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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10 - K
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(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, 2006.
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 [ ]
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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes [ ] No [X]
As of June 30, 2006, 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 $14,925,694. This calculation is based upon the
average of the bid and ask price of $7.00 (adjusted for the subsequent 1-for-50
reverse stock split) of the stock on June 30, 2006 as reported by OTC Bulletin
Board. 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.
The number of shares of the registrant's $.0005 par value common stock
outstanding as of February 28, 2007 was 3,087,988.
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2
ARC Wireless Solutions, Inc.
Form 10-K for the Year Ended December 31, 2006
Table of Contents
Page No.
PART I
Item 1. Business........................................................................... 4
Item 1a. Risk Factors....................................................................... 13
Item 1b. Unresolved Staff Comments.......................................................... 15
Item 2. Properties......................................................................... 15
Item 3. Legal Proceedings.................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................................ 16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities .................................................... 16
Item 6. Selected Consolidated Financial Data............................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operation.......................................................................... 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................... 28
Item 8. Financial Statements and Supplementary Data........................................ 28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................... 28
Item 9A. Controls and Procedures............................................................ 28
Item 9B. Other Information.................................................................. 28
PART III
Item 10. Directors and Executive Officers of the Registrant................................. 29
Item 11. Executive Compensation............................................................. 32
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
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Overview
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Our Company
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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
("Wincomm"), 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.
Principal Products
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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, Telefonica and Qwest mobile phone carrier networks as well
as other carrier networks across the United States and Latin America. We not
only supply our base station antenna products directly to the carriers, but
through other channels, such as OEMSs and distributors. Our base station antenna
products have been supplied to Alcatel, Bechtel, General Dynamics, Tessco,
Domital and Sprint North Supply. New base station antennas are being designed
for fixed wireless high speed voice and data systems.
Portable Antennas
-----------------
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, 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 "F"
antenna. The Freedom Antenna(R) 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 "F" Antenna is designed mainly to work with laptop
computers and metering devices in the 800 MHz to 900 MHz frequency range. 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
-------------------
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 added several new designs including 3.5GHz and 5.8GHz
flat panel antennas in 2004.
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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In 2005, the Company completed the construction of 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 will 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
----------------------------
Unlicensed wireless products use frequencies that require a license to
manufacture but not a license to use. Winncom's primary products are the
Wi-Fi(R), WiMAX(TM), and other license free products operating in the 2.4GHz to
5.8GHz and 60GHz frequency ranges for most license free standards. Any business
or consumer may use these products as long as they do not interfere with other
users. Winncom marketed products manufactured by Alvarion, Axxcelera,
Bridgewave, Cisco, Proxim("Terabeam"), Motorola, Nomadix, Orthogon Systems,
Colubris and BellAir, all of which are leaders in the unlicensed communications
hardware market. These products are used in high-speed (up to 1Gb)
point-to-point and point-to-multi-point wireless networking applications,
including, among others, internet access, hot spots, local and wide area
networks (LAN/WAN), Voice Over IP (VoIP), telco applications and industrial
process automation and data acquisition.
Licensed Wireless Products
--------------------------
Licensed wireless products require a Federal Communication Commission
("FCC") license to operate on a specific frequency in a geographic area. Winncom
distributed point-to-point microwave products including Alvarion, Avante
(Witcom) and Sagem. These microwave products are used as a backbone to connect
Service Providers cell sites or enterprise multiple locations for data and voice
applications.
Voice Over Internet Protocol (VoIP)
-----------------------------------
VoIP allows voice communications to be placed over standard Internet
networks. This VoIP is critical for emerging Wireless Internet Service Providers
so they can offer complete voice and data service to generate revenue to compete
with DSL and Cable Modem service. Winncom distributed Avaya, Cisco, Lucent,
Multitech, Polycom and Sagem VoIP products and Broadvox VoIP solutions for
enterprise and residential markets. VoIP products combined with wireless
environment delivers complete communication solutions for users of mobile
devices such as PDAs, WEB PADs and Tablet PCs.
Antennas
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Winncom sold both 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. Winncom offered directional panel antennas,
as well as a variety of sectorized and omni-directional, amplified CPE antennas
and ethernet CPE antennas for wireless Internet access and various data and
voice applications.
Accessories
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Winncom was a full service value-added distributor, specializing in the
design and development of a host of accessory products. These products included
the amplifiers, 2.4GHz-5.8GHz, and 2.4GHz-5.8GHz frequency converters, filters,
power supplies, power cords, and environmental enclosures necessary for the
installation and optimum performance of a wireless network. The 2.4GHz to 5.8GHz
frequency converter, designed by Winncom engineers, enhanced the deployment of
the readily available low-cost 2.4GHz wireless WAN/ LAN equipment sold by
Winncom. The main applications for this new solution included wireless Internet
access, campus wireless LANs and wireless spectrum WANs. The frequency converter
provided additional transmission channels in the unlicensed spectrum resulting
in a considerable increase in bandwidth capacity. It also promoted usage of the
5.8GHz spectrum to supplement network performance where the 2.4GHz spectrum is
saturated. The product was sold both domestically and internationally.
6
Network Infrastructure Product
------------------------------
Winncom offered a complete line of high-performance voice and data
infrastructure and security products by AVAYA Communication, Cisco, Comet,
Lucent Technologies, Multitech, Polycom and Sagem. The virtual private network
systems (VPN) enable organizations of all sizes, from small businesses to large
enterprises and managed data service providers, to securely connect remote
users, branch offices, business partners, and customers, taking full advantage
of the cost savings and productivity enhancing benefits of virtual private
networks. The voice and data products are designed for the new generation of
network (NGN) architectures that cost-effectively integrate voice, video, and
data on a single infrastructure, while providing reliability, ubiquity, and
security to meet the challenges and dynamic requirements of the enterprise
business environment from converged networks to e-business solutions.
Other Products
--------------
Winncom offered 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. Winncom
also offered a variety of environmental enclosures for a broad range of wireless
products for outdoor applications.
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. We are continuing our efforts to increase
our sales of cable and related products to complement our overall wireless
business.
Marketing and Distribution
- --------------------------
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
7
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 currently 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.
Winncom was a value added distributor that supports distribution of
products with internal sales, technical support, system design and feasibility
studies, installation and training. Winncom's customer base comprised networking
value added resellers ("VARs"), system integrators, ISPs, competitive local
exchange carriers ("CLECs") and incumbent local exchange carriers ("ILECs").
Winncom promoted and supported the one-stop-source philosophy for wireless data
networking products and services. Consistent with our one-stop-source approach,
Winncom marketed and sold a number of its own products as well as private label
products that fit into our marketing philosophy. We believe we have an advantage
over the competition due to our knowledge of wireless networking, better product
availability, in-house technical expertise and customer support and can turnkey
the implementation of most wireless network projects or applications.
Winncom continuously expanded its domestic and international marketing and
advertising efforts through print media, trade shows and via the Internet. The
main marketing focus was to expand the reseller base of customers, which were
active in medical, healthcare, enterprise, government, education and industrial
market segments. Winncom was also expanding its marketing efforts to sell
service providers and OEM markets. Additionally, Winncom continually expanded
its wireless certification training programs, including vendor-authorized
certification for VARs. Winncom provided wireless awareness seminars for system
integrators and consultant/design firms. We also had alliances with our vendors
that include road-shows, authorization/certification programs, trade shows and
advertising.
Winncom's suppliers generally warranted the products they distribute and
allowed returns of defective products, including those returned to us by our
customers. Winncom did not independently warrant the products they distribute;
however, they did warrant their services and the products that they build to
order from components purchased from other sources. Provision for estimated
warranty costs is recorded at the time of sale and periodically adjusted to
reflect actual experience. Historically, warranty expense has not been material.
Winncom had written distribution agreements with many of its suppliers;
however, these agreements usually provide for nonexclusive distribution rights
and often include territorial restrictions that limit the countries in which
they can distribute the products. The agreements were generally short term,
subject to periodic renewal, and often contain provisions permitting termination
by either party without cause upon relatively short notice. A supplier who
elects to terminate a distribution agreement generally will repurchase its
products carried in the distributor's inventory.
In October 2004, Winncom entered into a "Frame" Agreement (Agreement of
Understanding) with Joint Stock Company Kazakhtelecom ("Kazakhtelecom"),
Kazakhstan's national telecommunications operator for the Republic of
Kazakhstan, that gave Winncom the right, subject to Winncom obtaining 100%
financing for the project upon terms and conditions acceptable to Kazakhtelecom,
and subject to a number of other matters, to undertake, on a turnkey basis,
development of a modern telecommunications infrastructure to be located on the
left bank of the City of Astana, Kazakhstan. With several competing bids,
Winncom was awarded the contract after several months of negotiations. The total
cost of the project was for a total of approximately $55,000,000.
On May 9, 2005, the Export Import Bank of the United States ("Ex-Im Bank")
Board of Directors approved the majority of the financing for a project awarded
to Winncom for the development of a modern telecommunications infrastructure to
be located on the left bank of the City of Astana, Kazakhstan. The Ex-Im Bank is
the official export credit agency of the United States. Ex-Im Bank's mission is
to assist in financing the export of U.S. goods and services to international
8
markets. In August 2005, Societe Generale bank, New York, NY, committed to
finance up to $11 million of the remaining amount necessary for the previously
announced turnkey telecommunications project in Kazakhstan. Societe Generale New
York, NY, would be the lender for the entire $55 million to JSC Kazakhtelecom,
of which the Ex-Im Bank of New York had previously agreed to guarantee up to $48
million. The primary guarantor for repayment of the $55 million would be
Kazkommertsbank, Kazakhstan's largest bank.
In January 2006, the Ex-Im Bank guaranteed portion of financing totaling
approximately $48 million was closed and JSC Kazakhtelecom committed to the
balance of the $55 million tender to either pay directly to Winncom or through a
loan from other lenders.
Societe Generale loaned the money to Kazkommertsbank on behalf of the end
user, JSC Kazakhtelecom. JSC Kazakhtelecom had approved the work program and
timeline for part of the project, submitted by Winncom earlier, which was a
prerequisite prior to the closing of the previously announced $2.3 million
financing for Winncom to accelerate the installation of the fiber optic cable.
Winncom completed the installation of the fiber optic cable in October, 2005.
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.
Winncom offered a wide variety of high performance wireless system accessories
including antennas, amplifiers, lightning arrestors, custom cable assemblies and
environmental enclosures, as well as wireless access points, bridges, routers,
client adapters, modems, T1/E1, and licensed microwave systems from leading
manufacturers.
Starworks produces all cable jumpers and assemblies internally. External
purchases include bulk cable, coaxial connectors, and packaging materials.
Research And Development
- ------------------------
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 2006, 2005 and 2004. We spent approximately $363,000 $315,000
and $250,000 on R&D in 2006, 2005 and 2004, 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.
9
Employees
- ---------
At December 31, 2006, we had 40 full time employees including 23 in
manufacturing and distribution, 5 in sales and customer support, 4 in
engineering and product development, and 8 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
- -----------
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.
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 valid through the year 2007,
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,
which 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 the patent.
10
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.
We have also filed a utility patent application with Mr. Olson, the inventor,
for technology that is for our Omni-Dualbase(TM) antenna. Mr. Olson has
permanently assigned to us all patent and other rights in the products covered
by this utility patent and patent application, and all other products that have
been and will be developed while employed by us. This patent application 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.
We currently have seven trademarks, ANTENNAS AMERICA(TM), AIRBASE(TM),
DUALBASE(TM), UNIPAK(TM), FREEDOM ANTENNA(TM), EXSITE(TM), OMNIBASE(TM) and
PARITY(TM) that are registered marks. We also have in use the following
trademarks, which we anticipate will become registered: ARC VLPA and FREEDOM
ANTENNA PLUS.
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. (The number of units and
price per unit have been adjusted to reflect the one-for fifty reverse split in
February 2007 and the one-for-four reverse split in April 1989). 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
11
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 of
shares of our common stock 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 subsidiary, Winncom Technologies
Corp. ("Winncom"), 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 sale 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.
Wincomm was sold effective October 31, 2006 (see Note 2 to the consolidated
financial statements.
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 was required to refund 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.
12
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:
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 and 2006, 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 14 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 have limited financial resources available that may restrict our ability
to grow. Additional capital from sources other than our operating cash flow
may be necessary to develop new products. We cannot predict that this
financing will be available from any source.
5. 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.
13
6. Our success depends on the availability of efficient overseas labor and we
cannot predict that we will always have access to this labor in the
futuret. We are transitioning our production to China and are dependent on
efficient workers for these functions. We cannot predict that our contract
manufacturers in China will will continue to be available to us at a cost
consistent with our budget.
7. 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.
8. 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.
9. Historically, there has been an extremely limited public market for our
shares and we cannot predict that recent trading volume will be sustained.
Historically, there has been an extremely limited public market for our
shares. We cannot predict that the recent trading volume will be sustained.
The prices of our shares are highly volatile. Due to the relatively low
price of the shares, many brokerage firms may not effect transactions and
may not deal with low priced shares, as it may not be economical for them
to do so. This could have an adverse effect on sustaining the market for
our shares. Further, we believe it is improbable that any investor will be
able to use our shares as collateral in a margin account. For the
foreseeable future, trading in the shares, if any, will occur in the
over-the-counter market and the shares will be quoted on the OTC Bulletin
Board. On February 28, 2007, the low bid price for the common stock was
$4.82, the high asked price was $4.98 and the closing sale price was $4.98.
Because of the matters described above, a holder of our shares may be
unable to sell shares when desired, if at all.
10. 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.
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;
14
o losses resulting from significant credit exposure to reseller
customers and negative trends in their businesses;
o reductions in credit ratings and/or unavailability of adequate
capital;
o failure to attract new sources of business from expansion of products
or services or entry into new markets;
o inability to manage future adverse industry trends;
o future periodic assessments required by current or new accounting
standards resulting in additional charges; and
o Unstable conditions in China.
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 and warehouse space for our corporate
office, engineering and limited manufacturing of antennas and foe use by each of
our segments. This lease commenced on July 1, 2003 and expires on June 30, 2010.
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, 2006 or at the date of this
report that management believes will have a material impact on the financial
position or operations of the Company.
15
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
The Company held its annual meeting of shareholders on October 31, 2006 and
2,872,585 shares were represented at the meeting, after giving effect to the
one-for-fifty reverse stock split in February 2007. The following are the
results of the voting on matters submitted to the shareholders, all of which
were approved:
(1) For election of the following nominees as directors:
Name Number of Shares For Withheld
---- -------------------- --------
Sigmund A. Balaban 2,857,516 15,069
Donald A. Huebner 2,842,995 29,589
Randall P. Marx 2,813,255 59,330
Robert E. Wade 2,857,305 15,279
(2) Proposal to approve of the sale of the Company's subsidiary Winncom
Technologies Corp.
Number of Shares:
1,749,220 (For) 170,068 (Against) 5,073 (Abstain) 948,122 (Not Voting)
(3) Proposal to ratify the selection of HEIN + Associates, LLP as the Company's
independent registered public accounting firm.
Number of Shares:
2,863,592 (For) 3,516 (Against) 5,447 (Abstain) 0 (Not Voting)
(4) Proposed recommendation by the Board Of Directors to authorize the Board Of
Directors to determine whether to effect a reverse stock split of our
outstanding Common Stock at the time and at the ratio between 1 for 20 and
1 for 50 that the Board of Directors deems appropriate.
Number of Shares:
2,569,126 (For) 302,052 (Against) 1,405 (Abstain) 0 (Not Voting)
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
- ------------------------------------------------------------------------------
Our common stock was traded in the over-the-counter market, and prices for our
shares are quoted on the OTC Bulletin Board under the trading symbol "ARCS"
until February 12, 2007 when it began trading under the symbol "ARCW" effective
with the 1 for 50 reverse stock split described below. Because trading in our
shares is so limited, prices can be highly volatile.
On February 9, 2007, we announced a one-for-fifty 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 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 authorized shares of the Company's preferred stock remained at 2 million.
16
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 also proportionately reduced as of the Effective
Date to reflect the reverse stock split.
The table below represents the range of high and low sales prices for our common
stock during each of the quarters in the past two fiscal years as reported by
the OTC Bulletin Board. These over-the-counter quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessary
represent actual transactions. The prices have been adjusted for the 1-for-50
reverse stock split that was effective on February 12, 2007.
Common Stock
------------
Sales Price
-----------
Quarter Ended High Low
------------- ---- ---
March 31, 2005 $9.50 $6.50
June 30, 2005 8.00 5.00
September 30, 2005 7.00 5.00
December 31, 2005 6.50 4.50
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
On February 28, 2007, the closing sales price for our common stock was $4.98 and
the approximate number of our shareholders of record was 419. 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, 2006, we recorded the issuance of 1,185
shares of common stock to directors for outstanding obligations for directors'
fees in the amount of $8,000.
On February 21, 2006, the Company granted 2,500 options were granted to two
outside directors with an exercise price of $6.50. The option have a two year
terms and vest 20% for each meeting attended by the respective director.
The securities were issued pursuant to exemptions from registration set forth in
Section 4(2) of the Securities Act of 1933, as amended, and Regulation D
promulgated thereunder.
17
Equity Compensation Plan Information.
- -------------------------------------
Securities authorized for issuance under our equity compensation plans as of
December 31, 2006 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 49,500 $7.35 125,333
Equity compensation plans not
approved by security holders 0 - -
------------------- ------------------- -----------------------
Total 49,500 $7.35 125,333
------------------- ------------------- -----------------------
Share Performance Graph
- -----------------------
The following graph shows a comparison of our cumulative total shareholder
return, the Nasdaq Global Market (U.S.), and a peer group (the "Peer Group") of
four companies selected by us, whose primary business includes the manufacture
and sale of antennas and distribution of wireless communication products. This
graph assumes that $100 was invested on December 31, 2001 in our common stock
and in the other indices and in each case, assumes reinvestment of all
dividends. Note that historic stock price performance does not necessarily
indicate future stock price performance.
GRAPHIC ON FILE
18
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,
-----------------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Revenues $6,470,000 $6,736,000 $6,449,000 $5,618,000 $ 7,497,000
Gross profit 1,449,000 2,730,000 2,509,000 1,828,000 2,896,000
Income (loss) from continuing
operations (1,606,000) 573,000 (320,000) (729,000) 173,000
Income from discontinued
operations 864,000 719,000 1,008,000 444,000 134,000
Net income (loss) $(742,000) $1,292,000 $ 688,000 $ (285,000) $ 307,000
Earnings (loss) per share:
Basic and diluted continuing
operations $(.52) $.19 $(.11) $(.24) $.06
Earnings (loss) per share:
Basic and diluted discontinued
operations $.28 $.23 $.33 $.15 $.04
Earnings (loss) per share:
Basic and diluted $(.24) $.42 $.22 $(.09) $.10
-----------------------------------------------------------------------------
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Cash and cash equivalents $15,720,000 $ 64,000 $ 321,000 $ 227,000 $ 265,000
Working capital 15,679,000 16,387,000 7,289,000 7,049,000 3,502,000
Total assets 17,975,000 33,489,000 22,493,000 22,740,000 23,455,000
Total liabilities 1,888,000 16,679,000 7,031,000 7,968,000 8,451,000
Stockholders' equity $16,087,000 $16,810,000 $15,462,000 $14,772,000 $15,004,000
19
The following table sets forth selected unaudited consolidated financial data
for each of the Company's last eight fiscal quarters:
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 166,000 469,000 394,000 420,000
Income (loss) from continuing
operations (722,000) (331,000) (274,000) (279,000)
Income from discontinued operations
91,000 $141,000 324,000 308,000
Net income (loss) $ (631,000) $ (190,000) $ 50,000 $ 29,000
Earnings (loss) per share:
Basic and diluted continuing
operations $(.23) $(.11) $(.09) $(.09)
Earnings (loss) per share:
Basic and diluted discontinued
operations $ .02 $.05 $ .11 $ .10
Net income (loss) per share $(.21) $(.06) $ .02 $ .01
2005
December 31 September 30 June 30 March 31
----------- ------------ ------- --------
Net sales $1,918,000 $2,041,000 $1,691,000 $ 1,086,000
Gross profit 749,000 866,000 761,000 354,000
Income (loss) from continuing
operations 575,000 138,000 75,000 (215,000)
Income from discontinued operations
371,000 102,000 132,000 114,000
Net income (loss) $946,000 $ 240,000 $207,000 $(101,000)
Earnings (loss) per share:
Basic and diluted continuing
operations $.19 $.04 $.03 $(.07)
Earnings (loss) per share:
Basic and diluted discontinued
operations $.12 $.04 $.04 $ .04
Net income (loss) per share $.31 $.08 $.07 $(.03)
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
Financial Condition
At December 31, 2006, we had approximately $15.7 million in working capital,
which is an increase over working capital at December 31, 2005 of $7.8 million.
The reason for the increase is the sale of Winncom on October 31, 2006, 2006 for
$17 million in cash.
We had total assets of $18 million as of December 31, 2006 as compared with
$33.5 million as of December 31, 2005. The decrease is due to sale of Winncom on
October 31, 2006.
Liabilities decreased from $16.7 million at December 31, 2005 to $1.9 million at
December 31, 2006 as a result of the sale of Winncom on October 31, 2006,
whereby the buyer assumed all of Winncom's debt in connection with the sale.
20
Management believes that current working capital and renewed bank lines of
credit, will be sufficient to allow the Company to maintain its operations
through December 31, 2007 and into the foreseeable future.
Long Term Contract Of Winncom
In October 2004, Winncom entered into a "Frame" Agreement (Agreement of
Understanding) with Joint Stock Company Kazakhtelecom ("Kazakhtelecom"),
Kazakhstan's national telecommunications operator for the Republic of
Kazakhstan, that gives Winncom the right, subject to Winncom obtaining 100%
financing for the project upon terms and conditions acceptable to Kazakhtelecom,
and subject to a number of other matters, to undertake, on a turnkey basis,
development of a modern telecommunications infrastructure to be located on the
left bank of the City of Astana, Kazakhstan. With several competing bids,
Winncom was awarded the contract after several months of negotiations. The total
cost of the project is for a total of approximately $55,000,000.
On May 9, 2005, the Export Import Bank of the United States ("Ex-Im Bank") Board
of Directors approved the majority of the financing for a project awarded to
Winncom for the development of a modern telecommunications infrastructure to be
located on the left bank of the City of Astana, Kazakhstan. The Ex-Im Bank is
the official export credit agency of the United States. Ex-Im Bank's mission is
to assist in financing the export of U.S. goods and services to international
markets. In August 2005, Societe Generale bank, New York, NY, committed to
finance up to $11 million of the remaining amount necessary for the previously
announced turnkey telecommunications project in Kazakhstan. Societe Generale New
York, NY, would be the lender for the entire $55 million to JSC Kazakhtelecom,
of which the Ex-Im Bank of New York had previously agreed to guarantee up to $48
million. The primary guarantor for repayment of the $55 million would be
Kazkommertsbank, Kazakhstan's largest bank.
In January 2006, the Ex-Im Bank guaranteed portion of financing totaling
approximately $48 million was closed and JSC Kazakhtelecom committed to the
balance of the $55 million tender to either pay directly to Winncom or through a
loan from other lenders.
Societe Generale was lending the money to Kazkommertsbank on behalf of the end
user, JSC Kazakhtelecom. JSC Kazakhtelecom had approved the work program and
timeline for part of the project, submitted by Winncom earlier, which was a
prerequisite prior to the closing of the previously announced $2.3 million
financing for Winncom to accelerate the installation of the fiber optic cable.
Winncom completed the installation of the fiber optic cable in October, 2005. As
discussed above, we sold Winncom on October 31, 2006 and all income for Winncom
received prior to the sale is described in income from discontinued operations.
21
Off-Balance Sheet Arrangements
- ------------------------------
We do not have any off-balance sheet arrangements.
Contractual Obligations as of December 31, 2006.
Payments Due By Period
------------------------------------------------
Less than 1 More than 5
Total Year 1-3 Years 3-5 Years Years
- ----------------------------------- ---------- ------------ ----------- ----------- -----------
Lines of credit $ 830,000 $ 830,000 - - -
- ----------------------------------- ---------- ------------ ----------- ----------- -----------
Long-term debt - - - - -
- ----------------------------------- ---------- ------------ ----------- ----------- -----------
Capital lease obligations (1) $ 64,000 $ 39,000 $ 25,000 - -
- ----------------------------------- ---------- ------------ ----------- ----------- -----------
Operating leases $ 939,000 $ 246,000 $530,000 $163,000 -
- ----------------------------------- ---------- ------------ ----------- ----------- -----------
Purchase obligations (2) $ 776,000 $ 776,000 - - -
- ----------------------------------- ---------- ------------ ----------- ----------- -----------
(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.
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 due to; 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
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 year ended
December 31, 2006 and 2005, respectively.
22
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
then 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.
23
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.
Results of Continuing Operations for the Year Ended December 31, 2005 compared
to the Year Ended December 31, 2004
- ------------------------------------------------------------------------------
Total revenues increased 4% from $6.4 million for the year ended December 31,
2004 to $6.74 million for the year ended December 31, 2005. The $287,000
increase in revenues during the year ended December 31, 2005, is primarily
attributable to an increase in revenues from the Wireless Communications
Solutions Division from $6.4 million for the year ended December 31, 2004 to
$6.6 million for the year ended December 31, 2005. The increase in revenues from
the Wireless Communication Solutions Division in 2005 compared to 2004 occurred
despite management's decision to withhold shipments and minimize the Company's
risk to a significant customer whose credit privileges were suspended due to
delinquent payments. The customer announced a recapitalization of its company
and shipments commenced again in June of 2005.
Gross profit margins were 41% and 39% for the year ended December 31, 2005 and
2004, respectively. The increase in gross margin for the year ended December 31,
2005 as compared to the year ended December 31, 2004 is primarily the result of
increased sales in certain product lines that have slightly higher margins than
other product lines.
Selling, general and administrative expenses (SG&A) decreased by $168,000 for
the year ended December 31, 2005 compared to the year ended December 31, 2004.
Certain costs were incurred in 2004 that were not recurring in 2005, such as an
employer matching contribution into the 401(K) plan and a stockholder meeting
cost. In addition, legal fees were lower in 2005 than in 2004. SG&A as a percent
of revenue decreased from 42% for the year ended December 31, 2004 to 38% for
the year ended December 31, 2005 primarily due to a decrease in SG&A expenses
and an increase in revenues in 2005. Salaries and wages, even though they
remained fairly constant comparing 2005 and 2004, remain the largest component
of SG&A, constituting 62% and 58% of the total for the year ended December 31,
2005 and 2004, respectively.
Net interest expense was $123,000 for the year ended December 31, 2005 compared
to $114,000 for the year ended December 31, 2004. While the average balance
outstanding on the line of credit and capital leases was 33% less comparing 2004
to 2005, the prime interest rate increased 40% from 5% at December 31, 2004 to
7% as of December 31, 2005.
We had an income tax benefit of $475,000 for the year ended December 31, 2005
compared to no income tax expense for the year ended December 31, 2004. The 2005
income tax benefit is comprised of two components, taxes currently payable
offset by the restoration of net deferred tax assets of approximately $490,000.
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. In 2005, the Company used its remaining net operating loss
carry-forwards of approximately $412,000 to offset some taxable income whereas
in 2004 the Company used net operating loss carry-forwards to offset all taxable
income.
24
The Company had income from continuing operations of $573,000 for the year ended
December 31, 2005 as compared to a net loss from continuing operations of
$320,000 for the year ended December 31, 2004. As discussed in the previous
paragraphs, the Company had a slight increase in revenues from 2004 to 2005, a
slight increase in gross margin % from 2004 to 2005, a decrease in SG&A from
2004 to 2005 and a net income tax benefit of $475,000 in 2005 all contributing
to the increase in income in 2005 compared to the net loss in 2004.
Results of Discontinued Operations for the Year Ended December 31, 2005 compared
to the Year Ended December 31, 2004
- --------------------------------------------------------------------------------
(See Note 2, Discontinued Operations for the detailed operating results of the
discontinued operations)
Winncom had an 11% increase in revenues comparing the year ended December 31,
2004 to the year ended December 31, 2005. The increase of nearly $3.7 million is
primarily the result of a $2.6 million increase in its long term contract
revenue associated with the Kazakhstan project for which there was none in 2004.
Winncom's normal distribution revenues increased $1 million comparing 2005 to
2004.
Winncom's gross margin % decreased slightly from 15% in 2004 to 14% in 2005.
Gross margin on the long term contract was slightly lower then the gross margin
for normal distribution revenues.
SG&A expenses increased $423,000, or 12% comparing 2005 to 2004, although SG&A
expenses as a percentage of revenue remained constant at 12% for 2005 and 2004.
Most of the SG&A increases in 2005 were associated with international marketing
costs.
Interest expense decreased from $186,000 in 2004 to $161,000 in 2005. The
decease in interest expense is the result of a decrease in the average balance
outstanding on revolving lines of credit and other bank debt from 2004 to 2005
even though the prime interest rate increased from 5% in 2004 to 7% in 2005.
Other income primarily consists of purchase discounts which decreased from 2004
to 2005 due to Winncom suspending early payments to Proxim, its largest vendor.
The increase in the provision for income taxes for the year ended December 31,
2005 compared to the year ended December 31, 2004 is primarily the result of the
utilization of net operating loss carry forwards in 2004 to offset federal
taxable income.
The decrease in the net income from discontinued operations from $1,008,000 for
the year ended December 31, 2004 to $719,000 for the year ended December 31,
2005 is primarily due to a loss of early payment discounts and an increase in
income tax expense.
Critical Accounting Policies and Estimates
The Company's significant accounting policies are summarized in Note 1 of its
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, 2006, our net accounts receivable balance was $620,000.
25
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, 2006, our inventory balance was
$788,000.
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, 2006, we had $98,000 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, 2006 the Company recorded a valuation allowance against deferred taxes of
$445,000
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 $32,000 should be adequate for any
exposure to loss in our accounts receivable as of December 31, 2006. We have
also established reserves for slow moving and obsolete inventories and believe
the current reserve of $694,000 is adequate. We depreciate our property and
equipment over their estimated useful lives and we have not identified any items
that are impaired.
26
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") ratified the
consensus reached by the EITF on EITF Issue No. 05-01, Accounting for the
Conversion of an Instrument That Becomes Convertible Upon the Issuer's Exercise
of a Call Option ("EITF 05-01"). The EITF consensus applies to the issuance of
equity securities to settle a debt instrument that was not otherwise currently
convertible but became convertible upon the issuer's exercise of call option
when the issuance of equity securities is pursuant to the instrument's original
conversion terms. The adoption of EITF 05-01 is not expected to have an impact
on the Company's results of operations or financial condition.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes--an interpretation of FASB Statement No. 109 ("FIN 48"). This
interpretation clarifies the application of SFAS 109 by defining a criterion
than an individual tax position must meet for any part of the benefit of that
position to be recognized in an enterprise's financial statements and also
provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. FIN 48 is effective for
our fiscal year commencing January 1, 2007. At this time, the Company has not
completed its review and assessment of the impact of adoption of FIN 48.
In September 2006, the FASB issued FASB No. 157, "Fair Value Measurements." FASB
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. FASB No. 157 is effective for fiscal years beginning after
November 15, 2007. While the Company is currently evaluating the impact of FASB
No. 157, the Company does not believe the impact will be material to its results
of operations.
In September 2006, the FASB issued FASB No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB No.
87, 88, 106 and 132(R)." FASB No. 158 improves financial reporting by requiring
an employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. FASB No. 158 also improves financial reporting by requiring an employer
to measure the funded status of a plan as of the date of its year-end statement
of financial position, with limited exceptions. FASB No. 158 is effective as of
the fiscal year ending after December 15, 2006. The Company does not believe the
impact of FASB No. 158 will be material to its results of operations.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements," ("SAB 108"). SAB 108 provides guidance on the consideration of
effects of the prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. The SEC staff
believes registrants must quantify errors using both a balance sheet and income
statement approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 is effective for the first annual period ending
after November 15, 2006 with early application encouraged. The adoption of SAB
108 did not have a material impact on our financial statements.
Fair Value Option - In February 2007, the FASB issued FAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159
permits an entity to irrevocably elect fair value on a contract-by-contract
basis as the initial and subsequent measurement attribute for many financial
assets and liabilities and certain other items including insurance contracts.
Entities electing the fair value option would be required to recognize changes
in fair value in earnings and to expense upfront cost and fees associated with
27
the item for which the fair value option is elected. FAS 159 is effective for
fiscal years beginning after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FAS No. 157, Fair
Value Measurements. The Company is currently evaluating the impact, if any, of
adopting FAS 159 on its financial condition or results of operations.
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 existing bank prime rate
(8.25% as of December 31, 2006) plus one and one-half percent. The prime
interest rate increased from 7.25% to 8.25% in 2006. An increase in the bank's
prime interest rates on our line of credit by an additional 2% in 2007 would
increase our yearly interest expense by approximately $7,500, assuming borrowed
amounts remain outstanding at 2006 average levels. 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-27 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) Evaluation of disclosure controls and procedures
Based on an evaluation carried out under the supervision, and with the
participation of our management, including the Chief Executive Officer and the
Chief Financial Officer during the 90 day period prior to the filing of this
report, the Company's Chief Executive Officer and Chief Financial Officer
believe our disclosure controls and procedures, as defined in Securities
Exchange Act Rules 13a-14 and 15d-14, and as of the date of this report, are to
the best of their knowledge, effective.
(b) Changes in internal controls over financial reporting
In connection with the date evaluation discussed in the forgoing paragraph,
the Chief Executive Officer and Chief Financial Officer did not find, and are
not aware of any significant changes in the Company's internal controls over
financial reporting, including any corrective actions with regard to significant
deficiencies and material weaknesses, or in other factors that could
significantly affect these controls to ensure that information required to be
disclosed by the Company, in reports that it files or submits under the
Securities Act of 1934, is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
regulations.
Item 9B. Other Information
- --------------------------
None
28
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 54 Chief Executive Officer, Secretary, Director 1990
Donald A. Huebner 61 Director 1998
Robert E. Wade 60 Director 2005
Sigmund A. Balaban 65 Director 1994
Monty R. Lamirato 51 Chief Financial Officer, Treasurer -
Steve C. Olson 50 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.
Donald A. Huebner. Mr. 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. Mr. 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
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.
29
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. 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. Mr. Wade also serves as a
director in several Templeton investment company funds. He has also been a
director of El Oro and Exploration Co. plc. since 2003. Mr. Wade is a practicing
attorney in New Jersey and is a trustee of the Newark Museum, Newark, NJ.
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.
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.
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 its 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.
30
Compensation Committee
- ----------------------
The Board of Directors currently has a Compensation Committee, consisting of Mr.
Robert E. Wade, the chairman of the Compensation Committee, Mr. Donald A.
Huebner and Mr. Sigmund A. Balaban. Mr. Marc also served on the Compensation
Committee until he resigned effective October 13, 2006.
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.
On October 31, 2006, the Board of Directors adopted certain Nominating Policies
and Procedures, 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 audit Board
members. 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 recently adopted 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
Shareholder and the Shareholder Candidate must comply with certain procedures as
set forth in the Nominating and Policies Procedures. 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 Policies and Procedures, which are attached hereto as Exhibit 99.1
and incorporated herein by reference.
For a Shareholder Candidate recommendation 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.
31
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,
2006, 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 principal
financial officer 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 see 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 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
executive officer, chief financial officer and chief technology officer, which
we collectively refer to as our named executive officers, or NEO's.
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
____ times during 2006, 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
32
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 reflect
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 Chief Executive Officer regarding compensation for other NEO's and key
employees.
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.
33
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 named
executive officers for the achievement and over-performance of our critical
financial and strategic goals.
Long-Term Equity Incentive Compensation
- ---------------------------------------
Long-term equity awards for our executives are granted from our 1997 Stock
Option and Compensation Plan, ("1997 Plan"). The Compensation Committee grants
awards under the 1997 Plan in order to align the interests of the named
executive officers with our stockholders, and to motivate and reward the named
executive officers 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
announcement of favorable information, or after 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. No grants
of stock options were made to any executive officer in 2006.
Other Health, Welfare and Retirement Benefits
- ---------------------------------------------
Health and Welfare Benefits
All full-time employees, including our named executive officers, 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.
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 ___% 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.
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.
34
Employment Agreements and Other Post-Employment Payments
All of our named executive officers 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
35
Summary Compensation Table for 2006
- --------------------------------------------------------------------------------------------------------------------------------
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 ($) ($) ($) ($) ($) Earnings ($) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------------
Randall P. Marx,
Chair, Chief
Executive Officer,
Secretary 2006 245,000 - - - - - - 245,000
- --------------------------------------------------------------------------------------------------------------------------------
Monty R. Lamirato,
Chief Financial
Office, Treasurer 2006 155,000 - - - - - - 155,000
- --------------------------------------------------------------------------------------------------------------------------------
Steven C. Olson,
Chief Technology
Officer 2006 175,000 - - - - - - 175,000
- --------------------------------------------------------------------------------------------------------------------------------
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 $108,000 during fiscal year 2006.
Grants of Plan-Based Awards
There were no stock options or other plan-based awards granted to the executive
officers with respect to the year ended December 31, 2006. In addition, no
options were exercised or vested by the executive officers during the year ended
December 31, 2006.
36
Outstanding Equity Awards at Fiscal Year-End
- --------------------------------------------
The following table sets forth information on outstanding option and stock
awards held by the named executive officers as of December 31, 2006, including
the number of shares underlying both exercisable and unexercisable portions of
each stock option as well as the exercise price and the expiration date of each
outstanding option.
Option Awards Stock Awards
----------------------------------------------------------------- ---------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
Equity Equity
Incentive Equity Incentive
Plan Number Market Incentive Plan Awards:
Number Awards: of Value Awards: Market or
Number of Number Shares of Shares Number of Payout Value
of Securities of or Units Unearned Unearned of Unearned
Securities Underlying Securities of Stock or Units Shares, Shares,
Underlying Unexercised Underlying That of Stock Units or Units or
Unexercised Options Unexercised Option Option Have That Other Rights Other Rights
Options (#) Unearned Exercise Expiration Not Have Not That Have That Have Not
(#) Unexercisable Options Price Date Vested Vested Not Vested Vested
Name Exercisable (1) (#) ($) (2)(3) ($) (#) ($)
- -----------------------------------------------------------------------------------------------------------------------------------
Randall P.
Marx 20,000 - - $9.00 1/02/2007 - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Monty R.
Lamirato 10,000 - - $6.00 7/01/2007 - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Steven C.
Olson 10,000 - - $6.00 8/22/2007 - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
No options were exercised and no stock vested in 2006.
Director Compensation for the Year Ended December 31, 2006
- ----------------------------------------------------------
The table below summarizes the compensation paid by the Company to non-employee
directors for the year ended December 31, 2006:
Director Compensation for the Year Ended December 31, 2006
(a) (b) (c) (d) (e) (f) (g) (h)
Change in
Pension Value
and
Non-Equity Nonqualified
Fees Earned or Stock Incentive Plan Deferred All Other
Paid in Cash Awards Option Awards Compensation Compensation Compensation
Name(1) ($) ($) (2) ($)(3) ($) Earnings ($) Total ($)
- ---------------------------------------------------------------------------------------------------------------------
Randall P. Marx - - - - - - -
(1)
- ---------------------------------------------------------------------------------------------------------------------
Sigmund A. Balaban 30,000 - 4,500 - - - 34,500
- ---------------------------------------------------------------------------------------------------------------------
Robert E. Wade 8,000 8,000 4,500 - - - 20,500
- ---------------------------------------------------------------------------------------------------------------------
Donald A. Huebner 6,000 - 2,500 - - - 8,500
- ---------------------------------------------------------------------------------------------------------------------
37
(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, 2006 in accordance with
FAS 123R, and thus may include amounts from awards granted in and prior to
2006. 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, 2006 in accordance with FAS 123R,
and thus includes amounts from options granted in and prior to 2006. In
2006, the fair value of the awards granted to each director was as follows:
Sigmund A. Balaban: $7,500; Robert E. Wade: $7,500; Donald A Huebner: none.
For more information used in the calculations of these amounts see footnote
1 to our audited consolidated financial statements for the year ended
December 31, 2006, included in this Form 10-K. As of December 31, 2006,
each director had the following number of options outstanding: Sigmund A.
Balaban: 4,000; Robert E. Wade: 1,500 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.
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, 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. On
November 9, 2004, the shareholders approved to amend 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 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.
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 options
held by Outside Directors 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.
38
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. The Company granted a total of
5,000 options to Outside Directors under the Plan during 2004 at an exercise
price of $8.00 per share.
As of December 31, 2006, there were 7,500 exercisable options outstanding
related to the grants to Outside Directors. Dr. Donald Huebner's employment
terminated on January 31, 2002 but he continues as a Director of the Company, as
such all of his options are disclosed as Outside Directors options.
In addition to Outside Directors grants, the Board of Directors may grant
incentive options to our key employees pursuant to the Plan. In 2006, the Board
did not grant any options to employees under the Plan. In 2005 and 2004, the
Board granted a total of 22,000 options under the Plan to employees with
exercise prices ranging from $6.00 to $7.50. As of December 31, 2006, there were
42,000 exercisable options outstanding related to grants to employees, all of
which were granted under the Plan.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
- ------------------------------------------------------------------------
We entered into a new written three year employment agreement with Mr. Marx
effective January 2, 2004. In accordance with his employment agreement, Mr. Marx
is to receive an annual base salary of $195,000 in 2004, $235,000 in 2005 and
$245,000 in 2006. In addition, Mr. Marx can receive bonuses up to $90,000,
$100,000 and $150,000 in 2004, 2005 and 2006, respectively if certain net profit
goals are achieved. Mr. Marx did not earn a bonus in 2006 but earned a bonus of
$50,000 for 2005 and $90,000 for 2004.
In September 2004, we entered into a new two and one-half year employment
agreement with Mr. Raskin effective October 1, 2004. Pursuant to the new
agreement, Mr. Raskin is to receive an annual base salary of $385,000 per year.
Mr. Raskin was eligible to receive bonus for the year ending December 31, 2004
between $25,000 and $90,000 depending upon Winncom achieving certain
predetermined net income goals and Mr. Raskin was eligible to earn a bonus of
$10% of net income for the years ended December 31, 2005 and 2006. Mr. Raskin
earned a bonus of $108,000, $98,000 and $90,000 for 2006, 2005 and 2004,
respectively.
We entered into a new written employment agreement with Monty R. Lamirato, our
Chief Financial Officer and Treasurer, effective July 1, 2005 for the period
July 1, 2005 through June 30, 2007, at an 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.
We entered into a new written employment agreement with Steven C. Olson, our
Chief Technology Officer, effective August 22, 2004. The employment agreement is
for the period August 22, 2004 through August 22, 2007 at an annual base salary
of $175,000. Mr. Olson also is 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 and $37,000 in
2004. 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.
39
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
- -------- -------- ------------ ---------
If early retirement occurred at December 31, 2006 - - -
If termination for cause occurred at December 31, 2006 - - -
If termination without cause occurred at December 31, 2006 $20,000 $39,000 $44,000
If "change in control" occurred at December 31, 2006 $60,000 $39,000 $44,000
If death or disability occurred as of December 31, 2006 - - -
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 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 28, 2007,
including 3,087,988 shares outstanding, 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 (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 166,803(2) 5.4%
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Sigmund A. Balaban 33,515(3) 1.1%
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Donald A. Huebner 4,434(4) *
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Robert E. Wade 78,985(7) 2.6%
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Steve C. Olson 11,751(6) *
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Monty R. Lamirato 11,423(5) *
ARC Wireless Solutions, Inc.
10601 West 48th Ave.
Wheat Ridge, CO 80033
Paul J. Rini 178,308 5.77%
7376 Johnnycake Rd
Mentor, Ohio 44060
Hudson River Investments, Inc. 242,134 8.37%
Skelton Building, Main Street.
POB 3139 Road Town
Tortola, British Virgin Islands
Evansville Limited 258,393 7.84%
c/o Quadrant Management Inc.
40 West 57th Street, 20th Floor
New York, NY 10019
All officers and directors as a group (six persons) 306,411 (2)(3)(4)(5)(6)(7) 9.8%
* Less than one percent.
41
(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 163,453 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 2,500 shares at $7.50 per share until February 15, 2007, and
options to purchase 2,000 shares at $6.50 per share until February 21,
2008, all of 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 2,500 shares at $5.50 per share until October 31, 2007, all of
which are currently exercisable.
(5) Consists of 1,423 shares in Mr. Lamirato's ARC Wireless 401(k) account and
options to purchase 10,000 shares until July 1, 2007, all granted under the
1997 Stock Option and Compensation Plan and all of which are currently
exercisable.
(6) Consists of 1,751 shares in Mr. Olson's ARC Wireless 401(k) account and
options to purchase 10,000 shares at $8.00 per share until August 22, 2007,
granted under the 1997 Stock Option and Compensation Plan and all of which
are currently exercisable.
(7) Includes 75,485 shares directly held by Mr. Wade, 1,000 shares held by his
spouse and options to purchase 2,500 shares at $6.50 per share until
February 21, 2008, granted under the 1997 Stock Option and Compensation
Plan and all of which are currently exercisable
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.
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.
The following table sets forth the aggregate fees billed to us by HEIN &
ASSOCIATES LLP for the years ended December 31, 2006, 2005 and 2004:
2006 2005 2004
---- ---- ----
Audit fees $108,000 (1) $110,000 (1) $99,000 (1)
Audit-related fees -- (2) -- (2) -- (2)
Tax fees 14,000 (3) 10,000 (3) 9,000 (3)
All other fees -- --
----------------------------------------------
Total audit and non-audit fees $122,000 $120,000 $108,000
==============================================
(1) Includes fees for professional services rendered for the audit of ARC's
annual financial statements and review of ARC's Annual Report on Form 10-K
for the year 2006, 2005 and 2004 and for reviews of the financial
statements included in ARC's quarterly reports on Form 10-Q for the first
three quarters of fiscal 2006, 2005 and 2004 and related SEC registration
statements.
(2) Includes fees billed for professional services rendered in fiscal 2006,
2005 and 2004, in connection with acquisition planning and due diligence.
(3) Includes fees billed for professional services rendered in fiscal 2006,
2005 and 2004, 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, 2006 and 2005......................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004........................................F-3
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2006, 2005 and 2004....................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006, 2005 and 2004........................................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, Sale of Balance,
Beginning of Cost and Net of Winncom End of Year
Year Expenses Recoveries
-------------------------------------------------------------------
Allowance for Doubtful
Accounts
Years Ended December 31,
2006 $ 385,000 558,000 (51,000) (861,000) $ 31,000
2005 $ 502,000 233,000 (350,000) $ 385,000
2004 $ 257,000 308,000 (63,000) $ 502,000
-------------------------------------------------------------------
Balance, Charges to Sale of Balance,
Beginning of Cost and Winncom End of Year
Year Expenses Write-offs
--------------------------------------------------------------------
Inventory Valuation
Years Ended December 31,
2006 $ 799,000 266,000 (13,000) (358,000) $ 694,000
2005 $ 712,000 87,000 - $ 799,000
2004 $ 498,000 214,000 - $ 712,000
--------------------------------------------------------------------
44
(3) Exhibits.
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1a Articles of Incorporation of Westcliff Corporation, now
known as Antennas America, Inc. (the "Company"), are
incorporated herein by reference from the Company's Form
S-18 Registration Statement dated December 1, 1987 (File No.
33-18854-D).
3.1b Articles of Amendment of the Company dated January 26, 1988
are incorporated herein by reference from the Company's
Post-Effective Amendment No. 3 to Form S-18 Registration
Statement dated December 5, 1989 (File No. 33-18854-D).
3.1c Articles and Agreement of Merger between the Company and
Antennas America, Inc., a Colorado corporation, dated March
22, 1989, are incorporated herein by reference from the
Company's Post-Effective Amendment No. 3 to Form S-18
Registration Statement dated December 5, 1989 (File No.
33-18854-D).
3.1d 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 Employment Agreement effective January 2, 2004 between the
Company and Randall P. Marx. (4)
10.3 Employment Agreement effective October 1, 2004 between
Winncom Technologies Corp. and Gregory E. Raskin. (4)
10.4 Employment Agreement effective July 1, 2005 between the
Company and Monty R. Lamirato.(5)
10.5 Stock Purchase Agreement, dated as of July 28, 2006, by and
among the Company, Winncom Technologies Corp. and Bluecoral
Limited. (6)
10.6 Escrow Agreement, dated as of July 28, 2006, by and among
the Company, Bluecoral Limited and Consumer Title Services,
LLC. (6)
14.1 Amended and Restated Code of Ethics (7)
21 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 10-K for December 31,
2004 filed on March 30, 2005.
(5) Incorporated by reference from the Company's Form 10-K for December 31,
2005 filed on March 20, 2006.
(6) Incorporated by reference from the Company's Form 8-K/A filed on August 2,
2006.
(7) Incorporated by reference from the Company's Form 8-K filed on November 10,
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 30, 2007 By: /s/ Randall P. Marx
-----------------------
Randall P. Marx, Chief Executive Officer
Date: March 30, 2007 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 30, 2007 /s/ Sigmund A. Balaban
----------------------
Sigmund A. Balaban, Director
March 30, 2007 /s/ Robert E. Wade
------------------
Robert E. Wade, Director
March 30, 2007 /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, 2006 and 2005, 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, 2006. Our audit 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, 2006 and 2005, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2006, 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.
As discussed in Note 1 to the accompanying consolidated financial statements,
effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment.
/s/ Hein & Associates LLP
Denver, Colorado
March 29, 2007
F-1
ARC Wireless Solutions, Inc.
Consolidated Balance Sheets
December 31, December 31,
2006 2005
------------ ------------
Assets
- ------
Current assets:
Cash and equivalents $ 15,720,000 $ 64,000
Accounts receivable - trade, net 620,000 907,000
Inventory, net 788,000 919,000
Deferred tax assets, net of allowance -- 516,000
Net assets of discontinued operation (Note 2) -- 30,524,000
Other current assets 416,000 71,000
------------ ------------
Total current assets 17,544,000 33,001,000
------------ ------------
Property and equipment, net 297,000 342,000
Other assets:
Intangible assets, net 98,000 103,000
Deposits 36,000 43,000
------------ ------------
Total assets $ 17,975,000 $ 33,489,000
============ ============
Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
Accounts payable $ 790,000 $ 353,000
Bank debt - current 830,000 554,000
Accrued expenses 213,000 302,000
Net liabilities of discontinued operation (Note 2) -- 15,339,000
Current portion of capital lease obligations 32,000 66,000
------------ ------------
Total current liabilities 1,865,000 16,614,000
Deferred tax liabilities -- 26,000
Capital lease obligations, less current portion 23,000 39,000
------------ ------------
Total liabilities 1,888,000 16,679,000
------------ ------------
Commitments (Notes 8 and 10)
Stockholders' equity:
Common stock, $.0005 par value, 250,000,000 authorized, 2,000 2,000
3,126,000 and 3,125,000 issued in 2006 and 2005, respectively
Preferred stock, $001 par value, 2,000,000 authorized, none -- --
issued and outstanding
Additional paid-in capital 21,855,000 21,836,000
Treasury stock, at cost, 39 shares in 2006 and 2005 (1,195,000) (1,195,000)
Accumulated deficit (4,575,000) (3,833,000)
------------ ------------
Total stockholders' equity 16,087,000 16,810,000
------------ ------------
Total liabilities and stockholders' equity $ 17,975,000 $ 33,489,000
============ ============
See accompanying notes to consolidated financial statements.
F-2
ARC Wireless Solutions, Inc.
Consolidated Statements of Operations
Years Ended December 31,
2006 2005 2004
----------- ----------- -----------
Sales, net $ 6,470,000 $ 6,736,000 $ 6,449,000
Cost of sales 5,021,000 4,006,000 3,940,000
----------- ----------- -----------
Gross profit 1,449,000 2,730,000 2,509,000
Operating expenses:
Selling, general and administrative expenses 3,112,000 2,571,000 2,739,000
----------- ----------- -----------
Income (loss) from continuing operations (1,663,000) 159,000 (230,000)
Other income (expense):
Interest expense (124,000) (123,000) (114,000)
Other income 101,000 62,000 24,000
Loss on sale of Winncom (187,000) -- --
----------- ----------- -----------
Total other income (expense) (210,000) (61,000) (90,000)
----------- ----------- -----------
Income (loss) from continuing operation before income
taxes (1,873,000) 98,000 (320,000)
(Provision) benefit for income taxes 267,000 475,000 --
----------- ----------- -----------
Income (loss) from continuing operation (1,606,000) 573,000 (320,000)
----------- ----------- -----------
Discontinued operations (Note 2)
Income from operations of the discontinued component 1,068,000 902,000 1,061,000
(Provision) for income taxes, discontinued component (204,000) (183,000) (53,000)
----------- ----------- -----------
Income from discontinued operations 864,000 719,000 1,008,000
----------- ----------- -----------
Net income (loss) $ (742,000) $ 1,292,000 $ 688,000
=========== =========== ===========
Net income (loss) per share - continuing operations -
Basic and Diluted $ (.52) $ .19 $ (.11)
Net income per share - discontinued operations - Basic
and Diluted $ .28 $ .23 $ .33
Net income (loss) per share - Basic and Diluted $ (.24) $ .42 $ .22
Weighted average shares - Basic 3,086,000 3,083,000 3,078,000
Weighted average shares - Diluted 3,086,000 3,084,000 3,080,000
See accompanying notes to consolidated financials statements.
F-3
ARC Wireless Solutions, Inc.
Consolidated Statements of Changes in Stockholders' Equity
(Shares and amounts in thousands)
Common Stock Additional Treasury Stock
---------------------------- Paid-in ---------------------------- Accumulated
Shares Amount Capital Shares Amount Deficit
------------ ------------ ------------ ------------ ------------ ------------
Balances, January 1, 2004 3,117,000 $ 2,000 $ 21,778,000 (39,000) $ (1,195,000) $ (5,813,000)
Common stock issued for -- -- 2,000
directors' fees
Net income 688,000
------------ ------------ ------------ ------------ ------------ ------------
Balances, December 31, 2004 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 2,000 21,836,000 (39,000) (1,195,000) (3,833,000)
Share based compensation -- -- 11,000
Common stock issued for
directors' fees 1,000 -- 8,000
Net income (loss) (742,000)
------------ ------------ ------------ ------------ ------------ ------------
Balances, December 31, 2006 3,126,000 $ 2,000 $ 21,855,000 (39,000) $ (1,195,000) $ (4,575,000)
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
ARC Wireless Solutions, Inc.
Consolidated Statements of Cash Flows
For the years ended December 31,
2006 2005 2004
------------ ------------ ------------
Operating activities
Income (loss) from continuing operations $ (1,606,000) $ 573,000 $ (320,000)
Adjustments to reconcile income (loss) from continuing operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 162,000 187,000 201,000
Non-cash expense for issuance of stock and options 19,000 56,000 2,000
Deferred taxes -- (490,000) --
Loss on sale of discontinued operations 187,000 -- --
Changes in operating assets and liabilities:
Accounts receivable, trade 287,000 107,000 (127,000)
Inventory 131,000 (35,000) 261,000
Prepaids and other current assets (345,000) (19,000) 20,000
Other assets 7,000 -- (9,000)
Accounts payable and accrued expenses 348,000 (308,000) 166,000
Other 2,000 -- --
------------ ------------ ------------
Net cash provided by (used in) continuing operations (808,000) 71,000 194,000
Net cash provided by (used in) discontinued operations 1,394,000 (657,000) 407,000
------------ ------------ ------------
Net cash provided by (used in) operating activities 586,000 (586,000) 599,000
------------ ------------ ------------
Investing activities
Net proceeds from sale of discontinued operations 16,397,000 -- --
Patent acquisition costs (10,000) (6,000) (18,000)
Purchase of plant and equipment (80,000) (74,000) (76,000)
------------ ------------ ------------
Net cash provided by (used) in investing activities, continuing
operations 16,307,000 (80,000) (94,000)
------------ ------------ ------------
Purchase of plant and equipment, discontinued operations (58,000) (25,000) (88,000)
------------ ------------ ------------
Net cash used in investing activities, discontinued operations (58,000) (25,000) (88,000)
------------ ------------ ------------
Net cash provided by (used in) investing activities 16,249,000 (105,000) (182,000)
Financing activities
Net advances from line of credit 276,000 228,000 84,000
Net repayment of line of credit and capital lease obligations (73,000) (64,000) (52,000)
------------ ------------ ------------
Net cash provided by financing activities, continuing operations 203,000 164,000 32,000
------------ ------------ ------------
Net advances (repayment) of line of credit and bank debt,
discontinued operations (1,382,000) 517,000 (461,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities, discontinued
operations (1,382,000) 517,000 (461,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities (1,179,000) 681,000 (429,000)
------------ ------------ ------------
Net change in cash 15,656,000 (10,000) (12,000)
Cash, beginning of year 64,000 74,000 86,000
------------ ------------ ------------
Cash, end of year $ 15,720,000 $ 64,000 $ 74,000
============ ============ ============
Supplemental cash flow information:
Cash paid for interest, continuing operations $ 124,000 $ 123,000 $ 114,000
Cash paid for interest, discontinued operations $ 109,000 $ 161,000 $ 214,000
Cash paid for taxes, discontinued operations 220,000 $ 44,000 $ 51,000
Equipment acquired under capital lease, continuing operations $ 22,000 $ 17,000 $ 67,000
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, and Starworks Wireless Inc. ("Kit") and ARC Wireless Hong Kong
Limited, ("ARCHK"), since their respective acquisition dates, after elimination
of all material intercompany accounts, transactions, and profits.
Basis of Presentation
The Company has experienced recurring losses, and has accumulated a deficit of
$4.6 million since inception in 1989. In 2005, 2004 and 2002 the Company
generated net income and in 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, 2007.
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.
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.
Payments on trade receivables are applied to the earliest unpaid invoices.
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 $31,000 and $25,000 at December 31, 2006 and 2005.
Bad debt expense, continuing operations, was $0, $13,000 and $0 for the years
ended December 31, 2006, 2005 and 2004, 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 consists of the following at
December 31:
2006 2005
----------- -----------
Raw materials $ 900,000 $ 954,000
Work in progress 128,000 129,000
Finished goods 454,000 416,000
----------- -----------
1,482,000 1,499,000
Inventory reserve (694,000) (580,000)
----------- -----------
Net inventory $ 788,000 $ 919,000
=========== ===========
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:
2006 2005
----------- -----------
Machinery and equipment $ 1,237,000 $ 1,152,000
Computer equipment and software 404,000 390,000
Furniture and fixtures 180,000 177,000
Leasehold improvements 89,000 89,000
----------- -----------
1,910,000 1,808,000
Accumulated depreciation (1,613,000) (1,466,000)
----------- -----------
$ 297,000 $ 342,000
=========== ===========
Depreciation expense, which includes amortization of fixed assets acquired
through capital leases, amounted to $147,000, $211,000 and $235,000 during the
years ended December 31, 2006, 2005 and 2004, 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, $16,000
and $16,000 for the years ended December 31, 2006, 2005 and 2004, 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.
2006 2005
------------ ------------
Patents $ 252,000 $ 241,000
Goodwill -- 12,164,000
------------ ------------
252,000 12,405,000
Accumulated amortization (154,000) (1,478,000)
------------ ------------
Goodwill and intangible assets, net $ 98,000 $ 10,927,000
============ ============
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.
Billings in excess of costs and estimated earnings on uncompleted contracts
represents billings to customers in excess of earned revenue and advances on
contracts.
Total contract revenue recognized for the years ended December 31, 2006 and 2005
was $20,555,000 and $2,632,000, respectively.
The following amounts relate to the aggregate of contracts in progress as of
December 31, 2005.
Costs incurred $ 9,429,000
Amounts billed (3,529,000)
-----------
Construction in progress $ 5,900,000
===========
Amounts billed $ 3,528,000
Revenue recognized (2,632,000)
-----------
Billings in excess of recognized income $ 896,000
===========
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 $363,000, $315,000 and $250,000, respectively, for the years ended December
31, 2006, 2005 and 2004.
Advertising Costs
Advertising costs are charged to operations when the advertising is first shown.
Advertising costs charged to operations were $20,000, $40,000 and $22,000 in
2006, 2005 and 2004, respectively.
F-10
1. Organization and Summary of Significant Accounting Policies, continued
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, 2006, 2005 and 2004.
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.
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.
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.
The following table summarizes share-based compensation expense recorded in
general and administrative expenses during each period presented:
Year Ended
December 31, 2006
-----------------
Stock options $11,000
-------
Total share-based compensation expense $11,000
=======
F-11
1. Organization and Summary of Significant Accounting Policies, continued
Stock Based Compensation, continued
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 years ended December 31, 2005 and 2004, would have
been adjusted to the pro forma amounts indicated below:
Years Ended December 31,
--------------------------
2005 2004
----------- -----------
Net income (loss) as reported $ 1,292,000 $ 688,000
Add: stock based compensation included
in reported net income (loss)
Deduct: Stock-based compensation cost
under SFAS 123 (29,000) (86,000)
----------- -----------
Pro forma net income (loss) $ 1,263,000 $ 602,000
=========== ===========
Pro forma shares used in the calculation
of pro forma net income (loss) per common
share - basic and diluted 3,084,000 3,080,000
Reported net income (loss) per common
share - basic and diluted $.42 $.22
Pro forma net income (loss) per common
share - basic and diluted $.41 $.20
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company had accounted for
grants subsequent to December 31, 1994 under a method specified by SFAS 123.
Options granted were estimated using the Black-Scholes valuation model.
Stock option activity was as follows:
Number of Weighted Average
Shares Exercise Price ($)
======= ==================
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 $ 7.50
======= ========
F-12
1. Organization and Summary of Significant Accounting Policies, continued
Stock Based Compensation, continued
The following table presents information regarding options outstanding as of
December 31, 2006:
- --------------------------------------------------------------------------------
Weighted average contractual remaining term - options outstanding .43 years
- --------------------------------------------------------------------------------
Aggregate intrinsic value - options outstanding -
- --------------------------------------------------------------------------------
Options exercisable 49,500
- --------------------------------------------------------------------------------
Weighted average exercise price - options exercisable $7.35
- --------------------------------------------------------------------------------
Aggregate intrinsic value - options exercisable -
- --------------------------------------------------------------------------------
Weighted average contractual remaining term - options exercisable .43 years
- --------------------------------------------------------------------------------
There was no intrinsic value for options outstanding or options exercisable
since no options were exercised during the year ended December 31, 2006.
The following weighted average assumptions were used:
------------------------------------ ---------------------------------------
Years Ended December 31,
------------------------------------ ------------- ------------- -----------
2006 2005 2004
------------------------------------ ------------- ------------- -----------
Volatility .751 .80 - 1.02 1.04
------------------------------------ ------------- ------------- -----------
Expected life of options (in years) 2 2 2
------------------------------------ ------------- ------------- -----------
Dividend Yield 0.00% 0.00% 0.00%
------------------------------------ ------------- ------------- -----------
Risk free interest rate 6.00% 3.75% 3.0%
------------------------------------ ------------- ------------- -----------
Per share value of options granted $3.00 $3.75 $3.60
------------------------------------ ------------- ------------- -----------
As of December 31, 2006, future compensation costs related to nonvested stock
options was $7,000. Management anticipates that this cost will be recognized
over a weighted average period of 1 year.
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
year ended December 31, 2005 and 2004 options and warrants totaling 50,000 and
85,000 shares, respectively were not included in the calculation of diluted
earnings per share because their effect is anti-dilutive. For the year ended
December 31, 2006, the Company incurred a net loss and stock options totaling
52,000 were not included in the computation of diluted loss per share because
their effect was anti-dilutive; therefore, basic and fully diluted loss per
share are the same for 2006.
F-13
1. Organization and Summary of Significant Accounting Policies, continued
Net Income (Loss) Per Common Share, continued
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,
-------------------------------------
2006 2005 2004
Numerator: Net Income (Loss) $ (742,000) $1,292,000 $ 688,000
========== ========== ==========
Denominator:
Denominator for basic earnings per share - weighted average
shares 3,086,000 3,083,000 3,078,000
Effect of dilutive securities
Employee stock options -- 1,000 2,000
Common stock warrants -- -- --
---------- ---------- ----------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversion 3,086,000 3,084,000 3,080,000
========== ========== ==========
Basic earnings per share $ (.24) $ .42 $ .22
========== ========== ==========
Diluted earnings per share $ (.24) $ .42 $ .22
========== ========== ==========
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") ratified the
consensus reached by the Emerging Issues Task Force ("EITF") on EITF Issue No.
05-01, Accounting for the Conversion of an Instrument That Becomes Convertible
Upon the Issuer's Exercise of a Call Option ("EITF 05-01"). The EITF consensus
applies to the issuance of equity securities to settle a debt instrument that
was not otherwise currently convertible but became convertible upon the issuer's
exercise of call option when the issuance of equity securities is pursuant to
the instrument's original conversion terms. The adoption of EITF 05-01 is not
expected to have an impact on the Company's results of operations or financial
condition.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes--an interpretation of FASB Statement No. 109 ("FIN 48"). This
interpretation clarifies the application of SFAS 109 by defining a criterion
that an individual tax position must meet for any part of the benefit of that
position to be recognized in an enterprise's financial statements and also
provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods and disclosure. FIN 48 is effective for
our fiscal year commencing January 1, 2007. At this time, the Company has not
completed its review and assessment of the impact of adoption of FIN 48.
In September 2006, the FASB issued FASB No. 157, "Fair Value Measurements." FASB
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. FASB No. 157 is effective for fiscal years beginning after
November 15, 2007. While the Company is currently evaluating the impact of FASB
No. 157, the Company does not believe the impact will be material to its results
of operations.
F-14
1. Organization and Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements
In September 2006, the FASB issued FASB No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB No.
87, 88, 106 and 132(R)." FASB No. 158 improves financial reporting by requiring
an employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. This Statement also improves financial reporting by requiring an
employer to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. FASB No. 158 is
effective as of the fiscal year ending after December 15, 2006. The Company does
not believe the impact of FASB No. 158 will be material to its results of
operations.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements," ("SAB 108"). SAB 108 provides guidance on the consideration of
effects of the prior year misstatements in quantifying current year
misstatements for the purpose of a materiality assessment. The SEC staff
believes registrants must quantify errors using both a balance sheet and income
statement approach and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. SAB 108 is effective for the first annual period ending
after November 15, 2006 with early application encouraged. The Company plans to
adopt SAB 108 in its fourth fiscal quarter of 2006. The adoption of SAB 108 did
not have a material impact on our financial statements.
Fair Value Option - In February 2007, the FASB issued FAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159
permits an entity to irrevocably elect fair value on a contract-by-contract
basis as the initial and subsequent measurement attribute for many financial
assets and liabilities and certain other items including insurance contracts.
Entities electing the fair value option would be required to recognize changes
in fair value in earnings and to expense upfront cost and fees associated with
the item for which the fair value option is elected. FAS 159 is effective for
fiscal years beginning after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FAS No. 157, Fair
Value Measurements. The Company is currently evaluating the impact, if any, of
adopting FAS 159 on its financial condition or results of operations.
Note 2. Discontinued Operations
On July 28, 2006, ARC Wireless Solutions, Inc (the "Company") executed a Stock
Purchase Agreement ("Purchase Agreement") with Bluecoral Limited ("Bluecoral"),
an Irish company, for the sale of its wholly-owned subsidiary, Winncom
Technologies Corp. ("Winncom") to Bluecoral for $17 million in cash, which was
being 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.
F-15
Note 2. Discontinued Operations, continued
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, as an asset held for sale, and accordingly the net assets and
liabilities have been segregated from continuing operations in the accompanying
consolidated balance sheets for all periods presented and the results of
operations have been excluded from continuing operations in the accompanying
consolidated financial statements of operations and cash flows for all periods
presented.
The net assets and liabilities of the discontinued operations of the
distribution segment included in the accompanying consolidated balance sheet at
December 31, 2005 are as follows:
December 31, 2005
-----------------
Current assets:
Cash and equivalents $ 103,000
Accounts receivable - trade, net 6,798,000
Accounts receivable - vendors, net 766,000
Inventory, net 5,188,000
Construction in progress 5,900,000
Other current assets 730,000
-----------
Total current assets 19,485,000
Property and equipment, net 90,000
Other assets:
Goodwill, net 10,824,000
Deposits 125,000
-----------
Total assets $30,524,000
===========
Current liabilities:
Accounts payable $10,060,000
Bank debt - current 1,459,000
Accrued expenses 455,000
Billings in excess of recognized income 896,000
-----------
Total current liabilities 12,870,000
Bank debt, less current portion 2,469,000
-----------
Total liabilities $15,339,000
===========
F-16
Note 2. Discontinued Operations, continued
Information related to the discontinued operations for the years ended December
31, 2006, 2005 and 2004 are as follows:
2006 2005 2004
Sales, net $ 28,773,000 $ 30,288,000 $ 29,213,000
Contract revenue 20,555,000 2,632,000 --
------------ ------------ ------------
Total revenue 49,328,000 32,920,000 29,213,000
------------ ------------ ------------
Cost of sales 25,077,000 25,877,000 24,937,000
Cost of contract revenue 19,236,000 2,296,000 --
------------ ------------ ------------
Total cost of goods sold 44,313,000 28,173,000 24,937,000
------------ ------------ ------------
Gross profit 5,015,000 4,747,000 4,276,000
Operating expenses:
Selling, general and administrative
expenses 3,996,000 3,874,000 3,451,000
------------ ------------ ------------
Income from operations 1,019,000 873,000 825,000
Other income (expense):
Interest expense, net (110,000) (161,000) (186,000)
Other income 159,000 190,000 422,000
------------ ------------ ------------
Total other income (expense) 49,000 29,000 236,000
------------ ------------ ------------
Income before income taxes 1,068,000 902,000 1,061,000
(Provision) Benefit for income taxes (204,000) (183,000) (53,000)
------------ ------------ ------------
Net Income $ 864,000 $ 719,000 $ 1,008,000
============ ============ ============
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 October 1, 2003 line of credit agreement contains several covenants, which,
among other things, require that Winncom maintain certain financial ratios as
defined in the agreement. In addition, the agreement limits the payment of
management fees by Winncom to the Company, and also limits dividends and the
purchase of property and equipment. As of October 31, 2006, Winncom was in
compliance with these covenants.
F-17
Note 2. Discontinued Operations, continued
In September 2005, Winncom entered into a one-year Line of Credit Agreement with
Kazkommertsbank for $2.3 million with an annual interest rate of 13% for the
purpose of funding a small portion of the Kazakhtelecom project, specifically
project engineering, laying of fiber optic cable and telecommunication equipment
purchases necessary to be completed before winter to avoid project delays. The
Line of Credit Agreement was entered into only after Kazakhtelecom agreed to
fully guarantee the repayment of Winncom's borrowings under the Line of Credit
Agreement. The Line of Credit Agreement is collateralized only by the guarantee
of Kazakhtelecom. Kazakhtelecom intends to repay the Line of Credit borrowings
either from the proceeds of the permanent project financing or from its own
capital. In September 2005, Winncom was advanced $1,334,000 under the Line of
Credit Agreement and a portion of that balance still remained at December 31,
2005.
December 31,
2005
-----------
Bank line of credit - Winncom $ 2,469,000
Foreign bank line of credit - Winncom 1,334,000
Bank term loan - Winncom 125,000
-----------
3,928,000
Less current portion (1,459,000)
-----------
Long-term portion $ 2,469,000
===========
In October 2004, Winncom entered into a "Frame" Agreement (Agreement of
Understanding) with Joint Stock Company Kazakhtelecom ("Kazakhtelecom"),
Kazakhstan's national telecommunications operator for the Republic of
Kazakhstan, that gives Winncom the right, subject to Winncom obtaining 100%
financing for the project upon terms and conditions acceptable to Kazakhtelecom,
and subject to a number of other matters, to undertake, on a turnkey basis,
development of a modern telecommunications infrastructure to be located on the
left bank of the City of Astana, Kazakhstan. With several competing bids,
Winncom was awarded the contract after several months of negotiations. The total
cost of the project is approximately $55,000,000.
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.
F-18
Note 2. Discontinued Operations, continued
Billings in excess of costs and estimated earnings on uncompleted contracts
represents billings to customers in excess of earned revenue and advances on
contracts.
Total contract revenue recognized for the ten months ended October 31, 2006 and
the year ended December 31, 2005 was $20,555,000 and $2,632,000, respectively.
The following amounts relate to the aggregate of contracts in progress as
December 31, 2005.
December 31, 2005
-----------------
Costs incurred to date $ 8,196,000
Contract costs recognized in 2005 --
Contract costs recognized in 2006 (2,296,000)
-----------
Construction in progress $ 5,900,000
===========
Amounts billed $ 3,528,000
Revenue recognized in 2005 (2,632,000)
Revenue recognized in 2006 --
-----------
Billings in excess of recognized income $ 896,000
===========
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.
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 was
renewed for one year in May 2006. The new Credit Facility has a maturity of one
year, with interest at 1.5% over prime (9.75% at December 31, 2006), 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 , but excluding Winncom. The borrowing base is calculated on a
percentage of trade accounts receivable and inventory for the Company and
Starworks combined. As of December 31, 2006, the Company was in compliance with
these covenants. The weighted average interest rate for 2006 and 2005 was 8% and
9%, respectively.
F-19
Revolving bank line of credit at December 31, 2006 and 2005 consist of:
2006 2005
Line of credit, current $ 830,000 $554,000
========= ========
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's 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.
In March 2002, the Company issued 4,000 shares of restricted common stock for
consulting services valued at $34,000. The consulting agreement provides that,
because it was cancelled in September 2002, 2,000 of these shares are required
to be returned to the Company. The consultant was claiming the right to retain
all 4,000 shares. In 2005, the consultant and the Company agreed to a settlement
whereby the consultant agreed to retain 1,600 shares of common stock.
In November 1997, the Board of Directors approved our 1997 Stock Option And
Compensation Plan (the "Plan"). 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 2,5000 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.
F-20
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.
4. Stockholders' Equity, continued
The Company granted a total of 5,000 options to Outside Directors under the Plan
during 2004 at an exercise price of $8.00 per share
The following table summarizes the option activity for 2006, 2005 and 2004:
Number of Weighted Average
Shares Exercise Price ($)
------- ------------------
2004 Activity:
Outstanding at beginning of year 61,500 $ 10.50
Granted 25,000 $ 6.50
Exercised --
Forfeited or expired (38,000) $ 8.00
------- ---------
Outstanding at end of year 48,500 $ 7.50
======= =========
Exercisable at end of year 47,500 $ 7.50
======= =========
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
======= =========
At December 31, 2006, there are 49,500 options exercisable from $5.50 to $9.00.
These options expire between 2007 and 2008. The weighted average grant date fair
value of the options granted is $3.00
All option exercise prices were granted at market. The weighted average
remaining contractual life of options outstanding at the end of 2006, 2005 and
2004 were .43 years, 1.23 years and 2.04 years, respectively.
F-21
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, 2006, 2005 and 2004 is as follows:
2006 2005 2004
--------- --------- ---------
Current $ (93,000) $ 198,000 $ 53,000
Deferred 30,000 (490,000) --
--------- --------- ---------
Total (benefit) expense $ (63,000) $(292,000) $ 53,000
========= ========= =========
Total (benefit) expense, continuing operations $(267,000) $(475,000) $ --
Total (benefit) expense, discontinued operations 204,000 183,000 53,000
--------- --------- ---------
Total (benefit) expense $ (63,000) $(292,000) $ 53,000
========= ========= =========
The Company had not recorded a liability for federal income taxes payable
currently, or for deferred taxes to future periods for 2004 due to the existence
of substantial net operating loss carry-forward amounts available to offset
taxable income. For the year ended December 31, 2005, the Company utilized all
of its remaining net operating loss carry forwards of approximately $402,000 to
offset some taxable income. As a result of the net loss from continuing
operations of $1.6 million for the year ended December 31, 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:
2006 2005
--------- ---------
Deferred tax assets (current):
Net operating loss carry-forwards $ 191,000 $ --
Inventory reserve 258,000 297,000
Accrued expenses -- 76,000
Bad debt reserves 11,000 143,000
Property and equipment -- --
--------- ---------
460,000 516,000
Deferred tax liabilities (long-term):
Property and equipment (3,000) (14,000)
Other assets (12,000) (12,000)
--------- ---------
(15,000) (26,000)
Deferred tax assets 445,000 490,000
Valuation allowance (445,000) --
--------- ---------
Net deferred tax assets $ -- $ 490,000
========= =========
F-22
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:
2006 2005 2004
--------- --------- ---------
Tax (benefit) expense computed at statutory rate $(190,000) $ 350,000 $ 261,000
State income tax 42,000 27,000 53,000
Valuation allowance 445,000 (680,000) (214,000)
Effect of permanent differences (5,000) (7,000) (6,000)
Other (primarily net operating losses) (355,000) 18,000 (41,000)
--------- --------- ---------
Provision for income taxes expense (benefit) $ (63,000) $(292,000) $ 53,000
========= ========= =========
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, 2006 and 2004, 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 $445,000
in 2006 and decreased by $680,000 in 2005 and $214,000 in 2004.
6. Sales to Major Customers
The Company had no sales from continuing operations in excess of 10% of its net
sales to any unrelated parties for the years ended December 31, 2006, 2005 and
2004 although the loss of any significant customer(s) could have an adverse
impact on our financial condition.
7. Significant Suppliers
With regard to continuing operations, during 2006, the Company purchased
approximately 39% of its product from two vendors, in 2005, the Company
purchased approximately 22% of its product from two vendors and in 2004 the
Company purchased approximately 31% 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 noncancellableoperating leases through
2010. Minimum future rentals payable under the leases are as follows:
2007 $ 246,000
2008 259,000
2009 271,000
2010 163,000
----------
$ 939,000
==========
Rent expense from continuing operations was $245,000, $247,000 and $250,000 for
the years ended December 31, 2006, 2005 and 2004, respectively.
F-23
8. Leasing Activities, continued
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, plant and equipment included the following amounts for leases that
have been capitalized at December 31, 2006 and December 31, 2005.
2006 2005
--------- ---------
Machinery and Equipment $ 215,000 $ 193,000
Computers and Software 52,000 52,000
Furniture and Fixtures 13,000 13,000
--------- ---------
280,000 258,000
Less accumulated amortization (139,000) (99,000)
--------- ---------
$ 141,000 $ 159,000
========= =========
The Company recorded amortization expense of $50,000, $39,000 and $20,000,
respectively, on assets recorded under capitalized leases for 2005, 2004 and
2003.
Future minimum lease payments under capital leases are as follows at December
31, 2006:
2007 $39,000
2008 18,000
2009 7,000
2010 -
-------
Total minimum lease payments 64,000
Amount representing interest (9,000)
-------
Present value of lease payments $55,000
=======
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. For the year ended December 31, 2004, the Board
of Directors approved a discretionary match in Company common stock, as such the
Company accrued $58,000, represented the value of the employer matching
contribution. The 2004 matching contribution was paid in 2005 by the issuance of
8,149 shares of common stock.
F-24
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, 2006, non-cancellable purchase obligations totaled approximately
$776,000.
The Company entered into an employment agreement with our CEO, Mr. Marx,
effective as of January 2, 2004, which terminates on January 2, 2007. Mr. Marx
is to receive an annual base salary of $195,000, $235,000 and $245,000 per year,
respectively, during the term of the agreement and is eligible to receive annual
bonuses ranging from $25,000 to $150,000 if the Company achieves certain
predetermined net income goals.
The Company entered into an employment agreement with our former President, Mr.
Raskin, effective as of October 1, 2004 with a term of two and one-half years.
Pursuant to the agreement, Mr. Raskin was to receive an annual base salary of
$385,000 per year. Mr. Raskin was eligible to receive bonuses for each of the
years ending December 31, 2004, 2005 and 2006 of 10% of net income. Effective
with the sale of Winncom, this employment agreement terminated and Mr. Raskin
resigned as President of the Company.
The Company entered into an employment agreement with our Chief Financial
Officer and Treasurer, Mr. Lamirato, effective July 1, 2005. The employment
agreement is for the period July 1, 2005 through June 30, 2007, at an annual
base salary of $155,000 and during the term of the agreement and is eligible to
receive an annual bonus of $15,000 if the Company achieves certain predetermined
net income goals.
The Company entered into a written employment agreement with our Chief
Technology Officer, Mr. Olson, effective August 22, 2004. The employment
agreement is for the period August 22, 2004 through August 22, 2007 at an annual
base salary of $175,000. Mr. Olson also is eligible to earn bonuses, upon
achieving certain gross margin objectives, over the term of the agreement.
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-25
11. Segment Information, continued
For the years ended December 31, 2006, 2005 and 2004, less than 5% of our sales
from continuing operations were outside North America.
Financial information regarding the Company's two operating segments for the
years ended December 31, 2006, 2005 and 2004 are as follows:
Manufacturing Cable Corporate Total
------------- ----- --------- -----
Net Sales 2006 $6,518,000 $500,000 $(548,000) $6,470,000
2005 6,630,000 420,000 (314,000) 6,736,000
2004 6,433,000 379,000 (363,000) 6,449,000
Net income (loss) from 2006 (467,000) (7,000) (1,132,000) (1,606,000)
continuing operations 2005 1,390,000 (34,000) (783,000) 573,000
2004 710,000 (56,000) (974,000) (320,000)
Income (loss) before income 2006 (734,000) (7,000) (1,132,000) (1,873,000)
taxes, continuing operations 2005 914,000 (34,000) (783,000) 97,000
2004 710,000 (56,000) (974,000) (320,000)
Identifiable assets, 2006 3,082,000 220,000 14,673,000 17,975,000
continuing operations 2005 3,730,000 192,000 (957,000) 2,965,000
2004 3,320,000 250,000 (969,000) 2,601,000
Capital expenditures, 2006 80,000 - - 80,000
continuing operations 2005 74,000 - - 74,000
2004 76,000 - - 76,000
Depreciation and 2006 162,000 - - 162,000
amortization, continuing 2005 184,000 3,000 - 187,000
operations 2004 199,000 2,000 - 201,000
Interest expense, 2006 124,000 - - 124,000
continuing operations 2005 123,000 - - 123,000
2004 114,000 - - 114,000
Corporate represents the operations of the parent Company, including segment
eliminations.
F-26
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1a Articles of Incorporation of Westcliff Corporation, now known as
Antennas America, Inc. (the "Company"), are incorporated herein by
reference from the Company's Form S-18 Registration Statement dated
December 1, 1987 (File No. 33-18854-D).
3.1b Articles of Amendment of the Company dated January 26, 1988 are
incorporated herein by reference from the Company's Post-Effective
Amendment No. 3 to Form S-18 Registration Statement dated December 5,
1989 (File No. 33-18854-D).
3.1c Articles and Agreement of Merger between the Company and Antennas
America, Inc., a Colorado corporation, dated March 22, 1989, are
incorporated herein by reference from the Company's Post-Effective
Amendment No. 3 to Form S-18 Registration Statement dated December 5,
1989 (File No. 33-18854-D).
3.1d 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 Employment Agreement effective January 2, 2004 between the Company and
Randall P. Marx. (4)
10.3 Employment Agreement effective October 1, 2004 between Winncom
Technologies Corp. and Gregory E. Raskin. (4)
10.4 Employment Agreement effective July 1, 2005 between the Company and
Monty R. Lamirato. (5)
10.5 Stock Purchase Agreement, dated as of July 28, 2006, by and among the
Company, Winncom Technologies Corp. and Bluecoral Limited. (6)
10.6 Escrow Agreement, dated as of July 28, 2006, by and among the Company,
Bluecoral Limited and Consumer Title Services, LLC. (6)
14.1 Amended and Restated Code of Ethics (7)
21 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 10-K for December 31,
2004 filed on March 30, 2005.
(5) Incorporated by reference from the Company's Form 10-K for December 31,
2005 filed on March 20, 2006.
(6) Incorporated by reference from the Company's Form 8-K/A filed on August 2,
2006.
(7) Incorporated by reference from the Company's Form 8-K filed on November 10,
2006.