10-K 1 arc1205.txt 10-K ================================================================================ ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ======================== FORM 10 - K ======================== (MARK ONE) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2005. 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. ---------------------------- (Exact name of registrant as specified in its charter) Utah ---- (State or other jurisdiction of incorporation or organization) 000-18122 87-0454148 --------- ---------- (Commission File Number) (IRS Employer Identification Number) 10601 West 48th Avenue Wheat Ridge, Colorado, 80033-2660 --------------------------------- (Address of principal executive offices including zip code) (303) 421-4063 -------------- (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 preceeding 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] As of June 30, 2005, 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 $12,371,000. This calculation is based upon the average of the closing bid price of $.12 and ask price of $.12 of the stock on June 30, 2005 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. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The number of shares of the registrant's $.0005 par value common stock outstanding as of February 24, 2006 was 154,300,191. ================================================================================ 2 ARC Wireless Solutions, Inc. Form 10-K for the Year Ended December 31, 2005 Table of Contents Page No. PART I Item 1. Business......................................................... 4 Item 1a. Risk Factors..................................................... 13 Item 2. Properties....................................................... 15 Item 3. Legal Proceedings................................................ 16 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............................. 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation......................................... 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....... 24 Item 8. Financial Statements and Supplementary Data...................... 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................... 25 Item 9A. Controls and Procedures.......................................... 25 Item 9B. Other Information................................................ 25 PART III Item 10. Directors and Executive Officers of the Registrant............... 26 Item 11. Executive Compensation........................................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................................. 34 Item 13. Certain Relationships and Related Transactions................... 36 Item 14. Principal Accountant Fees and Services........................... 36 Part IV Item 15. Exhibits, Financial Statement Schedules.......................... 37 Signatures ................................................................. 39 3 PART I Item 1. Business ---------------- Overview -------- Our Company ----------- We provide high quality, timely, cost effective wireless network component and end-to-end 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. Our Winncom Technologies Corp subsidiary ("Wincomm") specializes in marketing, distribution and service of wireless component and network solutions in support of both voice and data applications, both domestically and internationally. Our Starworks Wireless Inc. subsidiary ("Starworks") specializes in the design, marketing and distribution of cable in the United States, primarily through OEMs and third-party distributors, retailers and the Internet. Principal Products ------------------ Principal products of our Wireless Communications Solutions Division include the following: Cellular Base Station Antennas ------------------------------ Included in the acquisition of certain commercial assets from Ball Aerospace & Technology Corp. ("BATC") in 2001 was the right to use BATC's technology in the manufacturing of the line of base station antennas, which consists of various models used in several frequency bands for cellular systems. These cellular systems include several protocols and technologies such as AMPS, GSM, PCS, GPRS, 2.5G and 3G. Our base station antennas are now being 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 Original Equipment Manufacturers ("OEMS") and distributors. Our base station antenna products have been supplied to Alcatel, Bechtel, General Dynamics, Tessco, Domital and Sprint North Supply. New base station models are being designed to meet other carrier mobile 2.5G and 3G requirements and other companies' fixed wireless high-speed Internet systems as well. 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) and Freedom Antenna Plus(TM) are unique broadband, patented antennas 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 devises 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 ------------------ 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 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 OEM and other special applications. Global Positioning System (GPS) Antennas ---------------------------------------- We have developed proprietary, flat GPS antenna systems that integrates 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 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 -------------- 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 6 GHz. 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 ---------- 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 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, 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 currently markets 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 distributes 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 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 distributes 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 -------- Winncom sells 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 offers 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 ----------- Winncom is a full service value-added distributor, specializing in the design and development of a host of accessory products. These products include 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, enhances the deployment of the readily available low-cost 2.4GHz wireless WAN/ LAN equipment sold by Winncom. The main applications for this new solution include wireless Internet access, campus wireless LANs and wireless spectrum WANs. The frequency converter will provide additional transmission channels in the unlicensed spectrum resulting in a considerable increase in bandwidth capacity. It also promotes usage of the 5.8GHz spectrum to supplement network performance where the 2.4GHz spectrum is saturated. The product is sold both domestically and internationally. 6 Network Infrastructure Product ------------------------------ Winncom offers 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 offers 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 offers a variety of environmental enclosures for a broad range of wireless products for outdoor applications. Winncom continuously evaluates new products, exploring the new markets and pursues distribution alliances with manufacturers whose equipment complements Winncom's product offerings as well as the development of Winncom's proprietary products that include amplifiers, frequency converters, antennas, outdoor enclosures and RF accessories. 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, 7 among other things, is designed to encourage both existing and potential customers to view us as a potential source for diversified wireless solutions. Inquiries through the web site are pursued by our in-house and outside sales personnel. To help customers get answers quickly about our products, we have established a toll-free telephone number administered by our customer service personnel from 8:00 a.m. to 5:00 p.m. mountain time. Many of our products are also marketed internationally. We 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 is 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 comprises networking value added resellers ("VARs"), system integrators, ISPs, competitive local exchange carriers ("CLECs") and incumbent local exchange carriers ("ILECs"). Winncom promotes and supports the one-stop-source philosophy for wireless data networking products and services. Consistent with our one-stop-source approach, Winncom markets and sells 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 expends its domestic and international marketing and advertising efforts through print media, trade shows and via the Internet. The main marketing focus is to expand the reseller base of customers, which are active in medical, healthcare, enterprise, government, education and industrial market segments. Winncom is also expanding its marketing efforts to sell service providers and OEM markets. Additionally, Winncom continually expands its wireless certification training programs, including vendor-authorized certification for Value Added Resellers ("VARs"). Winncom provides wireless awareness seminars for system integrators and consultant/design firms. We also have alliances with our vendors that include road-shows, authorization/certification programs, trade shows and advertising. Winncom's web site has complete E-commerce capability, enabling customers to order and pay for products online. Winncom's suppliers generally warrant the products they distribute and allow returns of defective products, including those returned to us by our customers. Winncom does not independently warrant the products they distribute; however, they do 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 has 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 are also 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 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. 8 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 Technologies Corp. ("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 is 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. The first phase of the contract is expected to be completed by the end of 2006 and is expected to generate revenues of $18 to $22 million. Production ---------- 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 offers 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 2005, 2004 and 2003. We spent approximately $315,000 $250,000 and $289,000 on R&D in 2005, 2004 and 2003, 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. 9 Financial Information About Industry Segments. ---------------------------------------------- The Company has three reportable segments that are separate business units that offer different products as follows: distribution of wireless communication products, antenna manufacturing and cable products. Please see Note 10 to our consolidated financial statements, included in this report. Employees --------- At December 31, 2005, we had 111 full time employees including 63 in manufacturing and distribution, 16 in sales and customer support, 12 in engineering and product development, and 20 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 13 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. 10 The former president of our subsidiary Starworks Wireless, Inc., 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 Technologies Inc. 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. 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 which is for our Omni-Dualbase(TM) antenna. Mr. Olson has permanently assigned to the Company 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. 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, AIRBASE, UNIPAK, FREEDOM ANTENNA, EXSITE, OMNIBASE and PARITY that are registered marks. We also have in use the following trademarks, which we anticipate will become registered: ARC VLPA, DUALBASE, FREEDOM PLUS 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 10,545,000 units at $.04 per unit, 11 resulting in net proceeds of approximately $363,000. (The number of units and price per unit have been adjusted to reflect our 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 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 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 41,952,000 of our shares, and our name was changed to Antennas America, Inc. In October 2000, we changed our name to ARC Wireless Solutions, Inc. ("ARC Wireless" or the "Company") 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. 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 (6,946,000 shares). The notes were paid in full by September 2000, with an $85,000 negotiated early payment reduction. On September 29, 2000, we purchased, through our subsidiary, Starworks Wireless Inc. ("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 (1,959,000 shares). As a result of a settlement agreement reached with the former shareholders of Starworks Technology, Inc. in December 2001, 1,459,499 shares of our common stock were returned to us and we received an option to purchase the remaining 500,000 shares of common stock at $.15 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 12 Distribution", "Production", "Research and Development", "Competition", "Governmental Regulations" and "Patents", and "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation", regarding our financial position, business strategy, plans and objectives of our management for future operations and capital expenditures, and other matters, other than historical facts, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements and the assumptions upon which the forward-looking statements are based are reasonable, we can give no assurance that such expectations will prove to have been correct. Additional statements concerning important factors that could cause actual results to differ materially from our expectations are disclosed in the following "Risk Factors" section and elsewhere in this Annual Report. In addition, the words "believe", "may", "will", "when", "estimate", "continue", "anticipate", "intend", "expect" and similar expressions, as they relate to ARC Wireless, 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 year ended December 31, 2003, 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. 13 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. However, we believe that we will have certain advantages in attempting to develop and market our products, including a more cost-effective technology, the ability to undertake smaller projects, and the ability to respond to customer requests more quickly than some larger competitors. We cannot be certain that these conclusions will prove correct. 6. Our success depends on the availability of efficient labor and we cannot predict that we will continue to have access to this labor at an affordable cost. We produce and assemble our antenna and coaxial cable kit products at our own facilities and are dependent on efficient workers for these functions. We cannot predict that efficient workers 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 and Gregory E. Raskin, Winncom's CEO. 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 which 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 the 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 24, 2006, the low bid price for the common stock was $0.12, the high asked price was $0.12 and the closing sale price was $0.12. 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 14 prices, lower sales or reduced sales growth, lower gross margins, extended payment terms with customers, increased capital investment and interest costs, bad debt risks and product supply shortages; o Termination of a supply or services agreement with a major supplier or customer or a significant change in supplier terms or conditions of sale; o the continuation or worsening of the severe downturn in economic conditions (particularly purchases of technology products) and failure to adjust costs in a timely fashion in response to a sudden decrease in demand; o losses resulting from significant credit exposure to reseller customers and negative trends in their businesses; o reductions in credit ratings and/or unavailability of adequate capital; 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; o the distribution business is subject to the risk that the value of our inventory will be affected adversely by suppliers' price reductions or by technological changes affecting the usefulness or desirability of the products comprising the inventory. o the loss of a distribution agreement with a major supplier or the loss of a major supplier, could have a material adverse impact on the business of Winncom. We have instituted in the past and continue to institute changes in our strategies, operations and processes to address these risk factors and to mitigate their impact on our results of operations and financial condition. However, no assurances can be given that we will be successful in these efforts. 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 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 offices and for the manufacture of antennas. This lease commenced on July 1, 2003 and expires on June 30, 2010. In addition, we lease approximately 24,000 square feet of office and warehouse space at our Winncom facility in Solon, Ohio, where we sell and distribute component solutions for LAN/WAN communications systems. This lease expires in December 31, 2010. 15 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, 2005 or at the date of this report that management believes will have a material impact on the financial position or operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders ----------------------------------------------------------- There have been no matters submitted to a vote of shareholders during the last quarter of the year ended December 31, 2005 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ------------------------------------------------------------------------- Our common stock is traded in the over-the-counter market, and prices for our shares are quoted on the OTC Bulletin Board under the trading symbol "ARCS". Because trading in our shares is so limited, prices can be highly volatile. 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. Common Stock ------------ Sales Price ----------- Quarter Ended High Low ------------- ---- --- March 31, 2004 $.22 $.13 June 30, 2004 .17 .09 September 30, 2004 .16 .10 December 31, 2004 .21 .12 March 31, 2005 .19 .13 June 30, 2005 .16 .10 September 30, 2005 .14 .10 December 31, 2005 .13 .09 On February 24, 2006 the closing sales price for our common stock was $0.12 and the approximate number of our shareholders of record was 443. 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 --------------------------------------- For the year ended December 31, 2005, we recorded the issuance of 17,350 shares of common stock to directors for outstanding obligations for directors' fees in the amount of $2,050. 16 For the year ended December 31, 2005, the Company granted a total of 350,000 options, 100,000 to employees and 250,000 to outside directors. 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. Equity Compensation Plan Information. ------------------------------------- Securities authorized for issuance under our equity compensation plans as of December 31, 2005 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 2,525,000 $.15 6,267,000 Equity compensation plans not approved by security holders 0 - - Total 2,525,000 $.15 6,267,000 17 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, ------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ Revenues $ 39,657,000 $ 35,662,000 $ 29,181,000 $ 30,205,000 $ 29,007,000 Gross Profit 7,477,000 6,784,000 4,984,000 6,082,000 6,054,000 Income (loss) from operations 1,032,000 594,000 (473,000) 261,000 (2,611,000) Net income (loss) $ 1,292,000 $ 688,000 $ (285,000) $ 307,000 $ (2,801,000) Earnings (loss) per share: Basic and diluted $ .008 $ .004 $ (.002) $ .002 $ (.019) ------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents $ 167,000 $ 321,000 $ 227,000 $ 265,000 $ 345,000 Working capital 7,816,000 7,289,000 7,049,000 3,502,000 5,589,000 Total Assets 33,490,000 22,493,000 22,740,000 23,455,000 24,001,000 Total Liabilities 16,680,000 7,031,000 7,968,000 8,451,000 9,354,000 Stockholders' equity $ 16,810,000 $ 15,462,000 $ 14,772,000 $ 15,004,000 $ 14,647,000 The following table sets forth selected unaudited consolidated financial data for each of the Company's last eight fiscal quarters: 2005 December 31 September 30 June 30 March 31 ----------- ------------ ------- -------- Net sales $ 13,005,000 $ 10,468,000 $ 8,108,000 $ 8,076,000 Gross profit 2,247,000 1,984,000 1,834,000 1,412,000 Net income (loss) $ 946,000 $ 240,000 $ 207,000 $ (101,000) Net income (loss) per share $ .006 $ .002 $ .001 $ (.001) 2004 December 31 September 30 June 30 March 31 ----------- ------------ ------- -------- Net sales $ 10,065,000 $ 8,973,000 $ 9,561,000 $ 7,063,000 Gross profit 1,781,000 1,878,000 1,768,000 1,357,000 Net income (loss) $ (53,000) $ 336,000 $ 324,000 $ 81,000 Net income (loss) per share $ (.001) $ .002 $ .002 $ .001
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------------------------------------------------------------- Financial Condition At December 31, 2005 we had approximately $7.8 million in working capital, which is an improvement over working capital at December 31, 2004 of $7.3 million. While there were significant increases in trade receivables ($3.6 million), and construction in progress ($5.9 million), (related to the Kazakhtelecom Project and new in 2005), and deferred tax assets ($516,000), these increases were offset by increases in trade accounts payable, $8.2 million and construction contract billings in excess of revenue $896,000(also new in 2005). Trade payables were unusually high at the end of 2005 compared to 2004 because Winncom purchased approximately $6 million in equipment related to the Kazakhtelecom Project in December, 2005. 18 We had total assets of $33.5 million as of December 31, 2005 as compared with $22.5 million as of December 31, 2005. The $11 million increase is primarily due to increases in trade receivables and construction in progress discussed above. Liabilities increased from $7.03 million at December 31, 2004 to $16.7 million at December 31, 2005, or approximately $9.4 million primarily due to the purchase of approximately $6 million in equipment in December 2005, borrowings on the foreign line of credit of $1 million and billings in excess of cost of $897,000 all related to the Kazakhtelecom Project. We had net cash used in operating activities of $731,000 and $239,000 for the years ended December 31, 2005 and 2003. We had net cash provided by operating activities of $706,000 for the year ended December 31, 2004. Management believes that continued profitable operations, current working capital, new and renewed bank lines of credit, will be sufficient to allow the Company to maintain its operations through December 31, 2006 and into the foreseeable future. Long Term Contract 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 Technologies Corp. ("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 is 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. 19 The first phase of the contract is expected to be completed by the end of 2006 and is expected to generate revenues of $18 to $22 million. Off-Balance Sheet Arrangements ------------------------------ We do not have any off-balance sheet arrangements. Contractual Obligations
Payments Due By Period ------------------------------------------------- Less than 1 More than 5 Total Year 1-3 Years 3-5 Years Years ----- ---- --------- --------- ----- Lines of credit $4,357,000 $1,888,000 $2,469,000 - - Long-term debt $ 125,000 $ 125,000 - - - Capital lease obligations (1) $ 123,000 $ 78,000 $ 41,000 $ 4,000 - Operating leases $1,694,000 $ 329,000 $ 709,000 $656,000 - Purchase obligations (2) $4,852,000 $4,852,000 - - -
(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 Operations --------------------- Fiscal Year Ended December 31, 2005 Compared To Fiscal Year Ended December 31, 2004 ------------------------------------------------------------------------------ Total revenues increased 11.2% from $35.7 million for the year ended December 31, 2004 to $39.7 million for the year ended December 31, 2005. The $4 million increase in revenues during the year ended December 31, 2005, is primarily attributable to an increase in Winncom's revenues from $29.2 million for the year ended December 31, 2004 to $32.9 million for the year ended December 31, 2005 and 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. Sales increased for the year ended December 31, 2005 at Winncom, boosted by sales to international customers of approximately $1.4 million each in the first and third quarter of 2005 and the commencement of the Kazakhtelecom construction contract that generated $2.6 million in contract revenue. This increase in sales occurred despite the decrease in revenue in the second quarter of 2005, which was attributable to Winncom's customers decreasing Proxim equipment orders due to their concern related to the announcement by Proxim of its bankruptcy and pending sales of assets, which was completed on July 27, 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 18.8% and 19% for the year ended December 31, 2005 and 2004, respectively. The decrease in gross margin for the year ended December 31, 2005 as compared to the year ended December 31, 2004 is primarily the result of a 13% increase in Winncoms revenue. Even though the Wireless Communications Solutions Division sales were relatively flat, only a $200,000 increase comparing 2005 to 2004, they contributed an additional $200,000 in gross margin comparing 2005 to 2004. The Wireless Communications Solutions Division accounted for only 16% of total revenues compared to the year ended December 31, 2005 as compared to the year ended December 31, 2004 in which the Wireless 20 Communications Solutions Division sales accounted for 17% of total revenues. Products from the Wireless Communications Solutions Division have a higher margin than the products of Winncom or Starworks. In addition, Winncoms margins were slightly lower in 2005 compared to 2004 as a result of the long term construction contract revenue which has a lower margin that Winncoms normal distribution revenue. Selling, general and administrative expenses (SG&A) increased by $255,000 for the year ended December 31, 2005 compared to the year ended December 31, 2004. The increase in SG&A from 2004 to 2005 is primarily attributable to increases in international marketing costs and compensation (including commissions and bonuses). Due to the potential of wireless networking in international markets, Winncom has been increasing its resources and marketing costs for its international markets. International costs primarily include marketing, advertising, trade shows, travel and outside services. SG&A as a percent of revenue decreased from 17.4% for the year ended December 31, 2004 to 16.3% for the year ended December 31, 2005. Salaries and wages remain the largest component of SG&A, constituting 54.5% and 54% of the total for the year ended December 31, 2005 and 2004, respectively. Net interest expense was $284,000 for the year ended December 31, 2005 compared to $300,000 for the year ended December 31, 2004. While the average balance outstanding on the lines of credit and term loan decreased by 35% from $4 million for the year ended December 31, 2004 to $2.6 million for the year ended December 31, 2005, the prime interest rate increased 40% from 5% at December 31, 2004 to 7% as of December 31, 2005. The reduction of the average line-of-credit balance was primarily due to profitability and a decease in the average number of days trade accounts receivable were outstanding. We had an income tax benefit of $292,000 for the year ended December 31, 2005 compared to income tax expense of $53,000 for the year ended December 31, 2004. The 2005 income tax benefit is comprised of two components, taxes currently payable of approximately $198,000 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. The Company had net income of $1,292,000 for the year ended December 31, 2005 as compared to net income of $688,000 for the year ended December 31, 2004. As discussed in the previous paragraph the Company had an income tax benefit of $292,000 in 2005 compared to income tax expense of $53,000. Income before income taxes rose 35% from $741,000 in 2004 to $1 million in 2005 mainly due to an 11% increase in net revenues from 2004 to 2005 offset by a reduction in other income in 2005, primarily a reduction of vendor early payment discounts of approximately $200,000 due to Winncom suspending early payments to Proxim, its largest vendor. Other income in 2005 also included a gain on sales of assets of $60,000 for which there was none in 2004 and other income in 2004 included collection of a previously written off account receivable of $15,000. Fiscal Year Ended December 31, 2004 Compared To Fiscal Year Ended December 31, 2003 ------------------------------------------------------------------------------ Revenues were $35.7 million and $29.2 million for the years ended December 31, 2004 and 2003, respectively. The $6.5 million increase in revenues for the year ended December 31, 2004 compared with the year ended December 31, 2003 is primarily due to a $5.6 million increase in Winncom's revenues, a $500,000 increase in the Wireless Communications Solutions Division's revenues, and a $400,000 increase in Starworks' revenues. Gross profit margins were 19% and 17.1% for the year ended December 31, 2004 and December 31, 2003, respectively or an 11% increase. The higher gross margin for the year ended December 31, 2004 compared with the year ended December 31, 2003 is primarily the result of higher margins from the Wireless Communications 21 Solutions Division whose margins increased from 35.6% to 43.5% as a result of product mix even though the percentage of revenues from the Wireless Communications Solutions Division compared to total revenues declined. For the year ended December 31, 2004, the Wireless Communications Solutions Division sales accounted for 17% of revenues as compared with the year ended December 31, 2003, in which the Wireless Communications Solutions Division sales accounted for 19.2% of revenues. Selling, general and administrative expenses (SG&A) were approximately $6.190 million for the year ended December 31, 2004 compared to $5.457 million for the year ended December 31, 2003, an increase of approximately $733,000. Despite the increase in SG&A, SG&A as a percent of revenue decreased from 18.7% for the year ended December 31, 2003 to 17.4% for the year ended December 31, 2004. Salaries and wages remain the largest component of SG&A, constituting 55% of the total SG&A for the year ended December 31, 2004 and 51% for the year ended December 31, 2003. The total dollar amount of salaries and wages increased from $2.8 million for the year ended December 31, 2003 to $3.4 million for the year ended December 31, 2004. Nearly half the increase in salaries and wages between 2003 and 2004 is due to increases in sales commissions as a result of the 22% increase in revenues. Net interest expense was $300,000 for the year ended December 31, 2004 compared with $190,000 for the year ended December 31, 2003. The primary reason for the increase in interest expense was due to accounts receivable factoring by the Wireless Communications Solutions Division, which commenced in December 2003. Interest expense from trade accounts receivable factoring was $113,000 in 2004 as compared to $13,000 in 2003. While the average balance outstanding on the line of credit was lower in 2004 as compared to 2003, the lower balance was offset by slightly higher interest rates. The average interest rate on the line of credit was 4.8% for the year ended December 31, 2004 as compared with 4.625% for the year ended December 31, 2003. Other income in 2004 is primarily vendor early payment discounts that Winncom has taken advantage of as a result of it's improved cash flow. Those early payment discounts amounted to $373,000 in 2004 as compared to $63,000 in 2003. Also included in other income for the year ended December 31, 2003 is a gain from debt settlements of $148,000 and a refund of prior years' franchise taxes of $220,000, none of which occurred in 2004. The Company had net income of $688,000 for the year ended December 31, 2004 as compared with a net loss of $285,000 for the year ended December 31, 2003. A 22 % increase in revenues as well as an 11% increase in gross margin, are the two main factors that contributed to profitability in 2004. Also contributing to profitability in 2004 was the fact that because of improved cash flow, Winncom could take advantage of early vendor payment discounts which were approximately $300,000 higher in 2004 as compared to 2003. Critical Accounting Policies and Estimates The Company's significant accounting policies are summarized in Note 1 of its consolidated financial statements 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 22 credit-worthiness, historical bad debts, and geographic risk. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As of December 31, 2005, our net accounts receivable balance was $7,706,000. Inventory: Inventory is stated at the lower of cost or net realizable value. Cost is based on a first-in, first-out basis. We review net realizable value of inventory in detail on an on-going basis, with consideration given to deterioration, obsolescence, and other factors. If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, additional write-downs or adjustments to recognize additional cost of sales may be required. As of December 31, 2005, our inventory balance was $6,107,000. 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, 2005, we had $10.9 million of goodwill and 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. 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 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 $385,000 should be adequate for any 23 exposure to loss in our accounts receivable as of December 31, 2005. We have also established reserves for slow moving and obsolete inventories and believe the current reserve of $799,000 is adequate. We depreciate our property and equipment over their estimated useful lives and we have not identified any items that are impaired. Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) which is effective for the Company beginning January 1, 2006, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. The Company has not yet completed its evaluation of the effect of SFAS No. 123(R) but expects its adoption to have an effect on the financial statements similar to the pro-forma effects reported in Note 1 to the Consolidated Financial Statements under the caption above "Stock Based Compensation". In November 2004, the FASB issued SFAS No. 151, Inventory Costs, which revised ARB 43, relating to inventory costs. This revision is to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This Statement requires that these items be recognized as a current period charge regardless of whether they meet the criterion specified in ARB 43. In addition, this Statement requires the allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 151 will have a material impact on the Company's financial statements. The FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which changes the guidance in APB Opinion 29, Accounting for Nonmonetary Transactions. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective during fiscal years beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will have a material impact on the Company's financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS No. 154 requires restatement of prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Also, SFAS No. 154 requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. 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 lines of credit and note payable to the banks which have variable interest rates equal to existing bank prime rate (7.0% as of December 31, 2005) plus one-half percent to two percent. The prime interest rate increased from 5.0% to 7.0% in 2005 and increased to 5.25% in January 2005. An increase in the bank's prime interest rates on the notes payable by an additional 2% in 2006 would increase our yearly 24 interest expense by approximately $52,000, assuming borrowed amounts remain outstanding at 2005 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-23 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 Subsequent to the date of this evaluation, the Chief Executive Officer and Chief Financial Officer are not aware of any significant changes in the Company's internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses, or in other factors that could significantly affect these controls to ensure that information required to be disclosed by 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 25 PART III Item 10. Directors and Executive Officers of the Registrant ----------------------------------------------------------- Directors and Executive Officers. --------------------------------- Our directors and executive officers are as follows: ----------------------------------------------------
Name Age Position with the Company Director Since ---- --- ------------------------- -------------- Randall P. Marx 53 Chief Executive Officer, Secretary, Director 1990 Donald A. Huebner 60 Director 1998 Robert E. Wade 59 Director 2005 Sigmund A. Balaban 64 Director 1994 Gregory E. Raskin 52 President, Director 2001 Monty R. Lamirato 50 Chief Financial Officer, Treasurer - Steve C. Olson 49 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 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 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. 26 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 since 1992 to 2000. In October 1995, Teknika Electronics changed its name to Fujitsu General America, Inc. Fujitsu General America, Inc. is a subsidiary of Fujitsu General, Ltd., a Japanese multiline manufacturer. Gregory E. Raskin. Mr. Raskin is President of the Company and CEO of Winncom. He founded Winncom in 1995 and joined us coincident with the acquisition of Winncom in May 2000. Mr. Raskin was elected as a Director of the Company in February 2001. Previous to Winncom, he was founder and President of a company that introduced (and certified) Wireless LANs to former Soviet Block Countries. He holds MS degrees in Electrical Engineering and Control System Engineering. Monty R. Lamirato. Mr. Lamirato has been 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 ARC Wireless 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, Mr. Sigmund A. Balaban, is an audit committee financial expert. 27 Audit Committee Charter Our Board of Directors has adopted a written charter for the Audit Committee. The Audit Committee will review and assess the adequacy of the Audit Committee charter annually. Compensation Committee The Board of Directors currently has a Compensation Committee, consisting of Mr. Robert E. Wade, the chairman of the compensation committee, Mr. Randall P. Marx, Mr. Gregory E. Raskin and Mr. Sigmund A. Balaban, which met during the year ended December 31, 2005 and 2004 but did not meet during the year ended December 31, 2003. Nominating Committee 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. There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors. 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, 2005, 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 that applies to our executive officers, including Mr. Randall P. Marx, our Chief Executive Officer, Mr. Gregory E. Raskin, our President, Mr. Monty R. Lamirato, our Chief Financial Officer, and Mr. Steven C. Olson, our Chief Technology Officer. 28 Item 11. Executive Compensation ------------------------------- Summary Compensation Table. The following table sets forth in summary form the compensation of our Chief Executive Officer and each other executive officer who received total salary and bonus exceeding $100,000 during any of the three successive fiscal years ending December 31, 2005 (the "Named Executive Officers").
Long Term Compensation ------------------------------------------------ Annual Compensation Awards Payouts ------ ------- ------------------------------------------- Restricted Securities Other Annual Stock Underlying LTIP All Other Fiscal Salary Bonus Compensation Awards Options Payouts Compensation Name and Principal Position Year ($) (1) ($) (2) ($) (3) ($) (#) ($) (4) ($) (5) --------------------------- ---- ------- ------- ------- --- --- ------- ------- Randall P. Marx 2005 235,000 50,000 0 0 0 0 0 Chief Executive Officer, Secretary and Director 2004 195,000 90,000 0 0 0 0 0 2003 195,000 0 0 0 0 0 0 Gregory E. Raskin 2005 385,000 98,000 0 0 0 0 0 President, and Director 2004 321,000 90,000 0 0 0 0 0 2003 300,000 25,000 0 0 0 0 0 Monty R. Lamirato 2005 150,000 15,000 0 0 0 0 0 Chief Financial Officer and Treasurer 2004 135,000 0 0 0 500,000 0 0 2003 125,000 20,000 0 0 0 0 0 Steve C. Olson 2005 175,000 49,000 0 0 0 0 0 Chief Technology Officer 2004 162,000 37,000 0 0 500,000 0 0 2003 155,000 16,000 0 0 0 0 0
(1) The dollar value of base salary (cash and non-cash) earned during the year indicated. (2) The dollar value of bonus (cash and non-cash) earned during the year indicated. (3) During the period covered by the Summary Compensation Table, we did not pay any other annual compensation not properly categorized as salary or bonus, including perquisites and other personal benefits, securities or property. (4) We do not have in effect any plan that is intended to serve as incentive for performance to occur over a period longer than one fiscal year except for our 1997 Stock Option and Compensation Plan. (5) All other compensation received that we could not properly report in any other column of the Summary Compensation Table including our annual contributions or other allocations to vested and unvested defined contribution plans, and the dollar value of any insurance premiums paid by, or on behalf of, the Company with respect to term life insurance for the benefit of the named executive officer, and, the full dollar value of the remainder of the premiums paid by, or on behalf of, us. 29 Option Grants in Last Fiscal Year --------------------------------- There we no individual grants of stock options made to Named Executive Officers during the fiscal year ended December 31, 2005. Aggregated Option Exercises for Last Fiscal Year and Fiscal Year-End Option Values --------------------------------------------------------------------------- The following table provides certain summary information concerning stock option exercises during the fiscal year ended December 31, 2005 by the Named Executive Officers and the value of unexercised stock options held by the Named Executive Officers as of December 31, 2005.
Aggregated Option Exercises For Fiscal Year Ended December 31, 2005 And Year-End Option Values (1) Number of Securities Value of Unexercised Underlying Unexercised In-the- Options at Fiscal Year- Money Options at End (#) (4) Fiscal Year-End ($) (5) ------------------------ ------------------------- Shares Acquired on Name Exercise (2) Value Realized ($) Exercisable Unexercisable Exercisable Unexercisable ---- ------------ ------------------ ----------- ------------- ----------- ------------- (3) Randall P. Marx 0 0 1,000,000 0 0 0 Gregory E. Raskin 0 0 0 0 0 0 Monty R. Lamirato 0 0 500,000 0 0 0 Steve C. Olson 0 0 500,000 0 0 0
(1) No stock appreciation rights are held by any of the Named Executive Officers. (2) The number of shares received upon exercise of options during the year ended December 31, 2005. (3) With respect to options exercised during the year ended December 31, 2005, the dollar value of the difference between the option exercise price and the market value of the option shares purchased on the date of the exercise of the options. (4) The total number of unexercised options held as of December 31, 2005, separated between those options that were exercisable and those options that were not exercisable on that date. (5) For all unexercised options held as of December 31, 2005, the aggregate dollar value of the excess of the market value of the stock underlying those options over the exercise price of those unexercised options. These values are shown separately for those options that were exercisable, and those options that were not yet exercisable, on December 31, 2005. As required, the price used to calculate these figures was the closing sale price of the common stock at year's end, which was $0.10 per share on December 31, 2005. Employee Retirement Plans, Long-Term Incentive Plans, and Pension Plans ----------------------------------------------------------------------- Other than our 1997 Stock Option and Compensation Plan and 401(k) plan, we have no employee retirement plan, long-term incentive plan or pension plan to serve as incentive for performance to occur over a period longer than one fiscal year. 30 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 5,000,000 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 10,000,000 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 250,000 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 50,000 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 250,000 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 250,000 to 25,000 options, and (2) decrease the amount of exercisable options from 50,000 to 5,000 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 25,000 to 125,000 options, and (2) increase the amount of exercisable options from 5,000 to 25,000 per meeting. The other terms of the Outside Director options did not change. The Company granted a total of 250,000 options to Outside Directors under the Plan during 2005 at exercise prices ranging from $.11 to $.15 per share. The Company granted a total of 250,000 options to Outside Directors under the Plan during 2004 and 2002, at an exercise price of $.16 and $.13 per share, respectively. No options were granted during 2003. As of December 31, 2005, there were 425,000 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. There were no options granted in 2003 but in 2005 and 2004, the Board granted a total of 1,100,000 options under the Plan to employees with exercise prices ranging from $.12 to $.15. As of December 31, 2005, there were 2,100,000 exercisable options outstanding related to grants to employees, all of which were granted under the Plan. Compensation of Outside Directors --------------------------------- Standard Arrangements. Outside Directors are paid $250 for each meeting of the Board of Directors that they attend. For meetings in excess of four meetings per year, Outside Directors receive $50 per meeting. Pursuant to the terms of the 1997 Stock Option and Compensation Plan, Outside Directors may elect to receive 31 payment of the meeting fee in the form of our restricted common stock at a rate per share equal to the fair market value of the common stock on the date of the meeting by informing our Secretary, Chief Executive Officer or President of that election on or before the date of the meeting. Directors are also reimbursed for expenses incurred in attending meetings and for other expenses incurred on our behalf. In addition, each Outside Director receives options to purchase shares of common stock (for details see the "1997 Stock Option And Compensation Plan" section above). Outside Directors vested 225,000, 200,000 and 100,000 stock options, respectively, during fiscal years ended December 31, 2005, 2004 and 2003. Outside Directors earned $2,050, $2,000 and $1,000, respectively in meeting attendance fees in 2005, 2004 and 2003, respectively and were paid with the issuance of 17,350 shares of restricted common stock in 2005, the issuance of 13,865 shares of restricted common stock in 2004 and 9,280 shares of restricted common stock in 2003. Other Arrangements. During the year ended December 31, 2005, no compensation was paid to our Outside Directors other than pursuant to the standard compensation arrangements described in the previous section. During the years ended December 31, 2005, 2004 and 2003 Mr. Sigmund Balaban, one of our outside directors was paid $30,000, $30,000 and $30,000, respectively, in connection with his position as Chairman of the Audit Committee. 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 earned a bonus of $50,000 for 2005 and $90,000 for 2004. We entered into a written employment agreement with Mr. Marx effective January 2, 2002, which terminated on January 2, 2004. In accordance with his employment agreement, Mr. Marx received an annual base salary of $195,000 in 2002 and 2003 and a bonus of $70,000 for 2002. He did not earn a bonus for 2003. We entered into a written employment agreement with Gregory E. Raskin, President of our Winncom subsidiary and beneficial owner of 2.7 percent of our stock, or 4,069,162 shares, effective May 24, 2000. The employment agreement was for the period May 24, 2000 through May 31, 2002, at an annual base salary of $250,000. Mr. Raskin also was eligible to earn bonuses of up to $500,000 over the term of the agreement, based on Winncom's periodic attainment of certain revenues and earnings objectives, no bonus was earned in 2001. Mr. Raskin also received options to purchase 250,000 shares of our common stock at a price of $0.89 per share from December 19, 2000 through May 24, 2002. We entered into an employment agreement with Mr. Raskin effective as of June 1, 2002 with a term of two and one-half years. Pursuant to the new agreement, Mr. Raskin is to receive an annual base salary of $300,000 per year. Mr. Raskin was eligible to receive bonuses for each of the years ending December 31, 2002, 2003 and 2004 of between $50,000 and $300,000 depending upon Winncom achieving certain predetermined revenues and EBIDTA goals for those periods. Mr. Raskin earned a bonus of $25,000 and $50,000 for 2003 and 2002, respectively. 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 will earn a bonus of $10% of net income for the years ended December 31, 2005 and 2006. Mr. Raskin earned a bonus of $98,000, $90,000 and $25,000 for 2005, 2004 and 2003, respectively. 32 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 can earn a bonus of $15,000 in 2005 and 2006 if certain net profit goals are achieved. Mr. Lamirato earned a bonus of $15,000 for 2005. We entered into a written employment agreement with Monty R. Lamirato, our Chief Financial Officer and Treasurer, effective July 1, 2004 for the period July 1, 2004 through June 30, 2005, at an annual base salary of $145,000. In addition, Mr. Lamirato also received options to purchase 500,000 shares of our common stock at $0.12 per share exercisable from July 1, 2004 to July 1, 2007. We entered into a written employment agreement with Monty R. Lamirato, our Chief Financial Officer and Treasurer, effective June 22, 2001. The employment agreement is for the period June 22, 2001 through June 30, 2004, at an annual base salary of $111,000, adjusted to $125,000 on July 1, 2002. Mr. Lamirato also is eligible to earn bonuses of $35,000 or 3% of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), whichever is greater, over the term of the agreement. Mr. Lamirato earned a bonus of $20,000 for 2003. Mr. Lamirato also received options to purchase 350,000 shares of our common stock at prices ranging from $.14 to $0.33 per share exercisable from June 22, 2001 through June 30, 2004. 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 earned a bonus of $49,000 in 2005 and $37,000 in 2004. Mr. Olson also received options to purchase 500,000 shares of our common stock at a price of $0.12 per share from August 22, 2004 through August 22, 2007. We entered into a written employment agreement with Steven C. Olson, our Chief Technology Officer, effective August 13, 2001. The employment agreement is for the period August 13, 2001 through August 13, 2004 at an annual base salary of $155,000. Mr. Olson also is eligible to earn bonuses, upon achieving certain gross margin objectives, over the term of the agreement. Mr. Olson earned a bonus of $16,000, in 2003. Mr. Olson also received options to purchase 500,000 shares of our common stock at a price of $0.27 per share from August 13, 2001 through August 13, 2004. 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. Compensation Committee Interlocks and Insider Participation ----------------------------------------------------------- The Compensation Committee is composed of our Chief Executive Officer/Secretary, our President and two non-employee directors. None of these individuals served as a member of the compensation committee of another entity, which has an executive officer serving on the Compensation Committee of the Company. No executive officer of the Company served as a director of another entity, which had an executive officer serving on the Compensation Committee of the Company. Finally, no executive officer of the Company served as a member of the compensation committee of another entity, which had an executive officer serving as a director of the Company. 33 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table summarizes certain information as of February 24, 2006 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: Number of Shares Percent Name and Address of Beneficial Owner Beneficially Owned (1) of Class ------------------------------------ ---------------------- -------- Randall P. Marx 9,480,111(2) 6.1% ARC Wireless Solutions, Inc. 10601 West 48th Ave. Wheat Ridge, CO 80033 Sigmund A. Balaban 1,725,751(3) 1.1% ARC Wireless Solutions, Inc. 10601 West 48th Ave. Wheat Ridge, CO 80033 Donald A. Huebner 296,715(4) * ARC Wireless Solutions, Inc. 10601 West 48th Ave. Wheat Ridge, CO 80033 Robert E. Wade 3,467,000(9) 2.2% ARC Wireless Solutions, Inc. 10601 West 48th Ave. Wheat Ridge, CO 80033 Gregory E. Raskin 4,069,162(5) 2.6% ARC Wireless Solutions, Inc. 10601 West 48th Ave. Wheat Ridge, CO 80033 Steve Olson 587,559(8) * ARC Wireless Solutions, Inc. 10601 West 48th Ave. Wheat Ridge, CO 80033 Monty R. Lamirato 571,133(6) * ARC Wireless Solutions, Inc. 10601 West 48th Ave. Wheat Ridge, CO 80033 Michael Maness 237,313(7) * ARC Wireless Solutions, Inc. 10601 West 48th Ave. Wheat Ridge, CO 80033 34 Number of Shares Percent Name and Address of Beneficial Owner Beneficially Owned (1) of Class ------------------------------------ ---------------------- -------- Barry Nathanson 11,798,559 7.7% 6 Shore Cliff Place Great Neck, NY 11023 Hudson River Investments, Inc. 11,603,225 7.52% Skelton Building, Main Street. POB 3139 Road Town Tortola, British Virgin Islands Evansville Limited 9,301,060 6.03% c/o Quadrant Management Inc. 40 West 57th Street, 20th Floor New York, NY 10019 All officers and directors as a group 20,434,744(2)(3)(4)(5)(6) 13% (eight persons) (7)(8)(9) * Less than one percent. (1) "Beneficial ownership" is defined in the regulations promulgated by the U.S. Securities and Exchange Commission as having or sharing, directly or indirectly (1) voting power, which includes the power to vote or to direct the voting, or (2) investment power, which includes the power to dispose or to direct the disposition, of shares of the common stock of an issuer. The definition of beneficial ownership includes shares underlying options or warrants to purchase common stock, or other securities convertible into common stock, that currently are exercisable or convertible or that will become exercisable or convertible within 60 days. Unless otherwise indicated, the beneficial owner has sole voting and investment power. (2) Includes 8,312,665 shares directly held by Mr. Marx, 98,984 shares in his ARC Wireless 401(k) account, 40,000 shares held by his spouse's IRA and 28,463 shares owned beneficially through a 50% ownership of an LLC. Includes options to purchase 1,000,000 shares at $.18 per share until January 2, 2007, granted under the 1997 Stock Option and Compensation Plan all of which are currently exercisable. 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 155,000 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 1,450,751 shares directly held by Mr. Balaban and Outside Director options granted under the 1997 Stock Option and Compensation Plan to purchase 125,000 shares at $0.16 per share until February 26, 2006, options to purchase 125,000 shares at $0.15 per share until March 15, 2007 and option to purchase 25,000 at $.13 per share until February 21, 2008, all of which are currently exercisable. (4) Includes 96,715 shares directly held by Dr. Huebner and Outside Director options granted under the 1997 Stock Option and Compensation Plan to purchase 125,000 shares at $0.16 per share until February 26, 2006 and 75,000 shares at $0.11 per share until November 1, 2007, all of which are currently exercisable. (5) Includes 3,898,389 shares directly held by Mr. Raskin and 170,773 shares beneficially owned by a partnership in which Mr. Raskin is a partner. 35 (6) Consists of 71,133 shares in Mr. Lamirato's ARC Wireless 401(k) account and options to purchase 500,000 shares until July 1, 2007, all granted under the 1997 Stock Option and Compensation Plan all of which are currently exercisable. (7) Consists of 196,280 shares directly held by Mr. Maness and 41,033 shares in his ARC Wireless 401(k) account. (8) Consists of 87,559 shares in Mr. Olson's ARC Wireless 401(k) account and options to purchase 500,000 shares at $.16 per share until August 22, 2007, granted under the 1997 Stock Option and Compensation Plan and all of which are currently exercisable. (9) Includes 3,392,000 shares directly held by Mr. Wade, 50,000 shares held by his spouse and options to purchase 25,000 shares at $.13 per share until February 21, 2008, granted under the 1997 Stock Option and Compensation Plan and all of which are currently exercisable 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 $60,000. 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 (auditors), 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. The 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, 2005, 2004 and 2003: 2005 2004 2003 ---- ---- ---- Audit fees $110,000(1) $99,000(1) $90,000(1) Audit-related fees --(2) --(2) --(2) Tax fees 10,000(3) 9,000(3) 12,000(3) All other fees -- -- ---------------------------------------- Total audit and non-audit fees $120,000 $108,000 $102,000 ======================================== (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 2005, 2004 and 2003 and for reviews of the financial statements included in ARC's quarterly reports on Form 10-Q for the first three quarters of fiscal 2005, 2004 and 2003 and related SEC registration statements. (2) Includes fees billed for professional services rendered in fiscal 2005, 2004 and 2003, in connection with acquisition planning and due diligence. (3) Includes fees billed for professional services rendered in fiscal 2005, 2004 and 2003, in connection with tax compliance (including U.S. federal and state returns) and tax consulting. 36 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, 2005 and 2004..........F-2 Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003............................F-3 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2005, 2004 and 2003........F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003............................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 Cost Write-offs, Balance, End Beginning of and Expenses Net of of Year Year Recoveries Allowance for Doubtful Accounts Years Ended December 31, 2005 $ 502,000 233,000 (350,000) $385,000 2004 $ 257,000 308,000 ( 63,000) $502,000 2003 $ 987,000 193,000 (923,000) $257,000 Balance, Charges to Cost Beginning of and Expenses Balance, End Year Write-offs of Year Inventory Valuation Years Ended December 31, 2005 $712,000 87,000 - $799,000 2004 $498,000 214,000 - $712,000 2003 $382,000 116,000 - $498,000 37
(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 (5) 3.2 Bylaws of the Company as amended and restated on March 25, 1998 (6) 10.1 Employment Agreement dated as of October 1, 1998 between the Company and Randall P. Marx is incorporated by reference from the Company's Annual Report on From 10-KSB for the year ended December 31, 1998 (File No. 000-18122) 10.2 Promissory Note dated February 15, 1999 from the Company to Jasco Products Co., Inc. (2) 10.3 Stock Option Agreement dated February 15, 1999 between the Company and Jasco Products Co., Inc. (2) 10.4 Agreement between and among Winncom Technologies Inc., Winncom Technologies Corp. and the Company dated May 24, 2000 (3) 10.5 Employment Agreement dated as of May 24, 2000 between Winncom Technologies Corp. and Gregory E. Raskin (5) 10.6 Agreement between and among Starworks Technology, Inc., Starworks Wireless Inc. and the Company dated September 29, 2000 (4) 10.7 Employment Agreement dated as of June 22, 2001 between ARC Wireless Solutions, Inc. and Monty R. Lamirato (7) 10.8 Employment Agreement dated as of August 13, 2001 between ARC Wireless Solutions, Inc. and Steven C. Olson (7) 10.9 Employment Agreement dated as of May 30, 2000 between ARC Wireless Solutions, Inc. (formerly Antennas America, Inc.) and Burton J. Calloway (7) 10.10 Employment Agreement dated as of January 2, 2002 between the Company and Randall P. Marx. (8) 10.11 Employment Agreement dated as of June 1, 2002 between Winncom Technologies Corp. and Gregory E. Raskin. (8) 10.12 Employment Agreement dated as of July 1, 2002 between the Company and Monty R. Lamirato.(8) 10.13 Employment Agreement effective January 2, 2004 between the Company and Randall P. Marx. (10) 10.14 Employment Agreement effective October 1, 2004 between Winncom Technologies Corp. and Gregory E. Raskin. (10) 10.15 Employment Agreement effective July 1, 2004 between the Company and Monty R. Lamirato. (10) 10.16 Employment Agreement effective July 1, 2005 between the Company and Monty R. Lamirato. 14.1 Code of Ethics (9) 21 Subsidiaries of the Registrant 38 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 ------------------- (1) Incorporated by reference from the Company's Form SB-2 Registration Statement dated June 8, 1998 (File No. 333-53453) (2) Incorporated by reference from the Company's Form SB-2 Registration Statement filed February 9, 2000 (File No. 333-96485) (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 Exhibit 2.1 of the Company's Form 8-K filed on October 13, 2000 (5) Incorporated by reference from the Company's Form 10-KSB for December 31, 2000 filed on April 2, 2001 (6) Incorporated by reference from the Company's Form 10-KSB for December 31, 1997 filed on March 31, 1998 (7) Incorporated by reference from the Company's Form 10-KSB for December 31, 2001 filed on April 1, 2002 (8) Incorporated by reference from the Company's Form 10-KSB for December 31, 2002 filed on March 28, 2003. (9) Incorporated by reference from the Company's Form 10-K for December 31, 2003 filed on March 30, 2004 (10) Incorporated by reference from the Company's Form 10-K for December 31, 2004 filed on March 30, 2005 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 15, 2006 By: /s/ Randall P. Marx ------------------------------- Randall P. Marx, Chief Executive Officer Date: March 15, 2006 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 15, 2006 /s/ Gregory E. Raskin ------------------------------- Gregory E. Raskin, Director March 15, 2006 /s/ Sigmund A. Balaban ------------------------------- Sigmund A. Balaban, Director March 15, 2006 /s/ Robert E. Wade ------------------------------- Robert E. Wade, Director March 15, 2006 /s/ Donald A. Huebner ------------------------------- Donald A. Huebner, Director 39 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, 2005 and 2004, 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, 2005. Our audit also included the consolidated financial statement schedules listed in the index at Item 15. These consolidated financial statements and the consolidated financial statement schedules 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, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the consolidated financial statement schedules, 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. /s/ Hein & Associates LLP Denver, Colorado February 17, 2006 F-1
ARC Wireless Solutions, Inc. Consolidated Balance Sheets December 31, 2005 2004 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 167,000 $ 321,000 Accounts receivable trade, net of allowance for doubtful accounts of $385,000 and $502,000, respectively 7,706,000 4,145,000 Accounts receivable vendors 766,000 688,000 Inventory, net 6,107,00 5,624,000 Construction in progress 5,900,000 -- Deferred tax assets 516,000 -- Other current assets 800,000 209,000 ------------ ------------ Total current assets 21,962,000 10,987,000 Property and equipment, net 433,000 527,000 Other assets: Goodwill, net 10,824,000 10,824,000 Intangible assets, net 103,000 113,000 Other assets 168,000 42,000 ------------ ------------ Total assets $ 33,490,000 $ 22,493,000 ============ ============ Liabilities and stockholders' equity Current liabilities: Accounts payable $ 10,413,000 $ 2,253,000 Bank debt - current 2,013,000 493,000 Accrued expenses 757,000 890,000 Billings in excess of recognized income 897,000 -- Current portion of capital lease obligations 66,000 62,000 ------------ ------------ Total current liabilities 14,146,000 3,698,000 Deferred tax liabilities 26,000 -- Capital lease obligations, less current portion 39,000 90,000 Bank debt, less current portion 2,469,000 3,243,000 ------------ ------------ Total liabilities 16,680,000 7,031,000 ------------ ------------ Commitments (Notes 7 and 9) Stockholders' equity: (Note 3) Common stock, par value $.0005; 250,000,000 shares authorized; 156,262,000 and 155,857,000 shares issued, respectively 78,000 78,000 Preferred stock, par value $.001; 2,000,000 shares authorized; no shares issued and outstanding -- -- Additional paid-in capital 21,760,000 21,704,000 Treasury stock (1,962,000 shares) (1,195,000) (1,195,000) Accumulated deficit (3,833,000) (5,125,000) ------------ ------------ Total stockholders' equity 16,810,000 15,462,000 ------------ ------------ Total liabilities and stockholders' equity $ 33,490,000 $ 22,493,000 ============ ============ See accompanying notes to consolidated financial statements. F-2 ARC Wireless Solutions, Inc. Consolidated Statements of Operations Year Ended December 31, 2005 2004 2003 ------------ ------------ ------------ Sales, net $ 37,025,000 $ 35,662,000 $ 29,181,000 Contract revenue 2,632,000 -- -- ------------ ------------ ------------ Total revenue 39,657,000 35,662,000 29,181,000 ------------ ------------ ------------ Cost of sales 29,884,000 28,878,000 24,197,000 Contract cost of goods sold 2,296,000 -- -- ------------ ------------ ------------ Total cost of goods sold 32,180,000 28,878,000 24,197,000 ------------ ------------ ------------ Gross profit 7,477,000 6,784,000 4,984,000 Operating expenses: Selling, general and administrative expenses 6,445,000 6,190,000 5,457,000 ------------ ------------ ------------ Total operating expenses 6,445,000 6,190,000 5,457,000 ------------ ------------ ------------ Income (Loss) from operations 1,032,000 594,000 (473,000) Other income (expense): Interest expense (284,000) (300,000) (190,000) Other income 252,000 447,000 444,000 ------------ ------------ ------------ Total other income (expense) (32,000) 147,000 254,000 ------------ ------------ ------------ Income (Loss) before income taxes 1,000,000 741,000 (219,000) Less provision for income taxes (expense) benefit 292,000 (53,000) (66,000) ------------ ------------ ------------ Net income (loss) $ 1,292,000 $ 688,000 $ (285,000) ------------ ------------ ------------ Basic and diluted income (loss) per share $ .008 $ .004 $ (.002) ------------ ------------ ------------ 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 -------------------- Paid in Stock Accumulated Shares Amount Capital Shares Amount Deficit -------- -------- -------- -------- -------- -------- Balances, January 1, 2003 155,185 $ 78 $ 21,649 (1,962) $ (1,195) $ (5,528) Issuance of common stock to 401(K) Plan 649 52 Common stock issued for directors' fees 9 1 Net loss (285) -------- -------- -------- -------- -------- -------- Balances, December 31, 2003 155,843 $ 78 $ 21,702 (1,962) $ (1,195) $ (5,813) Common stock issued for directors' fees 14 -- 2 Net income 688 -------- -------- -------- -------- -------- -------- Balances, December 31, 2004 155,857 $ 78 $ 21,704 (1,962) $ (1,195) $ (5,125) Issuance of common stock to 401(K) Plan 408 57 Common stock issued for directors' fees 17 2 Shares returned in settlement agreement (20) (3) Net income 1,292 -------- -------- -------- -------- -------- -------- Balances, December 31, 2005 156,262 $ 78 $ 21,760 (1,962) $ (1,195) $ (3,833) ======== ======== ======== ======== ======== ======== See accompanying notes to consolidated financial statements. F-4 ARC Wireless Solutions, Inc. Consolidated Statements of Cash Flows Year Ended December 31, 2005 2004 2003 ----------- ----------- ----------- Operating activities Net Income (loss) $ 1,292,000 $ 688,000 $ (285,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 227,000 251,000 286,000 Provision for doubtful receivables 233,000 308,000 193,000 Non-cash expense for issuance of stock and options (1,000) 2,000 53,000 Provision for deferred income taxes (490,000) -- -- Gain on debt settlements -- -- (148,000) Changes in operating assets and liabilities: Accounts receivable, trade and vendor (3,872,000) (349,000) 1,170,000 Inventory (483,000) 457,000 (684,000) Construction in progress (5,900,000) -- -- Other current assets (591,000) (92,000) 14,000 Accounts payable and accrued expenses 8,084,000 (575,000) (848,000) Billings in excess of recognized income 896,000 -- -- Other (126,000) 16,000 10,000 ----------- ----------- ----------- Net cash provided by (used in) operating activities (731,000) 706,000 (239,000) Investing activities Patent acquisition costs (6,000) (19,000) (15,000) Purchase of property and equipment (100,000) (164,000) (158,000) ----------- ----------- ----------- Net cash used in investing activities (106,000) (183,000) (173,000) Financing activities Repayment of notes payable - others and capital lease obligations (63,000) (513,000) (21,000) Net borrowings under line of credit agreements 746,000 84,000 395,000 ----------- ----------- ----------- Net cash provided by (used in) financing activities 683,000 (429,000) 374,000 ----------- ----------- ----------- Net increase (decrease) in cash (154,000) 94,000 (38,000) Cash, beginning of period 321,000 227,000 265,000 ----------- ----------- ----------- Cash, end of period $ 167,000 $ 321,000 $ 227,000 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid for interest $ 284,000 $ 328,000 $ 190,000 Cash paid for taxes 44,000 51,000 79,000 Supplemental schedule of non-cash investing and financing activities: Purchase of assets under capital lease financing $ 17,000 $ 67,000 $ 139,000 See accompanying notes to consolidated financial statements F-5
ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 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 41,952,000 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. 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. 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") and Starworks Wireless Inc. ("Kit"), 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 $3.8 million since inception in 1989. In 2005, 2004 and 2002 the Company generated net income and in 2003 the Company generated a loss of $285,000. 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 the current level of sales and current working capital and available borrowings on existing bank lines of credit, together with additional equity infusions that management believes would be available, will be sufficient to allow the Company to maintain its operations through December 31, 2006. F-6 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 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 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, 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. 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: 2005 2004 ----------- ----------- Raw materials $ 954,000 $ 917,000 Work in progress 129,000 112,000 Finished goods 5,823,000 5,307,000 ----------- ----------- 6,906,000 6,336,000 Inventory reserve (799,000) (712,000) ----------- ----------- Net inventory $ 6,107,000 $ 5,624,000 =========== =========== F-7 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 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: 2005 2004 ----------- ----------- Machinery and equipment $ 1,166,000 $ 1,116,000 Computer equipment and software 551,000 510,000 Furniture and fixtures 256,000 251,000 Leasehold improvements 132,000 132,000 ----------- ----------- 2,105,000 2,009,000 Accumulated depreciation (1,672,000) (1,482,000) ----------- ----------- $ 433,000 $ 527,000 =========== =========== Depreciation expense, which includes amortization of fixed assets acquired through capital leases, amounted to $211,000, $235,000 and $271,000 during the years ended December 31, 2005, 2004 and 2003, respectively. Patent Costs Patent costs are stated at cost and amortized over ten years using the straight-line method. Patent amortization expense amounted to $16,000, $16,000 and $15,000 for the years ended December 31, 2005, 2004 and 2003, 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 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 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. 2005 2004 ------------ ------------ Patents $ 241,000 $ 235,000 Goodwill 12,164,000 12,164,000 ------------ ------------ 12,405,000 12,399,000 Accumulated amortization (1,478,000) (1,462,000) ------------ ------------ Goodwill and intangible assets, net $ 10,927,000 $ 10,937,000 ============ ============ 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. 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 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 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 total contract costs. 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 year ended December 31, 2005 was $2,632,000. 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 $ 3,529,000 Revenue recognized (2,632,000) ----------- Billings in excess of recognized income $ 897,000 =========== 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 $315,000, $250,000 and $289,000 respectively, for the years ended December 31, 2005, 2004 and 2003. F-10 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 1. Organization and Summary of Significant Accounting Policies, continued Advertising Costs Advertising costs are charged to operations when the advertising is first shown. Advertising costs charged to operations were $40,000, $22,000 and $105,000 in 2005, 2004 and 2003, respectively. Product Warranty The Company's vendors generally warrant the products distributed by the Company and allow the Company to return defective products, including those that have been returned to the Company by its customers. The Company does not independently warrant the products it distributes. The Company does warranty products it manufactures and records a provision for estimated warranty costs at the time of the sale and periodically adjusts the provision to reflect actual experience. Warranty expense was not material to the Company's consolidated statements of operations for the years ended December 31, 2005, 2004 and 2003. 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 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"), and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure, an amendment of FASB Statement No. 123," ("SFAS 148") encourages, but does not require, companies to recognize compensation expense associated with stock-based compensation plans over the anticipated service period based on the fair value of the award on the date of grant. As allowed by SFAS 123 and SFAS 148, the Company has elected to continue to report stock-based compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, no compensation expense has been recognized for options granted. F-11 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 1. Organization and Summary of Significant Accounting Policies, continued Stock Based Compensation, continued The following table illustrates the effect on net income (loss) and earnings (loss) per share had compensation expense for the Company's plans been determined using the fair value-based method:
Year Ended December 31, ----------------------------------------------- 2005 2004 2003 ------------- ------------- ------------- Net income (loss) as reported $ 1,292,000 $ 688,000 $ (285,000) Add: stock based compensation included in reported net income (loss) -- Deduct: Stock-based compensation cost under SFAS 123 (29,000) (86,000) (81,000) ------------- ------------- ------------- Pro forma net income (loss) $ 1,263,000 $ 602,000 $ (366,000) ============= ============= ============= Pro forma shares used in the calculation of pro forma net income (loss) per common share - basic and diluted 154,125,000 153,888,000 153,400,000 Reported net income (loss) per common share - basic and diluted $ .008 $ .004 $ (.002) Pro forma net income (loss) per common share - basic and diluted $ .008 $ .004 $ (.002)
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. The following weighted average assumptions were used: Year Ended December 31, --------------------------------- 2005 2004 2003 ---- ---- ---- Volatility .80 - 1.02 1.04 - Expected life of options (in years) 2 2 - Dividend Yield 0.00% 0.00% -% Risk free interest rate 3.75% 3.0% -% 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 2,525,000 and 4,252,000 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, 2003 the Company incurred a net loss and stock options and stock warrants, totaling 5,013,000 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 2003. F-12 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 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:
Year Ended December 31, 2005 2004 2003 ------------- ------------- ------------- Numerator: Net Income (Loss) $ 1,292,000 $ 688,000 $ (285,000) ============= ============= ============= Denominator: Denominator for basic earnings per share - weighted average shares 154,125,000 153,888,000 153,400,000 Effect of dilutive securities Employee stock options 75,000 111,000 -- Common stock warrants -- -- -- ------------- ------------- ------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversion 154,200,000 153,999,000 153,400,000 ============= ============= ============= Basic earnings per share $ .008 $ .004 $ (.002) ============= ============= ============= Diluted earnings per share $ .008 $ .004 $ (.002) ============= ============= =============
Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123(R) which is effective for the Company beginning January 1, 2006, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. The Company has not yet completed its evaluation of the effect of SFAS No. 123(R) but expects its adoption to have an effect on the financial statements similar to the pro-forma effects reported in Note 1 to the Consolidated Financial Statements under the caption above "Stock Based Compensation". In November 2004, the FASB issued SFAS No. 151, Inventory Costs, which revised ARB 43, relating to inventory costs. This revision is to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This Statement requires that these items be recognized as a current period charge regardless of whether they meet the criterion specified in ARB 43. In addition, this Statement requires the allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 151 will have a material impact on the Company's financial statements. F-13 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 Recent Accounting Pronouncements, continued The FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which changes the guidance in APB Opinion 29, Accounting for Nonmonetary Transactions. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective during fiscal years beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 will have a material impact on the Company's financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections." SFAS No. 154 requires restatement of prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Also, SFAS No. 154 requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. 2. Revolving Bank Loan Agreements and Notes Payable 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% (7.5% at December 31, 2005) 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% (7.75% at December 31, 2005). The term loan will become due on October 26, 2006. The agreement contains several covenants, which, among other things, require that Winncom maintain certain financial ratios as defined in the line-of-credit 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 December 31, 2005 Winncom was in compliance with these covenants. 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 and laying of fiber optic cable and telecommunication equipment purchases necessary to be completed before winter to avoid project delays. The Line of Credit Agreement was only entered into after Kazakhtelecom agreed to fully guaranty the repayment of Winncom's borrowings under the Line of Credit Agreement. Kazakhtelecom will repay the Line of Credit borrowings either from the proceeds of the permanent project financing or from its own capital. In September 2005, Winncom was advanced $1,334,000 under the Line of Credit Agreement and that balance still remains at December 31, 2005 F-14 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 2. Revolving Bank Loan Agreements and Notes Payable, continued We entered into a financing agreement (the "WFBC Facility") with Wells Fargo Business Credit, Inc. ("WFBC"), on December 9, 2003. The financing agreement was for a term of one year and was renewable for additional one-year terms. The WFBC Facility provided for the sale of accounts receivable by the Company to WFBC at a 1% discount for the first 15 days and an additional .055 of 1% per day until the account receivable is paid in full. Sales of accounts receivable and advances under the WFBC Facility were subject to conditions and restrictions, including, without limitation, accounts receivable eligibility restrictions, verification, and approval. Obligations under the WFBC Facility were collateralized by substantially all of the assets of the Company. Advances under the WFBC Facility were made at the sole discretion of WFBC, even if the accounts receivable offered by ARC for sale to WFBC satisfied all necessary conditions and restrictions. WFBC was under no obligation to purchase accounts receivable from the Company or to advance any funds or credit to the Company under the WFBC Facility. This financing agreement was terminated on May 10, 2005. On May 10, 2005 the Company entered into a new $1.5 million revolving line-of-credit agreement (the "Credit Facility") with Citywide Banks. The new Credit Facility has a maturity of one year, with interest at 2% over prime (9% at December 31, 2005), contains covenants to maintain certain financial statement ratios, and is collateralized by essentially all of the assets of ARC Wireless Solutions, Inc ("ARC") and its wholly owned subsidiary, Starworks Wireless Inc.("Starworks"), but excluding Winncom Technologies Corp. The borrowing base is calculated on a percentage of trade accounts receivable and inventory for ARC and Starworks combined. As of December 31, 2005 ARC was in compliance with these covenants. Revolving bank lines of credit and other bank debt at December 31, 2005 and 2004 consist of: 2005 2004 ----------- ----------- Bank line of credit - Winncom $ 2,469,000 $ 3,118,000 Foreign Bank line-of-credit - Winncom 1,334,000 -- Bank term loan - Winncom 125,000 292,000 Bank Facility - ARC 554,000 326,000 ----------- ----------- 4,482,000 3.736,000 Less current portion (2,013,000) (493,000) ----------- ----------- Long-term portion $ 2,469,000 $ 3,243,000 =========== =========== 3. Stockholders' Equity In March 2002, the Company issued 200,000 shares of restricted common stock for consulting services valued at $34,000. The consulting agreement provides that, because it was cancelled in September 2002, 100,000 of these shares are required to be returned to the Company. The consultant was claiming the right to retain all 200,000 shares. In 2005 the consultant and the Company agreed to a settlement whereby the consultant agreed to retain 80,000 shares of common stock. F-15 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 3. Stockholders' Equity, continued 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 5,000,000 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 aggragate number of option to be issued under the Plan from 5,000,000 to 10,000,000. 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. Through May 24, 2000, directors who were not also our employees ("Outside Directors") automatically received options to purchase 250,000 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 50,000 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 250,000 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 250,000 to 25,000 options, and (2) decrease the amount of exercisable options from 50,000 to 5,000 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 25,000 to 125,000 options, and (2) increase the amount of exercisable options from 5,000 to 25,000 per meeting. The other terms of the Outside Director options did not change. For the year ended December 31, 2005, the Company granted a total of 350,000 options at exercise prices ranging from $.11 to $.15 per share, 100,000 to employees and 250,000 to outside directors. The Company granted a total of 250,000 options to Outside Directors under the Plan during 2004 and 2002, at an exercise price of $.16 and $.13 per share, respectively. F-16 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 3. Stockholders' Equity, continued The following table summarizes the option activity for 2005, 2004 and 2003: Number of Weighted Average Shares Exercise Price ($) ========= ================== 2003 Activity: Outstanding at beginning of year 4,060,000 0.504 Granted - Exercised - Forfeited or expired (985,000) 0.23 --------- --------- Outstanding at end of year 3,075,000 0.21 ========= ========= Exercisable at end of year 3,075,000 0.21 ========= ========= 2004 Activity: Outstanding at beginning of year 3,075,000 0.21 Granted 1,250,000 0.13 Exercised - Forfeited or expired (1,900,000) 0.16 --------- --------- Outstanding at end of year 2,425,000 0.15 ========= ========= Exercisable at end of year 2,375,000 0.15 ========= ========= 2005 Activity: Outstanding at beginning of year 2,425,000 0.16 Granted 350,000 0.13 Exercised - Forfeited or expired (175,000) 0.14 --------- --------- Outstanding at end of year 2,600,000 0.15 ========= ========= Exercisable at end of year 2,525,000 0.15 ========= ========= At December 31, 2005, there are 2,525,000 options exercisable from $0.11 to $0.18. These options expire between 2006 and 2008. The weighted average grant date fair value of the options granted is $.075. All option exercise prices were granted at market. The weighted average remaining contractual life of options outstanding at the end of 2005, 2004 and 2003 were 1.23, 2.04 years and 1.33 years, respectively. F-17 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 4. 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, 2005, 2004 and 2003 is as follows: 2005 2004 2003 --------- --------- --------- Current $ 198,000 $ 53,000 $ 66,000 Deferred (490,000) -- -- --------- --------- --------- Total (benefit) expense $(292,000) $ 53,000 $ 66,000 ========= ========= ========= The Company had not recorded a liability for federal income taxes payable currently, or for deferred taxes to future periods for 2004 and 2003 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 Company having positive income for the years ended December 31, 2005 and 2004, management believes a valuation allowance on its deferred tax assets is no longer necessary. The components of the deferred taxes asset as of December 31 are as follows: 2005 2004 --------- --------- Deferred tax assets (current): Net operating loss carry-forwards $ -- $ 149,000 Inventory reserve 297,000 264,000 Accrued expenses 76,000 84,000 Bad debt reserves 143,000 186,000 Property and equipment -- 9,000 --------- --------- 516,000 692,000 Deferred tax liabilities (long-term): Property and equipment (14,000) -- Other assets (12,000) (12,000) Property and equipment -- --------- --------- (26,000) (12,000) Deferred tax assets 490,000 680,000 Valuation allowance -- (680,000) --------- --------- Net deferred tax assets $ 490,000 $ -- ========= ========= F-18 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 4. 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:
2005 2004 2003 --------- --------- --------- Tax (benefit) expense computed at statutory rate $ 350,000 $ 261,000 $ (97,000) State income tax 27,000 53,000 66,000 Valuation allowance (680,000) (214,000) 105,000 Effect of permanent differences (7,000) (6,000) (8,000) Other 18,000 (41,000) -- --------- --------- --------- Provision for income taxes expense (benefit) $(292,000) $ 53,000 $ 66,000 ========= ========= =========
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, 2004, and 2003, 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 decreased by $680,000 in 2005, $214,000 in 2004 and increased by $105,000 in 2003. 5. Sales to Major Customers The Company had no sales in excess of 10% of its net sales to any unrelated parties for the years ended December 31, 2005, 2004 and 2003 although the loss of any significant customer(s) could have an adverse impact on our financial condition. 6. Significant Suppliers During 2005, the Company purchased approximately 37% of its product from two vendors, in 2004, the Company purchased approximately 65% of its product from four vendors and in 2003 the Company purchased approximately 65% of its product from five vendors. The loss of any of these vendors could have a material adverse impact on the operations of the Company. 7. Leasing Activities The Company leases its facilities under operating leases through 2010. Minimum future rentals payable under the leases are as follows: 2006 329,000 2007 345,000 2008 364,000 2009 379,000 2010 277,000 ---------- $1,694,000 ========== Rent expense was $379,000, $373,000 and $406,000 for the years ended December 31, 2005, 2004 and 2003, respectively. F-19 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 7. 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, 2005 and December 31, 2004. 2005 2004 --------- --------- Machinery and Equipment $ 194,000 $ 177,000 Computers and Software 83,000 83,000 Furniture and Fixtures 13,000 13,000 --------- --------- 290,000 273,000 Less accumulated amortization (131,000) (93,000) --------- --------- $ 159,000 $ 180,000 ========= ========= 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, 2005: 2006 $ 78,000 2007 31,000 2008 10,000 2009 4,000 2010 - -------- Total minimum lease payments 123,000 Amount representing interest (18,000) -------- Present value of lease payments $105,000 ======== 8. 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 which represent the value of the employer matching contribution. The 2004 matching contribution was paid in 2005 by the issuance of 407,488 shares of common stock. In September 2003 the Company contributed 649,278 shares of common stock, valued at $52,000, into the Company 401(k) Plan as an employer matching contribution. F-20 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 9. 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, 2005 non-cancellable purchase obligations totaled approximately $4,852,000. We entered into a new employment agreement with our CEO, 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. We entered into a new employment agreement with our President, effective as of October 1, 2004 with a term of two and one-half years. Pursuant to the new agreement, Mr. Raskin is to receive an annual base salary of $385,000 per year. Mr. Raskin is eligible to receive bonuses for each of the years ending December 31, 2004, 2005 and 2006 of 10% of net income. We entered into a new employment agreement with our Chief Financial Officer and Treasurer, 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, 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. 10. Segment Information The Company has three reportable segments that are separate business units that offer different products as follows: distribution of wireless communication products, 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. The following table sets forth our net sales by geographic segment. North America Eastern Europe Total Net Sales ------------- -------------- --------------- 2005 $ 29,219,000 $10,438,000 $ 39,657,000 2004 $ 29,548,000 $6,114,000 $ 35,662,000 2003 $ 25,594,000 $3,587,000 $ 29,181,000 Sales in North America include the United States and Canada and sales in Eastern Europe also include Russia, Kazakhstan and Uzbekistan. F-21 ARC Wireless Solutions, Inc. Notes to Consolidated Financial Statements December 31, 2005 10. Segment Information, continued Financial information regarding the Company's three operating segments for the years ended December 31, 2005, 2004 and 2003 are as follows:
Distribution Manufacturing Cable Corporate Total ------------ ------------- ----- --------- ----- Net Sales 2005 $32,920,000 $6,630,000 420,000 (313,000) $39,657,000 2004 29,213,000 6,433,000 379,000 (363,000) 35,662,000 2003 23,563,000 5,904,000 21,000 (307,000) 29,181,000 Net Income (Loss) 2005 765,000 1,390,000 (34,000) (829,000) $ 1,292,000 2004 1,046,000 710,000 (56,000) (1,012,000) 688,000 2003 488,000 (45,000) 84,000 (812,000) (285,000) Income (Loss) before Income 2005 948,000 914,000 (34,000) (828,000) 1,000,000 Taxes 2004 1,099,000 710,000 (56,000) (1,012,000) 741,000 2003 554,000 (45,000) 84,000 (812,000) (219,000) Identifiable Assets 2005 31,188,000 3,730,000 192,000 (1,620,000) 33,490,000 2004 20,650,000 3,320,000 250,000 (1,727,000) 22,493,000 2003 20,698,000 3,472,000 260,000 (1,690,000) 22,740,000 Capital Expenditures 2005 25,000 75,000 - - 100,000 2004 88,000 76,000 - - 164,000 2003 13,000 145,000 - - 158,000 Depreciation and 2005 40,000 184,000 3,000 - 227,000 Amortization 2004 50,000 199,000 2,000 - 251,000 2003 41,000 243,000 2,000 - 286,000 Interest Expense 2005 161,000 123,000 - - 284,000 2004 186,000 114,000 - - 300,000 2003 177,000 13,000 - - 190,000 Corporate represents the operations of the parent Company, including segment eliminations. 11. Items Affecting Fourth Quarter Results of Operations During the fourth quarter ended December 31, 2005 the Company determined that a valuation allowance for net deferred tax assets was not necessary as management believes that it is more likely than not that the net deferred tax assets will be realized. The effect of this was to increase net income by $490,000 for the fourth quarter 2005. F-22