assets:
Intangible assets, net 106,000 98,000
Deposits 39,000 36,000
-----------------------------------
Total assets $ 17,912,000 $ 17,975,000
===================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 631,000 $ 790,000
Bank debt - current 1,436,000 830,000
Accrued expenses 286,000 213,000
Current portion of capital lease obligations 56,000 32,000
-----------------------------------
Total current liabilities 2,409,000 1,865,000
Capital lease obligations, less current portion 83,000 23,000
-----------------------------------
Total liabilities 2,492,000 1,888,000
-----------------------------------
Commitments (Notes 7, 8 and 10) Stockholders' equity:
Preferred stock, $001 par value, 2,000,000 authorized, none -- --
issued and outstanding
Common stock, $.0005 par value, 250,000,000 authorized, 2,000 2,000
3,090,000 issued and outstanding in 2007 and 3,126,000 issued in
2006, respectively.
Additional paid-in capital 20,696,000 21,855,000
Treasury stock, at cost, 39,000 shares in 2006 -- (1,195,000)
Accumulated deficit (5,278,000) (4,575,000)
-----------------------------------
Total stockholders' equity 15,420,000 16,087,000
-----------------------------------
Total liabilities and stockholders' equity $ 17,912,000 $ 17,975,000
===================================
See accompanying notes to consolidated financial statements.
F-2
ARC Wireless Solutions, Inc.
Consolidated Statements of Operations
Years Ended December 31,
2007 2006 2005
---------------------------------------------------
Sales, net $ 8,048,000 $ 6,470,000 $ 6,736,000
Cost of sales 5,267,000 5,021,000 4,006,000
---------------------------------------------------
Gross profit 2,781,000 1,449,000 2,730,000
Operating expenses:
Selling, general and administrative expenses 4,171,000 3,112,000 2,571,000
---------------------------------------------------
Income (loss) from continuing operations (1,390,000) (1,663,000) 159,000
Other income (expense):
Interest expense (24,000) (124,000) (123,000)
Other income 705,000 101,000 62,000
Loss on sale of Winncom -- (187,000) --
---------------------------------------------------
Total other income (expense) 681,000 (210,000) (61,000)
---------------------------------------------------
Income (loss) from continuing operation before income
taxes (709,000) (1,873,000) 98,000
(Provision) benefit for income taxes 6,000 267,000 475,000
---------------------------------------------------
Income (loss) from continuing operation (703,000) (1,606,000) 573,000
---------------------------------------------------
Discontinued operations (Note 2)
Income from operations of the discontinued component
-- 1,068,000 902,000
(Provision) for income taxes, discontinued component
-- (204,000) (183,000)
---------------------------------------------------
Income from discontinued operations -- 864,000 719,000
---------------------------------------------------
Net income (loss) $ (703,000) $ (742,000) $ 1,292,000
===================================================
Net income (loss) per share - continuing operations -
Basic and Diluted $ (.23) $ (.52) $ .19
Net income per share - discontinued operations - Basic
and Diluted -- $ .28 $ .23
Net income (loss) per share - Basic and Diluted $ (.23) $ (.24) $ .42
Weighted average shares - Basic 3,090,000 3,086,000 3,083,000
Weighted average shares - Diluted 3,090,000 3,086,000 3,084,000
See accompanying notes to consolidated financial statements.
F-3
ARC Wireless Solutions, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Treasury
Common Stock Additional Stock
------------------------- Paid-in ---------------------- Accumulated
Shares Amount Capital Shares Amount Deficit
--------------------------------------------------------------------------------------
Balances, January 1, 2005 3,117,000 $2,000 $21,780,000 (39,000) $(1,195,000) $(5,125,000)
Issuance of common stock to
401(K) Plan 8,000 57,000
Common stock issued for
directors' fees 2,000
Shares returned in settlement
agreement (3,000)
Net income 1,292,000
--------------------------------------------------------------------------------------
Balances, December 31, 2005 3,125,000 21,836,000 (39,000) (1,195,000) (3,833,000)
2,000
Share based compensation 11,000
Common stock issued for
directors' fees 1,000 8,000
Net loss (742,000)
--------------------------------------------------------------------------------------
Balances, December 31, 2006
3,126,000 2,000 21,855,000 (39,000) (1,195,000) (4,575,000)
Cancellation of Treasury shares
(39,000) (1,195,000) 39,000 1,195,000
Share based compensation 21,000
Common stock issued for
directors' fees 3,000 15,000
Net loss (703,000)
--------------------------------------------------------------------------------------
Balances, December 31, 2007
3,090,000 $ 2,000 $20,696,000 - - $(5,278,000)
======================================================================================
See accompanying notes to consolidated financial statements.
F-4
ARC Wireless Solutions, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31,
2007 2006 2005
----------------------------------------------
Operating activities
Income (loss) from continuing operations $ (703,000) $ (1,606,000) $ 573,000
Adjustments to reconcile income (loss) from continuing operations to net
cash provided by (used in) operating activities:
Depreciation and amortization 181,000 162,000 187,000
Provision for doubtful receivables 395,000 7,000 --
Non-cash expense for issuance of stock and options 36,000 19,000 56,000
Deferred taxes -- -- (490,000)
Loss on sale of discontinued operations -- 187,000 --
Changes in operating assets and liabilities:
Accounts receivable, trade (948,000) 280,000 107,000
Inventory (391,000) 131,000 (35,000)
Prepaids and other current assets 308,000 (345,000) (19,000)
Other assets (3,000) 7,000 --
Accounts payable and accrued expenses (86,000) 348,000 (308,000)
Other (1,000) 2,000 --
----------------------------------------------
Net cash provided by (used in) continuing operations (1,212,000) (808,000) 71,000
Net cash provided by (used in) discontinued operations -- 1,394,000 (657,000)
----------------------------------------------
Net cash provided by (used in) operating activities (1,212,000) 586,000 (586,000)
----------------------------------------------
Investing activities
Net proceeds from sale of discontinued operations -- 16,397,000 --
Patent acquisition costs (23,000) (10,000) (6,000)
Purchase of plant and equipment (99,000) (80,000) (74,000)
----------------------------------------------
Net cash provided by (used) in investing activities, continuing operations
(122,000) 16,307,000 (80,000)
----------------------------------------------
Purchase of plant and equipment, discontinued operations -- (58,000) (25,000)
----------------------------------------------
Net cash used in investing activities, discontinued operations -- (58,000) (25,000)
----------------------------------------------
Net cash provided by (used in) investing activities -- 16,249,000 (105,000)
Financing activities
Net advances from line of credit 4,978,000 276,000 228,000
Net repayment of line of credit and capital lease obligations (4,423,000) (73,000) (64,000)
----------------------------------------------
Net cash provided by financing activities, continuing operations 555,000 203,000 164,000
----------------------------------------------
Net advances (repayment) of line of credit and bank debt, discontinued
operations -- (1,382,000) 517,000
----------------------------------------------
Net cash provided by (used in) financing activities, discontinued operations
-- (1,382,000) 517,000
----------------------------------------------
Net cash provided by (used in) financing activities 555,000 (1,179,000) 681,000
----------------------------------------------
Net change in cash (779,000) 15,656,000 (10,000)
Cash and cash equivalents, beginning of year 15,720,000 64,000 74,000
----------------------------------------------
Cash and cash equivalents, end of year $ 14,941,000 $ 15,720,000 $ 64,000
==============================================
Supplemental cash flow information:
Cash paid for interest, continuing operations $ 24,000 $ 124,000 $ 123,000
Cash paid for interest, discontinued operations -- $ 109,000 $ 161,000
Cash paid for taxes, discontinued operations -- $ 220,000 $ 44,000
Equipment acquired under capital lease, continuing operations $ 135,000 $ 22,000 $ 17,000
Issuance of common stock to 401(K) Plan -- -- $ 57,000
See accompanying notes to consolidated financial statements.
F-5
1. Organization and Summary of Significant Accounting Policies
Organization
The Company was organized under the laws of the State of Utah on September 30,
1987 for the purpose of acquiring one or more businesses, under the name of
Westflag Corporation, which was formerly Westcliff Corporation. In January 1989,
the Company completed its initial public offering.
In 1989, the Company merged with Antennas America, Inc., a Colorado corporation
that had been formed in September 1988. Pursuant to the merger, all the issued
and outstanding stock of Antennas America, Inc. was converted into 839,040
shares, and the Company name was changed to Antennas America, Inc. At the annual
shareholders meeting held on October 11, 2000, the shareholders voted to change
the Company's name to ARC Wireless Solutions, Inc. from Antennas America, Inc.
The Wireless Communications Solutions Division designs, develops, markets and
sells a diversified line of antennas and related wireless communication systems,
including base station panel antennas, conformal and phased array antennas,
distributed primarily through third party OEMs and distributors located in the
United States.
On May 24, 2000, the Company purchased, through its subsidiary, Winncom
Technologies, Corp. ("Winncom"), the outstanding shares of Winncom Technologies,
Inc. Winncom specializes in marketing, distribution and service, as well as
selected design, manufacturing and installation, of wireless component and
network solutions in support of both voice and data applications, primarily
through third party distributors located in the United States. Effective October
31, 2006, Winncom was sold for $17,000,000 and ceased to be a wholly owned
subsidiary.
On September 29, 2000, the Company purchased, through its subsidiary, Starworks
Wireless Inc. ("Starworks"), the outstanding shares of Starworks Technology,
Inc. (a/k/a The Kit Company). Starworks specializes in the design,
manufacturing, marketing, distribution and service of direct-to-home dish
satellite installation kits in the United States, primarily through OEMs and
third-party distributors, retailers and the Internet.
In May 2006, the Company formed a new wholly-owned subsidiary, ARC Wireless Hong
Kong Limited to pursue Asian and other international business, and to further
strengthen the Company's procurement and manufacturing capabilities.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of ARC
Wireless Solutions, Inc. ("ARC"), and its wholly-owned subsidiary corporations,
Winncom Technologies Corp. ("Winncom"), through October 31, 2006, the date of
its sale, Starworks Wireless Inc. ("Kit") and ARC Wireless Hong Kong Limited,
("ARCHK"), since their respective acquisition dates. All material intercompany
accounts, transactions, and profits have been eliminated in consolidation.
Basis of Presentation
The Company has experienced recurring losses, and has accumulated a deficit of
approximately $5.3 million since inception in 1989. In 2005, 2004 and 2002 the
Company generated net income and in 2007, 2006 and 2003 the Company generated
losses. There can be no assurance that the Company will achieve the desired
result of net income and positive cash flow from operations in future years.
Management believes that current working capital and available borrowings on
existing bank line of credit will be sufficient to allow the Company to maintain
its operations through December 31, 2008.
F-6
1. Organization and Summary of Significant Accounting Policies, continued
Use of Estimates
The preparation of the Company's consolidated financial statements in accordance
with generally accepted accounting principles of the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. From time to
time the Company has cash balances in excess of federally insured amounts. The
Company maintains its cash balances with several financial institutions. As of
December 31, 2007, the balance exceeded the Federal Deposit Insurance
Corporation limitation for coverage of $100,000 by approximately $14,700,000.
The Company reduces its exposure to credit risk by maintaining such balances
with financial institutions that have high credit ratings.
Fair Value of Financial Instruments
The Company's short-term financial instruments consist of cash, money market
accounts, accounts receivable, and accounts payable, accrued expenses and bank
debt. The carrying amounts of these financial instruments approximate fair value
because of their short-term maturities. Financial instruments that potentially
subject the Company to a concentration of credit risk consist principally of
cash and accounts receivable.
The Company does not hold or issue financial instruments for trading purposes
nor does it hold or issue interest rate or leveraged derivative financial
instruments.
Accounts Receivable
Trade receivables consist of uncollateralized customer obligations due under
normal trade terms requiring payment usually within 30 days of the invoice date.
Management reviews trades receivables periodically and reduces the carrying
amount by a valuation allowance that reflects management's best estimate of the
amount that may not be collectible. The allowance for doubtful accounts,
continuing operations, was $453,000 and $31,000 at December 31, 2007 and 2006,
respectively. Bad debt expense, continuing operations, was $395,000, $0 and
$13,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
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, which includes allocated
overhead, consists of the following at December 31:
2007 2006
---------------------------------
Raw materials $ 963,000 $ 900,000
Work in progress 105,000 128,000
Finished goods 815,000 454,000
---------------------------------
1,883,000 1,482,000
Inventory reserve (704,000) (694,000)
---------------------------------
Net inventory $ 1,179,000 $ 788,000
=================================
F-7
1. Organization and Summary of Significant Accounting Policies, continued
Property and Equipment
Property and equipment are stated at acquired cost. The Company uses the
straight-line method over estimated useful lives of three to seven years to
compute depreciation for financial reporting purposes and accelerated methods
for income tax purposes. Leasehold improvements and leased equipment are
amortized over the lesser of the estimated useful lives or over the term of the
leases. Upon sale or retirement, the cost and related accumulated depreciation
of disposed assets are eliminated from the respective accounts and the resulting
gain or loss is included in the statements of operations. Property and equipment
consist of the following at December 31:
2007 2006
------------------------------
Machinery and equipment $ 1,368,000 $ 1,237,000
Computer equipment and software 514,000 404,000
Furniture and fixtures 164,000 180,000
Leasehold improvements 32,000 89,000
------------------------------
2,078,000 1,910,000
Accumulated depreciation (1,713,000) (1,613,000)
------------------------------
$ 365,000 $ 297,000
==============================
Depreciation expense, which includes amortization of fixed assets acquired
through capital leases, amounted to $166,000, $147,000 and $171,000 during the
years ended December 31, 2007, 2006 and 2005, respectively.
Patent Costs
Patent costs are stated at cost and amortized over ten years using the
straight-line method. Patent amortization expense amounted to $15,000, $15,000
and $16,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Long-lived Assets
The carrying value of long-lived assets are reviewed annually; if at any time
the facts or circumstances at any of the Company's individual subsidiaries
indicate impairment of long-lived asset values, as a result of a continual
decline in performance or as a result of fundamental changes in a subsidiary's
market, a determination is made as to whether the carrying value of the
property's long-lived assets exceeds estimated realizable value.
F-8
1. Organization and Summary of Significant Accounting Policies, continued
Intangible Assets
Intangible assets consist principally of purchased intangible assets and the
excess acquisition cost over the fair value of tangible and identified
intangible net assets of businesses acquired (goodwill). Purchased intangible
assets include developed technology, trademarks and trade names, assembled
workforces and distribution network. The Company continually evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of
future cash flows expected to result from the use of the assets in comparison
with the assets carrying amount in deciding whether the goodwill is recoverable.
Intangible assets, except goodwill, are being amortized using the straight-line
method over estimated useful lives ranging from 5 to 15 years.
2007 2006
----------------------------
Patents $ 275,000 $ 252,000
----------------------------
275,000 252,000
Accumulated amortization (169,000) (154,000)
----------------------------
Intangible assets, net $ 106,000 $ 98,000
============================
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" effective January 1, 2002. Pursuant to
SFAS No. 142, goodwill and other indefinite lived intangible assets are no
longer amortized, but must be tested for impairment at least annually. The
Company has performed both the transitional impairment test and annual
impairment test required by 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.
Goodwill was eliminated upon the sale of Winncom effective October 31, 2006.
Revenue Recognition
Revenue is recorded when goods are shipped. The Company has established reserves
for anticipated sales returns based on historical return percentages as well as
specific identification and reserve of potential problem accounts. The Company
has several major commercial customers who incorporate the Company's products
into other manufactured goods, and returns from these customers have not been
significant. Additionally, returns related to retail sales have been immaterial
and within management's expectations.
F-9
1. Organization and Summary of Significant Accounting Policies, continued
Revenue Recognition, continued
Starting in 2005, the Company commenced a long term construction contract and
the Company follows the percentage-of-completion method of accounting for
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 costs incurred to date with management's current
estimate of total costs to be incurred at contract completion. Revenue is
recognized based on applying the percentage against the total contract amount.
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.
Total contract revenue recognized, included in discontinued operations, for the
years ended December 31, 2006 and 2005 was $20,555,000 and $2,632,000,
respectively (see Note 2). The percentage-of-completion method of accounting for
contract revenue applied only to discontinued operations, as such the Company no
longer uses this method of contract revenue accounting.
Shipping and Handling Costs
The Company classifies shipping and handling costs as a component of cost of
sales.
Research and Development
Research and development costs are charged to expense as incurred. Such expenses
were $512,000, $363,000 and $315,000, respectively, for the years ended December
31, 2007, 2006 and 2005.
Advertising Costs
Advertising costs are charged to operations when the advertising is first shown.
Advertising costs charged to operations were $13,000, $20,000 and $40,000 in
2007, 2006 and 2005, respectively.
Product Warranty
The Company's vendors generally warrant the products distributed by the Company
and allow the Company to return defective products, including those that have
been returned to the Company by its customers. The Company does not
independently warrant the products it distributes. The Company does warranty
products it manufactures and records a provision for estimated warranty costs at
the time of the sale and periodically adjusts the provision to reflect actual
experience. Warranty expense was not material to the Company's consolidated
statements of operations for the years ended December 31, 2007, 2006 and 2005.
F-10
1. Organization and Summary of Significant Accounting Policies, continued
Income Taxes
The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109) which
utilizes the asset and liability method of computing deferred income taxes. The
objective of the asset and liability method is to establish deferred tax assets
and liabilities for the temporary differences between the financial reporting
basis and the tax basis of the Company's assets and liabilities at enacted tax
rates expected to be in effect when such amounts are realized or settled. The
current and deferred tax provision is allocated among the members of the
consolidated group on the separate income tax return basis.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes -- An Interpretation of FASB
Statement No. 109, or FIN 48. FIN 48 provides detailed guidance for the
financial statement recognition, measurement and disclosure of uncertain tax
positions recognized in the financial statements in accordance with SFAS No.
109. Tax positions must meet a "more-likely-than-not" recognition threshold at
the effective date to be recognized upon the adoption of FIN 48 and in
subsequent periods. Upon the adoption of FIN 48, we had no unrecognized tax
positions. During the year ended December 31, 2007, we recognized no adjustments
for uncertain tax positions.
We recognize interest and penalties related to uncertain tax positions in income
tax expense. No interest and penalties related to uncertain tax positions were
accrued at December 31, 2007.
The tax years 2003 through 2006 remain open to examination by the major taxing
jurisdictions in which we operate. We expect no material changes to unrecognized
tax positions within the next twelve months.
Reclassifications
Certain balances in the 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 (loss).
Stock 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.
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.
F-11
1. Organization and Summary of Significant Accounting Policies, continued
Stock Based Compensation, continued
The following table summarizes share-based compensation expense recorded in
general and administrative expenses during each period presented:
Year Ended Year Ended
December 31, December 31,
2007 2006
---------------------------------
Stock options $21,000 $11,000
----------------------------
Total share-based compensation expense $21,000 $11,000
============================
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 income
and per share amounts for the year ended December 31, 2005 would have been
adjusted to the pro forma amounts indicated below:
2005
--------------
Net income as reported $1,292,000
Add: stock based compensation included in
reported net income
Deduct: Stock-based compensation cost under SFAS
123 (29,000)
--------------
Pro forma net income $1,263,000
==============
Pro forma shares used in the calculation of pro
forma net income per common share - basic and
diluted 3,084,000
Reported net income percommon share - basic and
diluted $.42
Pro forma net income per common share - basic
and diluted $.41
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company had accounted for
grants subsequent to December 31, 1994 under a method specified by SFAS 123.
Options granted were estimated using the Black-Scholes valuation model.
F-12
1. Organization and Summary of Significant Accounting Policies, continued
Stock Based Compensation, continued
Stock option activity was as follows:
Number of Weighted Average
Shares Exercise Price ($)
----------------------------------------
Balance at January 1, 2006 52,000 $7.50
Granted 5,000 $6.50
Exercised
-
Forfeited or expired (5,000) $7.50
----------------------------------------
Balance at December 31, 2006 52,000 $7.30
Granted 47,500 $5.38
Exercised -
Forfeited or expired (45,000) $7.40
----------------------------------------
Balance at December 31, 2007 54,500 $5.56
========================================
The following table presents information regarding options outstanding as of
December 31, 2007:
Weighted average contractual remaining term - options outstanding 7.34 years
Aggregate intrinsic value - options outstanding -
Options exercisable 21,000
Weighted average exercise price - options exercisable $5.82
Aggregate intrinsic value - options exercisable -
Weighted average contractual remaining term - options exercisable 4.13 years
No options were exercised during the years ended December 31, 2007 and 2006.
The following weighted average assumptions were used:
Years Ended December 31,
-------------------------------------------
2007 2006 2005
-------------------------------------------
Volatility .518 - .782 .751 .80 - 1.02
Expected life of options (in years) 2-4 2 2
Dividend Yield 0.00% 0.00% 0.00%
Risk free interest rate 4.60-5.25% 6.00% 3.75%
Per share value of options granted $.44 $3.00 $3.75
As of December 31, 2007, future compensation costs related to nonvested stock
options was $129,000. Management anticipates that this cost will be recognized
over a weighted average period of 4 years.
F-13
1. Organization and Summary of Significant Accounting Policies, continued
Net Income (Loss) Per Common 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
years ended December 31, 2007 and 2006, the Company incurred a net loss and
stock options totaling 54,250 and 52,000, respectively, 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 2007 and
2006. For the year ended December 31, 2005 out of the money options totaling
50,000 were not included in the calculation of diluted earnings per share
because their effect is anti-dilutive.
The following table represents a reconciliation of the shares used to calculate
basic and diluted earnings per share for the respective periods indicated:
Years Ended December 31,
-----------------------------------------------
2007 2006 2005
Numerator: Net Income (Loss) $ (703,000) $ (742,000) $1,292,000
===============================================
Denominator:
Denominator for basic earnings per share - weighted average
shares 3,090,000 3,086,000 3,083,000
Effect of dilutive securities
Employee stock options - - 1,000
Common stock warrants - - -
----------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversion 3,090,000 3,086,000 3,084,000
==============================================
Basic earnings per share $(.23) $(.24) $.42
==============================================
Diluted earnings per share $(.23) $(.24) $.42
==============================================
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which enhances existing guidance for measuring assets and
liabilities using fair value. SFAS 157 provides a single definition of fair
value, together with a framework for measuring it, and requires additional
disclosure about the use of fair value to measure assets and liabilities. SFAS
157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted market prices in active markets. Under the
standard, fair value measurements would be separately disclosed by level within
the fair value hierarchy. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. SFAS 157 does not require any new fair value measurements
for existing assets and liabilities on the Company's balance sheet as of the
date of adoption. As such, the Company does not expect any impact to its
financial statements as of the January 1, 2008 adoption date.
F-14
1. Organization and Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements, continued
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements No. 87, 88, 106, and 132(R) ("SFAS 158"), which requires the
recognition of the funded status of benefit plans in the balance sheet. SFAS 158
also requires certain gains and losses that are deferred under current pension
accounting rules to be recognized in accumulated other comprehensive income, net
of tax effects. These deferred costs (or income) will continue to be recognized
as a component of net periodic pension cost, consistent with current recognition
rules. For entities with no publicly traded equity securities, the effective
date for the recognition of the funded status is for fiscal years ending after
June 15, 2007. In addition, the ability to measure the plans' benefit
obligations, assets and net period cost at a date prior to the fiscal year-end
date is eliminated for fiscal years ending after December 15, 2008. The adoption
of the recognition element of SFAS 158 had no effect on the Company's financial
statements. The adoption of the measurement date element of SFAS 158 is not
expected to have a material impact on the Company's financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets and
liabilities to be carried at fair value. Under SFAS 159, a company may elect to
use fair value to measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts payable,
guarantees, issued debt and other eligible financial instruments. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company has
elected not to adopt SFAS 159.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"), which replaces SFAS 141. SFAS 141R establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired in
connection with a business combination. The Statement also establishes
disclosure requirements that will enable users to evaluate the nature and
financial effect of the business combination. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of an entity's first fiscal year that begins after December 15, 2008.
The Company is currently evaluating the potential impact, if any, of the
adoption of SFAS 141R on the Company's financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 requires that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This Statement is
effective as of the beginning of an entity's first fiscal year beginning after
December 15, 2008. The Company has not yet determined the impact, if any, that
SFAS 160 will have on its financial statements.
On March 19, 2008, The Financial Accounting Standards Board (FASB) issued FASB
Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities. The new standard is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. It is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The Company has not yet determined
the impact, if any, that SFAS 161 will have on its financial statements.
F-15
Note 2. Discontinued Operations
On July 28, 2006, ARC 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 was held in escrow per the terms of the Purchase
Agreement .
On October 31, 2006, the shareholders of the Company approved the sale of
Winncom and the remaining conditions under the Purchase Agreement were
satisfied. The Company received the $17,000,000 from the escrow agent on
November 1, 2006.
The net loss on the sale of Winncom is computed as follows:
Gross proceeds from the sale of Winncom $ 17,000,000
Net assets (17,187,000)
------------
Loss on sale of Winncom $ (187,000)
============
This business segment, Distribution, has been accounted for as a discontinued
operation, 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.
Information related to the discontinued operations for the years ended December
31, 2006 and 2005 are as follows:
2006 2005
------------------------------
Sales, net $ 28,773,000 $ 30,288,000
Contract revenue 20,555,000 2,632,000
------------------------------
Total revenue 49,328,000 32,920,000
------------------------------
Cost of sales 25,077,000 25,877,000
Cost of contract revenue 19,236,000 2,296,000
------------------------------
Total cost of goods sold 44,313,000 28,173,000
------------------------------
Gross profit 5,015,000 4,747,000
Operating expenses:
Selling, general and administrative
expenses 3,996,000 3,874,000
------------------------------
Income from operations 1,019,000 873,000
Other income (expense):
Interest expense, net (110,000) (161,000)
Other income 159,000 190,000
------------------------------
Total other income (expense) 49,000 29,000
------------------------------
Income before income taxes 1,068,000 902,000
Provision for income taxes (204,000) (183,000)
------------------------------
Net Income $ 864,000 $ 719,000
==============================
F-16
Note 2. Discontinued Operations, continued
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% (8.75% at
September 30, 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%
(9% at September 30, 2006). The term loan became due on October 26, 2006 and was
paid in full. Substantially all of the assets of Winncom were collateral on the
line of credit and the term loan.
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 the total
contract amount. The uninstalled portion of 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.
As noted above in Note 2, total contract revenue recognized for the ten months
ended October 31, 2006 and the year ended December 31, 2005 was $20,555,000 and
$2,632,000, respectively.
3. Revolving Bank Loan Agreements and Notes Payable
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.
F-17
3. Revolving Bank Loan Agreements and Notes Payable, continued
On May 10, 2005, the Company entered into a new $1.5 million revolving
line-of-credit agreement (the "Credit Facility") with Citywide Banks, which has
been renewed annually. The new Credit Facility has a maturity of one year, with
interest at 1.5% over prime (9.0% at December 31, 2007), contains covenants to
maintain certain financial statement ratios, and is collateralized by
essentially all of the assets of the Company and its wholly owned subsidiary,
Starworks. The borrowing base is calculated on a percentage of trade accounts
receivable and inventory for the Company and Starworks combined. As of December
31, 2007, the Company was in compliance with these covenants. The weighted
average interest rate for 2007 and 2006 was 9.5%.
Revolving bank line of credit at December 31, 2007 and 2006 consist of:
2007 2006
----------------------------
Line of credit, current $ 1,436,000 $ 830,000
============================
4. Stockholders' Equity
On February 9, 2007, the Company announced a one-for-fifty reverse stock split
of its issued and outstanding common stock to be effective as of February 12,
2007 (the "Effective Date"). Pursuant to the reverse stock split, each fifty
shares of the Company's issued and outstanding common stock were reclassified
and combined into one share of the Company's common stock as of the Effective
Date. The number of shares of the Company's common stock authorized remained at
250 million shares, without any change in par value per common share, and the
number of shares of the Company's preferred stock authorized remained at 2
million.
As of the Effective Date, the exercise or conversion price, as well as the
number of shares issuable under each of the Company's outstanding stock option
agreements, were proportionately adjusted to reflect the reverse stock split. In
addition, the number of shares authorized for issuance under the Company's
equity compensation plans were proportionately reduced as of the Effective Date
to reflect the reverse stock split.
Stockholders' equity, common stock, and stock option activity for all periods
presented have been restated to give retroactive recognition to the reverse
stock split. In addition, all references in the accompanying consolidated
financial statements, to the weighted average shares, per share amounts, and
market prices of the Company's common stock have been restated to give
retroactive recognition to the reverse stock split.
The 2007 Stock Incentive Plan ("the 2007 Plan") was approved by the Board of
Directors on August 2, 2007 and was also approved by the shareholders on
September 17, 2007. The 2007 Plan provides that no more than 300,000 shares of
our common stock may be issued for awards. If there is any change in the
Company's common stock by reason of any stock exchange, merger, consolidation,
reorganization, recapitalization, stock dividend, reclassification, split-up,
combination of shares or otherwise, then the Board, or any Option Committee,
shall make proportionate adjustments to the maximum number and kind of
securities (i) available for issuance under the 2007 Plan; (ii) available for
issuance as incentive stock options or non-qualified stock options; (iii) that
may be subject to awards received by any participant; (iv) that may be subject
to different types of awards; (v) that are subject to any outstanding award; and
(vi) the price of each security.
F-18
4. Stockholders' Equity, continued
The 2007 Plan provides that shares covered by an award will not count against
the shares available for issuance under the 2007 Plan until they are actually
issued and delivered to a participant. If an award granted under the 2007 Plan
lapses, expires, terminates or is forfeited, surrendered or canceled without
having been fully exercised or without the issuance of all the shares subject to
the award, the shares covered by such award will again be available for use
under the 2007 Plan.
In 2007, options totaling 40,000 were granted from the 2007 Plan to an officer
at an exercise price of $5.40. No options were granted to directors in 2007 from
the 2007 Plan.
In November 1997, the Board of Directors approved our 1997 Stock Option and
Compensation Plan (the "Plan"). The 1997 Plan expired November 2007. Pursuant to
the Plan, we may grant options to purchase an aggregate of 100,000 shares of our
common stock to key employees, directors, and other persons who have or are
contributing to our success. In November 2004, the shareholders approved to
amend the Plan to increase the aggregate number of option to be issued under the
Plan from 100,000 to 200,000. The options granted pursuant to the Plan may be
incentive options qualifying for beneficial tax treatment for the recipient or
they may be non-qualified options. The Plan is administered by an option
committee that determines the terms of the options subject to the requirements
of the Plan, except that the option committee shall not administer the Plan with
respect to automatic grants of options to our directors who are not our
employees. The option committee may be the entire Board or a committee of the
Board.
On May 24, 2000, the Board of Directors voted to (1) decrease the amount of
options automatically granted to Outside Directors from 5,000 to 500 options,
and (2) decrease the amount of exercisable options from 1,000 to 100 per
meeting. The term of the outside Director option granted in the future was
lowered from five years to two years. The other terms of the Outside Director
options did not change. On July 5, 2002, the Board of Directors voted to (1)
increase the amount of options automatically granted to Outside Directors from
500 to 2,500 options, and (2) increase the amount of exercisable options from
100 to 500 per meeting. The other terms of the Outside Director options did not
change.
The Company granted a total of 7,500 options to Outside Directors under the 1997
Plan during 2007 at exercise prices ranging from $4.80 to $5.47 per share. The
Company granted a total of 5,000 options to Outside Directors under the 1997
Plan during 2006 at an exercise price of $6.50 per share. The Company granted a
total of 5,000 options to Outside Directors under the Plan during 2005 at
exercise prices ranging from $5.50 to $7.50 per share.
F-19
4. Stockholders' Equity, continued
The following table summarizes the option activity for 2007, 2006 and 2005:
Number of Weighted Average
Shares Exercise Price ($)
=======================================
2005 Activity:
Outstanding at beginning of year 48,500 $8.00
Granted 7,000 $6.50
Exercised
-
Forfeited or expired (3,500) $7.00
---------------------------------------
Outstanding at end of year 52,000 $7.50
=======================================
Exercisable at end of year 50,500 $7.50
=============== =======================
2006 Activity:
Outstanding at beginning of year 52,000 $7.50
Granted 5,000 $6.50
Exercised -
Forfeited or expired (5,000) $8.00
---------------------------------------
Outstanding at end of year 52,000 $7.30
=======================================
Exercisable at end of year 49,500 $7.35
=======================================
2007 Activity:
Outstanding at beginning of year 52,000 $7.30
Granted 47,500 $5.38
Exercised -
Forfeited or expired (45,000) $7.40
---------------------------------------
Outstanding at end of year 54,500 $5.56
=======================================
Exercisable at end of year 21,000 $5.82
=======================================
At December 31, 2007, there are 21,000 options exercisable from $4.80 to $7.50.
These options expire between 2008 and 2017. The weighted average grant date fair
value of the options granted is $3.09.
All option exercise prices were granted at market. The weighted average
remaining contractual life of options outstanding at the end of 2007, 2006 and
2005 were 7.34 years, .43 years and 1.23 years, respectively.
F-20
5. Income Taxes
The Company records the income tax effect of transactions in the same year that
the transactions enter into the determination of income, regardless of when the
transactions are recognized for tax purposes. Income tax credits are used to
reduce the provision for income taxes in the year in which such credits are
allowed for tax purposes. Deferred taxes are provided to reflect the income tax
effects of amounts included for financial purposes in different periods than for
tax purposes, principally valuation allowances for inventory and trade
receivables for financial reporting purposes and accelerated depreciation for
income tax purposes. Income tax expense (benefit) for the years ended December
31, 2007, 2006 and 2005 is as follows:
2007 2006 2005
----------------------------------------------
Current $ (6,000) $( 93,000) $ 198,000
Deferred - 30,000 (490,000)
----------------------------------------------
Total benefit $ (6,000) $( 63,000) $(292,000)
==============================================
Total benefit, continuing operations $ (6,000) $(267,000) $(475,000)
Total expense, discontinued operations - 204,000 183,000
----------------------------------------------
Total benefit expense $ (6,000) $( 63,000) $(292,000)
==============================================
As a result of net losses for the years ended December 31, 2007 and 2006,
management believes a valuation allowance on its deferred tax assets is
necessary. The components of the deferred taxes asset as of December 31 are as
follows:
2007 2006
--------------------------------------
Deferred tax assets (current):
Net operating loss carry-forwards $ 271,000 $ 191,000
Inventory reserve 268,000 258,000
Deferred revenue (17,000) -
Bad debt reserves 172,000 11,000
--------------------------------------
694,000 460,000
--------------------------------------
Deferred tax liabilities (long-term):
Property and equipment 2,000 (3,000)
Intangibles 21,000 (12,000)
--------------------------------------
23,000 (15,000)
--------------------------------------
Deferred tax assets 717,000 445,000
Valuation allowance (717,000) (445,000)
--------------------------------------
Net deferred tax assets $ - $ -
======================================
As of December 31, 2007, we had total net operating loss carry-forwards of
$714,000 million, which start expiring in 2023.
F-21
5. Income Taxes, continued
A reconciliation of federal income taxes computed by multiplying pretax net loss
by the statutory rate of 35% to the provision for income taxes is as follows at
December 31:
2007 2006 2005
---------------------------------------------------
Tax (benefit) expense computed at statutory rate $(248,000) $(190,000) $ 350,000
State income tax (21,000) 42,000 27,000
Valuation allowance 272,000 445,000 (680,000)
Effect of permanent differences 16,000 (5,000) (7,000)
Other (primarily net operating losses) (25,000) (355,000) 18,000
---------------------------------------------------
Provision for income taxes benefit $ (6,000) $ (63,000) $(292,000)
===================================================
As of December 31, 2005, the Company determined that a valuation allowance was
not necessary as management believes that it is more likely than not that the
net deferred tax assets will be realized. As of December 31, 2007 and 2006, an
evaluation of the allowance determined that it was more likely than not that the
net operating loss asset may not be realized, and therefore a valuation
allowance for the full amount was recorded. The valuation allowance increased by
$272,000 in 2007, $445,000 in 2006 and decreased by $680,000 in 2005.
6. Sales to Major Customers
The Company had sales from continuing operations to two customers in 2007 that
represented approximately 17% and 15%, respectively, of our annual sales. The
Company had sales from continuing operations to two customers in 2006 that
represented approximately 33% and 16%, respectively, of our annual sales. The
Company had sales from continuing operations to one customer in 2005 that
represented approximately 52% of our annual sales. The concentration of the
Company's business with a relatively small number of customers may expose us to
a material adverse effect if one or more of these large customers were to
experience financial difficulty or were to cease being customer for
non-financial related issues. At December 31, 2007 three customers represented
approximately 31%, 11% and 11%, respectively, of our trade accounts receivable.
At December 31, 2006, three customers represented approximately 19%, 16% and
11%, respectively, of our trade accounts receivable.
7. Significant Suppliers
With regard to continuing operations during 2007 the Company purchased a
majority of its product from two vendors, during 2006, the Company purchased
approximately 39% of its product from two vendors, and in 2005, the Company
purchased approximately 22% of its product from two vendors. The loss of any of
these vendors could have a material adverse impact on the operations of the
Company.
8. Leasing Activities
The Company leases its facilities under non-cancellable operating leases through
2010. Minimum future rentals payable under the leases are as follows:
2008 259,000
2009 271,000
2010 163,000
----------
$ 693,000
==========
F-22
8. Leasing Activities, continued
Rent expense from continuing operations was $289,000, $245,000 and $247,000 for
the years ended December 31, 2007, 2006 and 2005, respectively.
Certain of the Company's office space leases are structured to include scheduled
and specified rent increases over the lease term. The Company has recognized the
effect of these rent escalations and periods of free rent on a straight-line
basis over the lease terms.
Property and equipment included the following amounts for leases that have been
capitalized at December 31, 2007 and December 31, 2006.
2007 2006
---------------------------
Machinery and Equipment $ 240,000 $ 215,000
Computers and Software 133,000 52,000
Furniture and Fixtures 13,000 13,000
---------------------------
386,000 280,000
Less accumulated amortization (234,000) (139,000)
---------------------------
$ 152,000 $ 141,000
===========================
The Company recorded amortization expense of $96,000, $50,000 and $39,000,
respectively, on assets recorded under capitalized leases for 2007, 2006 and
2005.
Future minimum lease payments under capital leases are as follows at December
31, 2007:
2008 $ 86,000
2009 51,000
2010 21,000
---------
Total minimum lease payments 158,000
Amount representing interest (19,000)
---------
Present value of lease payments $ 139,000
---------
Less current portion (56,000)
---------
Non-current portion $ 83,000
=========
9. Defined Contribution Plan
In November 1999, the Board of Directors approved the establishment of the
Antennas America, Inc. 401(k) Plan for employee contributions effective January
1, 2000. The name of the Plan was subsequently changed to the ARC Wireless
Solutions, Inc. 401(k) Plan. The Plan allows for discretionary matching in
Company common stock of employee contributions by the Company if the Company has
a profit for the preceding year. Effective January 1, 2007 the Plan was amended
to elect a Safe Harbor Contribution of 3% of a participant's compensation. For
the year ended December 31, 2007 the Company's Safe Harbor Contribution was
$87,000.
F-23
10. Commitments
Purchase obligations include agreements to purchase goods or services that are
enforceable and legally binding and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction.
Purchase obligations exclude agreements that are cancelable without penalty. At
December 31, 2007, non-cancellable purchase obligations totaled approximately
$808,000.
Effective February 1, 2008, the Company's Board of Directors approved an
employment agreement between the Company and Randall P. Marx, the Company's
Chief Executive Officer, effective as of January 31, 2008. Mr. Marx has served
as the Company's Chief Executive Officer from November 1991 to July 2000 and
from February 2001 to the present. The employment agreement was recommended to
the Board by the Compensation Committee. The agreement provides for annual
compensation of $250,000 in 2007, $275,000 in 2008 and $300,000 in 2009, with 5%
annual increases if the agreement is extended. The agreement may be extended by
mutual consent on an annual basis for 2010, 2011 and 2012. Mr. Marx will receive
a bonus of $25,000 for 2007 and will also be eligible to receive a bonus in 2008
and subsequent years, ranging from $50,000 to $300,000, if certain net income
goals are achieved.
Effective November 1, 2007, the Company entered into a two year employment
agreement with Mr. Monty R. Lamirato as the Company's Chief Financial Officer,
which he has served since June 2001. The agreement provides for annual
compensation of $165,000 in the first year and $175,000 in the second year.
Effective November 1, 2007, the Company entered into a five year employment
agreement with Mr. Steven C. Olson, as President and Chief Technology Officer of
the Company's Wireless Communications Solutions Division. Mr. Olson has been
with the Company since 2001. The agreement provides for annual base compensation
of $200,000 in 2007 increasing annually to $245,000 in 2011. Mr. Olson shall
also be entitled to bonuses ranging from $5,000 to $100,000 annually contingent
upon the Wireless Communications Solutions Division achieving certain net income
targets. Mr. Olson earned a bonus of $7,500 for 2007.
Effective November 1, 2007, the Company entered into a three year employment
agreement with Mr. Richard A. Anderson, as the Company's Executive Vice
President. Mr. Anderson has been with the Company since 1994. The agreement
provides for annual compensation of $125,000.
11. 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 sale of Winncom on October 31, 2006, which was the
Distribution segment, distribution is no longer classified as an operating
segment but is classified as discontinued operations in the accompanying
consolidated financial statements for all periods presented.
F-24
11. Segment Information, continued
For the year ended December 31, 2007, approximately 13% of our sales from
continuing operations were from customers outside North America, and for the
years ended December 31, 2006 and 2005, less than 7% of our sales from
continuing operations were from customers outside North America.
Financial information regarding the Company's two operating segments, which
includes the elimination of intersegment sales, for the years ended December 31,
2007, 2006 and 2005 are as follows:
Manufacturing Cable Corporate Total
------------------------------------------------------------------------
Net Sales 2007 $ 7,931,000 $ 117,000 -- $ 8,048,000
2006 6,087,000 383,000 -- 6,470,000
2005 6,442,000 294,000 -- 6,736,000
Net income (loss) from 2007 (131,000) 40,000 (612,000) (703,000)
continuing operations 2006 (467,000) (7,000) (1,132,000) (1,606,000)
2005 1,390,000 (34,000) (783,000) 573,000
Income (loss) before income 2007 (137,000) 40,000 (612,000) (709,000)
taxes, continuing operations 2006 (734,000) (7,000) (1,132,000) (1,873,000)
2005 914,000 (34,000) (782,000) 98,000
Identifiable assets, 2007 3,249,000 108,000 14,555,000 17,912,000
continuing operations 2006 3,082,000 220,000 14,673,000 17,975,000
2005 3,730,000 192,000 (957,000) 2,965,000
Capital expenditures, 2007 99,000 -- -- 99,000
continuing operations 2006 80,000 -- -- 80,000
2005 74,000 -- -- 74,000
Depreciation and 2007 181,000 -- -- 181,000
amortization, continuing 2006 162,000 -- -- 162,000
operations 2005 184,000 3,000 -- 187,000
Interest expense, 2007 24,000 -- -- 24,000
continuing operations 2006 124,000 -- -- 124,000
2005 123,000 -- -- 123,000
Corporate represents the operations of the parent Company, excluding segment eliminations.
F-25
EXHIBIT INDEX
Exhibit Number Description
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3.1 Amended and Restated Articles of Incorporation dated October 11, 2000 (1)
3.2 Bylaws of the Company as amended and restated on March 25, 1998 (2)
10.1 Agreement between and among Winncom Technologies Inc., Winncom Technologies Corp. and the
Company dated May 24, 2000 (3)
10.2 Stock Purchase Agreement, dated as of July 28, 2006, by and among Bluecoral Limited, Winncom
Technologies Corp. and The Company (4)
10.3 Escrow Agreement, dated July 28, 2006, by and among the Company, Bluecoral Limited and
Consumer Title Services, LLC (4)
10.4 Employment Agreement effective January 31, 2008 between the Company and Randall P. Marx (5)
10.5 Employment Agreement effective November 1, 2007 between the Company and Monty R. Lamirato (6)
10.6 Employment Agreement effective November 1, 2007 between the Company and Steve C. Olson (6)
10.7 Employment Agreement effective November 1, 2007 between the Company and Richard L. Anderson (6)
14.1 Amended and Restated Code of Ethics (7)
21.1 Subsidiaries of the Registrant
31.1 Officers' Certifications of Periodic Report pursuant to Section 302 of Sarbanes-Oxley Act of
2002
32.1 Officers' Certifications of Periodic Report pursuant to Section 906 of Sarbanes-Oxley Act of
2002
99.1 Nominating Policies and Procedures
- ------------------
(1) Incorporated by reference from the Company's Form 10-KSB for December 31, 2000 filed on April 2, 2001.
(2) Incorporated by reference from the Company's Form 10-KSB for December 31, 1997 filed on March 31, 1998.
(3) Incorporated by reference from Exhibit 2.1 of the Company's Form 8-K filed on June 8, 2000.
(4) Incorporated by reference from the Company's Form 8-K/A filed on August 2, 2006.
(5) Incorporated by reference from the Company's Form 8-K filed on February 7, 2008.
(6) Incorporated by reference from the Company's Form 8-K file November 8, 2007d .
(7) Incorporated by reference from the Company's Form 8-K filed on November 13, 2006.
EXHIBIT 21
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SUBSIDIARIES
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ARC Wireless Hong Kong Limited
StarworksWireless,Inc.