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Pegasus Wireless Corp · 10KSB · For 12/31/05

Filed On 3/2/06, 6:16pm ET   ·   Accession Number 1164150-6-66   ·   SEC File 0-32567

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 3/03/06  Pegasus Wireless Corp             10KSB      12/31/05    5:92K                                    Cvpospisil/FA

Annual Report — Small Business   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Annual Report -- Small Business                       34    160K 
 2: EX-31       Certification per Sarbanes-Oxley Act (Section 302)     2±     9K 
 3: EX-31       Certification per Sarbanes-Oxley Act (Section 302)     2±     9K 
 4: EX-32       Certification per Sarbanes-Oxley Act (Section 906)     1      7K 
 5: EX-32       Certification per Sarbanes-Oxley Act (Section 906)     1      7K 


10KSB   —   Annual Report — Small Business
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
4Item 1. Description of Business
9Item 2. Description of Property
10Item 3. Legal Proceedings
"Item 4. Submission of Matters to a Vote of Security Holders
"Item 5. Market Price of and Dividends on the Registrant's Common Equity and Other Shareholder Matters
11Item 6. Management's Discussion and Analysis or Plan of Operation Operations
12Item 7. Financial Statements
25Item 8. Changes in and Disagreements with Accountants
"Item 8A. Controls and Procedures
"Item 8B. Other Information
"Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act
29Item 10. Executive Compensation
30Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
"Item 12. Certain Relationships and Related Transactions
31Item 13. Exhibits and Reports filed on Form 8-K
32Item 14. Principal Accountant Fees and Services
33Signatures
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-KSB (Mark One) [_] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended [X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from July 1, 2005 to December 31, 2005 Commission file no.: 000-32567 PEGASUS WIRELESS CORP. -------------------------------------------- (Name of small business issuer in its charter) Nevada 52-2273215 --------------------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 48499 Milmont Dr. Fremont, California 94538 --------------------------------------- ------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number: (510) 490-8288 --------------------------------- (Former name or former address, if changes since last report) Securities registered under Section 12(b) of the Exchange Act: Name of each exchange on Title of each class which registered None ----------------------------- -------------------------- Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.0001 par value ------------------------ (Title of class)
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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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- KSB or any amendment to this Form 10-KSB. [X] The Registrant's revenue for the fiscal year ended December 31, 2005: $17,639,881. The aggregate market value of the voting and non-voting common equity held by non-affiliates (computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity) as of January 11, 2005 was $694,466,000. There were 73,391,261 shares of the registrant's common stock outstanding as of January 11, 2006. DOCUMENTS INCORPORATED BY REFERENCE: None Transitional Small Business Disclosure Format: Yes [X] No [_]
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SUMMARY TABLE OF CONTENTS PART I Item 1. Description of Business............................................4 Item 2. Description of Property............................................9 Item 3. Legal Proceedings.................................................10 Item 4. Submission of Matters to a Vote of Security Holders...............10 PART II Item 5. Market for Common Equity and Related Shareholder Matters..........10 Item 6. Management's Discussion and Analysis or Plan of Operation.........11 Item 7. Financial Statements..............................................12 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................................25 Item 8A. Controls and Procedures .........................................25 Item 8B. Other Information ...............................................25 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.................25 Item 10. Executive Compensation...........................................29 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..................................30 Item 12. Certain Relationships and Related Transactions...................30 Item 13. Exhibits.........................................................31 Item 14. Principal Accountant Fees and Services ..........................32 SIGNATURES................................................................33
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PART I Forward Looking Statements Certain statements contained in this annual filing, including, without limitation, statements containing the words "believes", "anticipates", "expects" and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings. Given these uncertainties, readers of this Form 10-KSB and investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward- looking statements contained herein to reflect future events or developments.  Item 1. Description of Business (a) Development Blue Industries, Inc., (the "Company"), was incorporated under the laws of Nevada on April 5, 2000 as Burrard Technologies, Inc. ("Burrard") and was involved in software development. During 2001, the Company discontinued the software development and became inactive until December 18, 2001, when it acquired all the issued and outstanding shares of Technocall S.A. ("Technocall"), a Swiss company. Technocall SA, a proprietary micro-calculator and electronic management system that regulates and controls the water treatment process, had been inactive until September 2001, at which time it acquired all the assets comprising the Blue Industries water treatment process. On April 2, 2002, the Company changed its name to Blue Industries Inc. In March 2003, the Company formed Blue Industries, Inc., a new subsidiary under the laws of Florida. In December 2003, the Company elected to liquidate its foreign operating subsidiaries and reverted to an inactive status again. In March 2002, the Company's stockholders approved a change to the Company's authorized share capital to increase the authorized common stock to 50,000,000 shares at a par value of $0.001 per share, and to authorize the creation of 10,000,000 shares of preferred stock at a par value of $0.001 per share. 4
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In May 2005, the Company changed its name to Pegasus Wireless Corp. and acquired issued and outstanding shares of OTC Wireless, Inc. by acquiring all the issued and outstanding shares of Pegasus Wireless Corp. (A Colorado corporation). At the time of this acquisition the Company changed its fiscal year end to June 30, to match that of OTC Wireless. On December 22, the Company changed its fiscal year end to December 31, effective immediately. On August 31, 2005, the Company completed a two for one forward split of its common stock, which included the forward split of the authorized common stock to 100,000,000 and the preferred stock to 20,000,000, without affecting the par value of either class of stock. The Company has authorized 100,000,000 shares of $0.0001 par value common stock and 10,000,000 shares of $0.0001 par value preferred stock. Rights and privileges of the preferred stock are to be determined by the Board of Directors prior to issuance. The Company had 71,569,039 and 66,956,140, (33,478,070 pre-split), shares of common stock and no shares of preferred stock issued and outstanding at December 31, 20045 and June 30, 2005, respectively. (b) Business of Issuer. General The fist acquisition of the Company was OTC Wireless, Inc. OTC Telecom, Inc. (the Company or OTC Wireless), changed its name to OTC Wireless, Inc. in 2000 to better reflect the nature of the company's core business. It was incorporated in September 1993 as a California corporation. The Company began its operations in November 1993 in Sunnyvale, California. OTC Wireless was founded by a group of experienced technologists from microwave communication and computer networking industries. The Company's major business is to provide wireless communication technologies and products to serve the business, education and industrial application markets. OTC Wireless introduced its 900MHz spread spectrum wireless Ethernet bridge in 1995, among the industry's earliest true plug-and-play wireless network solution. The Company also submitted its first patent application in October 1995, based on the spread spectrum receiver technology developed for this product. In 1996, OTC Wireless then introduced one of the industry's first 2.4 Ghz plug-and-play wireless Ethernet bridge, AirEZY and the 2.4GHz wireless serial radio modem, ADAM, both based on the Company's direct sequence spread spectrum technology. In 1998, the Company introduced the enhanced AiEZY series of wireless radios by combining the plug- and-play feature with the WIPP (wireless internet polling protocol) multiple access scheme developed by the Company, to provide a collision-free, adjustable bandwidth wireless access solution platform. In the same year, the Company also introduced one of the industry's earliest 2.4GHz IEEE 802.11b wireless bridges. In 2000, the Company introduced the one of the industry's earliest 54Mbps IEEE 802.11g plug-and-play indoor and outdoor wireless Ethernet bridge solutions, VCW and ASR/ACR. In 2002, the Company introduced a plug-and-play wireless serial communication solution, WiSER, for connecting the interactive whiteboard and the computer in classrooms as well as meeting rooms. In the same year, the Company introduced its 802.11b wireless projector/display solution, WiJET. 5
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In 2004, the Company introduced a new generation of plug-and-play WiSER, the WiSER.ip, that converts the conventional serial (RS-232) communication based "dumb" industrial devices into TCP/IP- capable, intelligent network nodes. The Company also introduced two new wireless display solutions based on the 54Mbps IEEE 802.11g technology (WiJET.G, and WiJET.Video) that supports streaming MPEG1 and MPEG2 video files from a computer to a projector, LCD TV or plasma flat panel display, wirelessly. The Company has applied and been awarded patents, based on the Company's spread spectrum receiver signal processing technology as well as its WIPP, plug-and-play and wireless display technology: "Non-coherent direct sequence spread spectrum receiver for detecting bit/symbol chip sequences using threshold comparisons of chip sequence correlation," U.S. Patent No. 5,687,190, awarded 11/11/1997. "A robust system for wireless projection of computer display and rendering of motion video contents," U.S. Patent Application No. 60/542,247, filed on 2/4/2004, pending. Although the Company initialized the following provisional patent applications, it decided not to continue with formal applications due to obsolesence caused by newer technology development: "Multiple access scheme for wireless internet connection," US patent application no. 09/660,285, filed 9/16/1999. Japanese Patent Application No. 2000-281792, filed 9/18/2000. "Wired protocol to wireless protocol converter," U.S. Patent Application No. 10/209,118, filed 7/30/2002. "USB-interface radio," U.S. Patent Application No. 60/388,553, filed 6/12/2002. Today, the Company offers the following products in three major application areas: For indoor and outdoor wireless networking: Pegasus Model # Application ------------------------------ --------------------------------------------- TRIMAR 54/108 Mbps outdoor wireless access point AVCW*-AP: 11Mbps outdoor wireless access point AVCW*-BRG: 11Mbps outdoor wireless bridge station AVCW*-AP-G: 54 Mbps outdoor wireless access point AVCW*-BRG-G: 54 Mbps outdoor wireless bridge station ASR: 11 Mbps indoor wireless access point ACR: 11Mbps indoor wireless bridge station ASR-G: 54 Mbps indoor wireless access point ACR-G: 54 Mbps indoor wireless bridge station * All AVCW models offer two integrated antenna options 9dBi and 15 dBi and a third option of a Type-N connector for external antenna connection. For industrial wireless networking solutions: Pegasus Model # Application --------------------------------- ----------------------------------------- WiSER: 11 Mbps wireless serial modem WiSER.ip: 11 Mbps wireless serial TCP/IP modem 6
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For wireless multimedia/video networking solutions: Pegasus Model # Application --------------------------------- ----------------------------------------- WiJET: 11 Mbps wireless display solution WiJET.G: 54 Mbps wireless display solution WiJET.Video: 54 Mbps wireless display solution with video streaming The Company has been delivering products to customers since 1995, both domestically and overseas. In addition to system integrators, value-added resellers and end users worldwide, the Company also offers products to major account customers who either bundle Pegasus Wireless's solution to their own products, or carry Pegasus Wireless's products under their own names by private labeling or OEM custom-designed products from the Company. Over the years, the Company's major account customers include our largest Japanese customer, CallUS Computers, which private labels our wireless technology products to Wireless Internet, (WI) and Nippon Telephone and Telegraph-ME Group, (NTT-ME). The Company also is a direct supplier to Showa Electric Cable Company (SWCC). In addition the Company is also the direct supplier of its products to, among others, Smart Technologies of Canada, Lexmark and Dell in the U.S., and D-Link, a major worldwide network equipment provider based in Taiwan, each of which private labels our technology products through their distribution networks. The TRIMAR and AVCW series of outdoor wireless Ethernet bridge products are used by Internet Service Providers (ISPs) to offer high speed Internet access to their customers wirelessly. They are also used by business customers and schools to interconnect computer networks in different buildings. When used in a point to point configuration, a pair of AVCW radios can reach a distance up to 20 miles. In a point to multiple-point configuration, the radius of a "coverage cell" typically ranges between 3 to 5 miles. Working with its service providers, the Company has deployed numerous wireless broadband Internet networks domestically as well as overseas (including Japan, China and South America). The Company's ASR and ACR indoor wireless products are used in the Wireless Local Area Networks (WLAN) by office and home users to interconnect computers without having to deploy cables. Being designed as a true plug-and-play wireless solution, Pegasus Wireless' radios require no installation of software drivers, and can be used to wirelessly interlink any devices equipped with the RJ-45 Ethernet port, not only computers. For example, they can be used to enable wireless printing, connecting computers and network printers. They can also be used to connect to game consoles such as X-Box, Play Station or Game Cube with the wireless home gateways. The WiSER wireless serial radios are used by both industrial and education users. Teachers in the schools use WiSER to wirelessly interconnect the interactive whiteboards to the computers in the classrooms. Industrial users use the WiSER to connect the central control computer to the remote data collecting and sensing devices. The WiJET products are used by both business and education customers. Presenters in a business meeting or teachers in the classroom can deliver their PowerPoint slide shows to the audience in the most convenient location with their computers wirelessly connected to the projector without the restriction of a tethering VGA cable. Home users can use WiJET to deliver movie files stored on their computer hard drives to an LCD or plasma flat panel TV wirelessly. 7
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The Company has a number of new products in the pipeline which its management believe to be innovative and responsive to customer needs and desires. The Company is planning to introduce a new generation of wireless access point products that operate in multiple frequency bands and supports backbone and last- mile functions from a simple, easy to install package. The Company also is developing its next generation wireless multi-media solution that delivers enhanced video streaming and audio performance and computer presentation capability over the wireless connectivity between the computer and the remote display/sound devices. In December, the company completed the acquisition of AMAX Engineering and AMAX Information Technologies (AIT), both based in Fremont, California. The company owns 51% controlling interest in both subsidiaries. AMAX Engineering is a computer system and peripheral solution providers. It manufactures, markets and distributes PC systems and subsystems, components, networking devices and storage solutions for both consumer and enterprise markets. It has 5 branch offices covering North America. The company is expected to benefit from the AMAX's extensive channel capacity in delivering the company's products to the market. AMAX Information Technologies provides high performance and high availability computing solutions to the enterprise and government customers. It manufactures and markets cluster servers, grid computing systems, network storage solutions and interconnect solutions to business, technology and education users. Both AMAX and AIT's capability in computer system solutions is also expect to benefit the company in providing the back-end server platform for the company's wireless infrastructure solutions. The company also completed the acquisition of 51% controlling interest of CNet Technology, Inc. (CNet) which operates an electronics manufacturing plant in Wu-Jiang, a city 90 miles west of Shanghai, China. CNet owns SMT and DIP manufacturing lines and produces both wired and wireless networking devices for consumer and business users. CNet's manufacturing capacity is expect to benefit the company in providing a stable production resource. The company is also in the process of negotiating an acquisition of 51% controlling interest in another electronics manufacturing facility in Taiwan. This second acquisition will further strengthen the company's capability in keeping on-schedule products delivering. COMPETITIVE BUSINESS CONDITIONS The field of wireless connectivity devices is highly competitive. We compete with a number of businesses that provide the same or similar products. Many of these competitors have a longer operating history, greater financial resources, and provide other products that we do not provide. Pegasus' competitors include companies such as Linksys, D-Link and Netgear in the consumer networking devices market. In the multimedia/video wireless market, its major competitors include companies such as Komatsu and Infocus. In the enterprise infrastructure wireless market, its major competitors include companies such as Cisco, Nortel and Motorola. We believe that quality of product, innovative products, proper pricing and range of product uses offered are the principal factors that will enable us to compete effectively. 8
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Government Regulation The Company's operations are subject to various federal, state and local requirements which affect businesses generally, such as taxes, postal regulations, labor laws, and environment and zoning regulations and ordinances. Operation of current Pegasus Wireless products are subject to the FCC regulation under FCC Part 15 rules, specifically, FCC Part 15 subpart C and subpart E. The company needs to submit its products for the FCC rule compliance test and obtain certifications before the products are available for sale. The users of the products need not to obtain usage license from the government. Research and Development The Company conducts in research and development on an ongoing basis in order to improve our current products as well as to develop new products. We do not have a specific plan of research and development at this stage. Employees As of February 10, 2006, the Company has approximately 450 employees, 120 in our Fremont, California offices, 160 in our Peoples Republic of China manufacturing facility and 160 in our Taiwan manufacturing facility. Manufacturing As of February 10, 2006, all of the Company's products are manufactured in China and Taiwan by the two manufacturing companies we purchased at the end of December 2005 and early January 2006. Reports to Security Holders The Company will send out audited annual reports to its shareholders if required by applicable law. Until such time, the Company does not foresee sending out such reports. The Company will make certain filings with the SEC as needed, and any filings the Company makes to the SEC are available and the public may read and copy any materials the Company files with SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549. The public may also obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at (http://www.sec.gov).  Item 2. Description of Property The corporate headquarters of Pegasus Wireless Corp. is located at 48499 Milmont Dr., Fremont, California 94538 and its telephone number is (510) 490-8288. We also maintain offices at 1565 Reliance Way, Fremont, California 94539. We are in the process of consolidating all of our Fremont based personnel into the Reliance Way location. We also maintain manufacturing facilities in the Peoples Republic of China and in Taiwan. 9
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 Item 3. Legal Proceedings From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. The Company is not currently a party to any legal proceedings.  Item 4. Submission of Matters to a Vote of Security Holders None. PART II  Item 5. Market Price of and Dividends on the Registrant's Common Equity and Other Shareholder Matters. Market Information * Reflects 2 for 1 stock split effective close of business August 31, 2005. 2005 HIGH LOW ------ -------- ------ * December 31, 2005 10.50 6.10 * September 30, 2005 7.39 3.70 * June 30, 2005 3.70 0.05 March 31, 2005 0.10 0.10 2004 HIGH LOW ------ -------- ------ December 31, 2004 0.10 0.10 September 30, 2004 0.10 0.10 June 30, 2004 0.25 0.10 March 31, 2004 0.40 0.25 2003 HIGH LOW ------ -------- ------ December 31, 2003 1.01 0.35 September 30, 2003 1.25 0.30 June 30, 2003 0.80 0.45 March 31, 2003 2.20 0.20 The approximate number of holders of record of common equity is 1,900 as of February 10, 2006. Dividends The Company has never declared or paid any cash dividends on its common stock and does not intend to declare any dividends in the foreseeable future. We currently intend to retain and reinvest future earnings, if any, to finance our operations. Transfer Agent Our transfer agent is Olde Monmouth Stock Transfer Co., Inc., 200 Memorial Parkway, Atlantic Highlands, NJ 07716. Their telephone number is (732) 872 2727. 10
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 Item 6. Management's Discussion and Analysis or Plan of Operation Operations This report on Transition Form 10-KSB contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements and from historical results of operations. Among the risks and uncertainties which could cause such a difference are those relating to our dependence upon certain key personnel, our ability to manage our growth, our success in implementing the business strategy, our success in arranging financing where required, and the risk of economic and market factors affecting our customers or us. Many of such risk factors are beyond the control of the Company and its management Results of Operations - For the Six and Twelve Months Ending December 31, 2005 and June 30, 2005 Basis of Presentation - On December 22, 2005 the Board of Directors elected to change the fiscal year end of the Company to December 31, effective immediately. This was completed as a result of two pending acquisitions of foreign companies, both of which had December 31, as their fiscal year end. As a result of this change, the accompanying financial statements include the six months of Pegasus from July 1, 2005 through December 31, 2005. On December 22, 2005, the Company acquired 51% of AMAX Engineering Corp. and AMAX Information Technology, Inc. Pursuant to the acquisition agreement, the accompanying financial statements include the three months of the AMAX companies from October 1, 2005 through December 31, 2005. On December 29, 2005, the Company acquired 51% of Cnet Technology, Inc. Pursuant to the acquisition agreement, financial statement consolidation begins on January 1, 2006, therefore the accompanying financial statements do not include any results of Cnet for the last 2 days of 2005. Financial Condition, Capital Resources and Liquidity For the six and twelve months ending December 31, 2005 and June 30, 2005 the Company recorded revenues of $17,639,900 and $3,172,400 respectively. The increase in revenue is a direct result of the acquisition of the AMAX companies. As previously stated, these financials include only three months of revenue of the AMAX companies. In addition, we were not able to begin the ramp-up of production of the Pegasus line of products until the beginning of 2006 as a result of our acquisition of the two manufacturing companies until the end of December 2005 and beginning of January 2006. For the six and twelve months ending December 31, 2005 and June 30, 2005, the Company had, on a consolidated basis, cost of sales of $15,414,100 and $1,728,500.The increase is a direct result of the acquisition of the AMAX companies. For the six and twelve months ending December 31, 2005 and June 30, 2005, the Company had, on a consolidated basis, general and administrative expenses of $1,318,782 and $1,893,400 respectively. The increase is a direct result of the acquisition of the AMAX companies. For the six and twelve months ending December 31, 2005 and June 30, 2005, the Company had, on a consolidated basis, total operating expenses of $2,026,789 and $2,103,300, respectively. The relative increase is a direct result of the acquisition of the AMAX companies. 11
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Net Income/(Loss) For the six and twelve months ending December 31, 2005 and June 30, 2005, the Company reported net income/(loss) from operations of $29,378 and $672,800, respectively. The ability of the Company to grow is dependent upon its ability to deliver product to its customers in ever increasing quantities. The Company has taken the steps necessary to address this problem by its acquisitions of the AMAX companies to provide the distribution channels needed and Cnet and SKI for the manufacturing requirements. Given our current product mix and selling prices, these two manufacuring companies have the ability to produce approximately $650 million, (at selling price), of Pegasus products. Research and Development Plans Our current research and development activities are relatively limited. They focus mainly on improving our current products, but do include, from time to time, include the development of new products or new uses for our existing products. Our plan is that over time, as our revenues grow, we will increase our expenditures for research and development.  Item 7. Financial Statements Financial Statement follow on page F-1. [Balance of this page intentionally left blank.] 12
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INDEX TO FINANCIAL STATEMENTS Reports of Independent Registered Public Accounting Firm.....................F-2 Consolidated Balance Sheets..................................................F-3 Consolidated Statements of Operations and Comprehensive Income (Loss)........F-4 Consolidated Statements of Stockholders' Equity (Deficiency).................F-5 Consolidated Statements of Cash Flows........................................F-6 Notes to Consolidated Financial Statements...................................F-7 F-1
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 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders Pegasus Wireless Corp. Fremont, California We have audited the accompanying consolidated balance sheets of Pegasus Wireless Corp., (the "Company") as of December 31, 2005 and June 30, 2005 and the related consolidated statements of operations and comprehensive income (loss), stockholders' equity (deficiency) and cash flows for the one year and six months in the period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 the Company as of December 31, 2005 and June 30, 2005 and the results of its operations and its cash flows for the one year and six months in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. /s/Pollard-Kelley Auditing Services, Inc. Pollard-Kelley Auditing Services, Inc. Fairlawn, Ohio February 24, 2006 F-2
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[Enlarge/Download Table] PEGASUS WIRELESS CORP. Consolidated Balance Sheets December 31, June 30, 2005 2005 ------------------ ------------------- ASSETS CURRENT ASSETS Cash and equivalents $ 1,079,588 $ 839,520 Accounts receivable, net of reserve of $115,049 and $5,700 6,676,806 307,389 Inventory, net of reserve of $1,041,248 and $656,602 6,568,274 469,613 Prepaid expenses 81,186 20,675 ------------------ ------------------- Total current assets 14,405,854 1,637,197 ------------------ ------------------- PROPERTY AND EQUIPMENT Computers and equipment 1,054,156 213,357 Machinery and equipment 320,685 320,685 Office furniture, fixtures and equipment 974,749 108,945 Vehicles 602,254 0 Leasehold improvements 470,645 0 ------------------ ------------------- Total Property and Equipment 3,422,489 642,987 Less accumulated depreciation (2,879,463) (517,746) ------------------ ------------------- Net property and equipment 543,026 125,241 ------------------ ------------------- OTHER ASSETS Investment in unconsolidated subsidiary 1,000,000 0 Goodwill 5,469,609 0 Deposits and other assets 1,471,243 16,186 ------------------ ------------------- Total other assets 7,940,852 16,186 ------------------ ------------------- Total Assets $ 22,889,732 $ 1,778,624 ================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY ( DEFICIENCY) CURRENT LIABILITIES Accounts payable $ 5,929,969 $ 413,099 Accrued expenses 3,627,513 137,994 Accrued income taxes payable 94,504 0 Customer deposits 3,481 5,097 Current portion of long-term debt 46,268 0 ------------------ ------------------- Total current liabilities 9,701,735 556,190 ------------------ ------------------- LONG-TERM DEBT Notes payable 116,105 0 ------------------ ------------------- Total long-term debt 116,105 0 ------------------ ------------------- Total Liabilities 9,817,840 556,190 ------------------ ------------------- Minority interest in consolidated subsidiary 2,545,156 0 ------------------ ------------------- STOCKHOLDERS' EQUITY (DEFICIENCY) Preferred stock, $0.0001 par value, authorized 10,000,000 shares; none issued and outstanding 0 0 Common stock, $0.0001 par value, authorized 100,000,000 shares; 71,569,039 and 69,699,520 issued and outstanding shares 7,157 6,972 Additional paid-in capital 24,923,443 14,898,600 Subscription receivable (750,000) 0 Accumulated comprehensive income (loss) (104) 0 Accumulated deficit (13,653,760) (13,683,138) -------------------------------------- Total stockholders' equity (deficiency) 10,526,736 1,222,434 ------------------ ------------------- Total Liabilities and Stockholders' Equity (Deficiency) $ 22,889,732 $ 1,778,624 ================== =================== The accompanying notes are an integral part of the financial statements F-3
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[Enlarge/Download Table] PEGASUS WIRELESS CORP. Consolidated Statements of Operations Six Months Ended Year Ended December 31, June 30, 2005 2005 ------------------ ------------------- REVENUES $ 17,639,881 $ 3,172,351 COST OF SALES 15,414,086 1,728,479 ------------------ ------------------- Gross Margin 2,225,795 1,443,872 OPERATING EXPENSES Sales and marketing 651,346 100,858 Depreciation and amortization 56,661 109,074 General and administrative 1,318,782 1,893,397 ------------------ ------------------- Total operating expenses 2,026,789 2,103,329 ------------------ ------------------- Operating income (loss) 199,006 (659,457) ------------------ ------------------- OTHER INCOME (EXPENSE): Interest income 5,785 5,581 Other income 33,477 4,798 Interest expense (1,189) (22,918) ------------------ ------------------- Total other income (expense) 38,073 (12,539) ------------------ ------------------- Net income (loss) before income tax and minority interest 237,079 (671,996) Income tax 93,704 800 ------------------ ------------------- Net income (loss) before minority interest 143,375 (672,796) Minority interest in consolidated subsidiary net income (loss) 113,997 0 ------------------ ------------------- Net income (loss) $ 29,378 $ (672,796) ================== =================== Net income (loss) per common share - basic $ 0.01 $ (0.01) ================== =================== Weighted average number of common shares outstanding - basic 71,335,806 24,186,993 ================== =================== Net income (loss) per common share - fully diluted $ 0.01 $ (0.01) ================== =================== Weighted average number of common shares outstanding - fully diluted 75,889,676 24,186,993 ================== =================== The accompanying notes are an integral part of the financial statements F-4
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[Enlarge/Download Table] PEGASUS WIRELESS CORP. Consolidated Statements of Stockholders' Equity (Deficiency) Number of Number of Add'l. Stock Total Shares - Shares - Amount - Amount - Paid-in Subscript Accumulated Stockholders' Preferred Common Preferred Common Capital Receivable Deficit Equity ----------- ----------- ------------ ------------ ------------ ------------ ------------ ------------- BEGINNING BALANCE, June 30, 2003 15,295,206 5,124,784 $ 12,663,209 $ 108,538 $ 0 $ 0 $(12,021,481) $ 750,266 Common stock issued for cash 0 307,692 0 200,000 0 0 0 200,000 Common stock issued for services 0 212,811 0 108,327 0 0 0 108,327 Net loss 0 0 0 0 0 0 (988,861) (988,861) ----------- ----------- ------------ ------------ ------------ ------------ ------------ ------------- BALANCE, June 30, 2004 15,295,206 5,645,287 12,663,209 416,865 0 0 (13,010,342) 69,732 Preferred converted to common (15,295,206) 16,764,705 (12,663,209) 12,663,209 0 0 0 Recapitalization 0 8,000,000 0 (13,077,032) 14,102,416 0 0 1,025,384 Acquisition of subsidiary 0 3,000,000 0 300 0 0 0 300 Recapitalization 0 1,439,768 0 144 799,670 0 0 799,814 Net loss 0 0 0 0 0 0 (672,796) (672,796) ----------- ----------- ------------ ------------ ------------ ------------ ------------ ------------- BALANCE, June 30, 2005 0 34,849,760 0 3,486 14,902,086 0 (13,683,138) 1,222,434 Exercise of employee stock options 0 118,708 0 11 25,017 0 0 25,028 Two for one forward split 0 34,968,466 0 3,497 (3,497) 0 0 0 Common stock issued for cash 0 571,429 0 57 3,999,943 0 0 4,000,000 Common stk issued for acquisition 0 838,454 0 84 3,999,916 0 0 4,000,000 Common stock issued for cash 0 222,222 0 22 1,999,978 (750,000) 0 1,250,000 Comprehensive inc/loss 0 0 0 0 0 0 (104) (104) Net income 0 0 0 0 0 0 29,378 29,378 ----------- ----------- ------------ ------------ ------------ ------------ ------------ ------------- Ending Balance, December 31, 2005 0 71,569,039 $ 0 $ 7,157 $ 24,923,443 $ (750,000) $(13,653,864) $ 10,526,736 =========== =========== ============ ============ ============ ============ ============ ============= The accompanying notes are an integral part of the financial statements F-5
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[Enlarge/Download Table] PEGASUS WIRELESS CORP. Consolidated Statements of Cash Flows Six Months Ended Year Ended December 31, June 30, 2005 2005 ------------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 29,378 $ (672,796) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 56,661 109,074 Change in inventory reserve 0 12,602 Minority interest in net income (loss) of consolidated subsidiary 113,997 0 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 420,575 114,527 (Increase) decrease in inventory (2,555,512) (217,069) (Increase) decrease in prepaid expenses 39,957 (9,200) (Increase) decrease in deposits and other assets (1,051,424) 15,000 Increase (decrease) in accounts payable 461,285 (101,159) Increase (decrease) in accrued expenses 629,604 35,486 Increase (decrease) in accrued income taxes payable 95,304 0 Increase (decrease) in customer deposits (1,615) (58,761) ------------------ ------------------ Net cash provided (used) by operating activities (1,761,790) (772,296) ------------------ ------------------ CASH FLOW FROM INVESTING ACTIVITIES: Purchase of property and equipment (116,512) (7,496) Cash paid for acquisitions (5,000,000) 0 Proceeds from sale of fixed assets 0 0 ------------------ ------------------ Net cash provided (used) by investing activities (5,116,512) (7,496) ------------------ ------------------ CASH FLOW FROM FINANCING ACTIVITIES: Cash acquired in acquisition/reorganization 1,771,201 1,825,498 Proceeds from loans 102,988 0 Repayment of loans (5,819) (504,231) Issuance of common stock for cash 5,250,000 0 ------------------ ------------------ Net cash provided by financing activities 7,118,370 1,321,267 ------------------ ------------------ Net increase (decrease) in cash and equivalents 240,068 541,475 CASH and equivalents, beginning of period 839,520 298,045 ------------------ ------------------ CASH and equivalents, end of period $ 1,079,588 $ 839,520 ================== ================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid in cash $ 1,189 $ 47,918 ================== ================== Income taxes paid in cash $ 0 $ 800 ================== ================== Non-Cash Financing Activities: Issuance of common stock to effect acquisition $ 4,000,000 $0 ================== ================== The accompanying notes are an integral part of the financial statements F-6
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PEGASUS WIRELESS CORP. Notes to the Consolidated Financial Statements NOTE 1 - THE COMPANY Pegasus Wireless Corp., (f/k/a Blue Industries, Inc.), was incorporated under the laws of the State of Nevada on April 5, 2000 as Burrard Technologies, Inc. ("Burrard") and was involved in software development. During 2001, the Company discontinued the software development and became inactive until December 18, 2001, when it acquired all the issued and outstanding shares of Technocall S.A. ("Technocall"), a Swiss company. On April 2, 2002, the Company changed its name to Blue Industries Inc. In December 2003, the Company again became inactive. In June 2005, the Company changed its name to Pegasus Wireless Corp. Subsequent to the acquisition, via reverse merger of Homeskills, Inc. The Company is engaged in the business of designing, manufacturing and marketing wireless hardware and software solutions for broadband fixed, portable networking and Internet access. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - On December 22, 2005 the Board of Directors elected to change the fiscal year end of the Company to December 31, effective immediately. This was completed as a result of two pending acquisitions of foreign companies, both of which had December 31, as their fiscal year end. As a result of this change, the accompanying financial statements include the six months of Pegasus from July 1, 2005 through December 31, 2005. On December 22, 2005, the Company acquired 51% of AMAX Engineering Corp. and AMAX Information Technology, Inc. Pursuant to the acquisition agreement, the accompanying financial statements include the three months of the AMAX companies from October 1, 2005 through December 31, 2005. On December 29, 2005, the Company acquired 51% of Cnet Technology, Inc. Pursuant to the acquisition agreement, financial statement consolidation begins on January 1, 2006, therefore the accompanying financial statements do not include any results of Cnet for the last 2 days of 2005. Principles of Consolidation - The consolidated financial statements include the accounts of Pegasus Wireless Corp. and its wholly owned and majority owned subsidiaries. All inter-company balances and transactions have been eliminated. Significant Acquisitions - On December 22, 2005, the Company acquired 51% of AMAX Engineering Corp. and AMAX Information Technology, Inc., (collectively "AMAX"), California corporations headquartered in Fremont, California. The Company paid $4,000,000 in cash and 838,454 shares of the Company's common stock, valued at $4,000,000, or $4.77 per share. The share valuation was based on 66% of the average closing price for the preceding 30 trading days, as per the acquisition agreement. The cash portion of the AMAX transaction was provided by the sale of 571,429 shares of restricted common stock of the Company to Jasper Knabb, President of Pegasus, in exchange for $4,000,000 in cash, or $7.00 per share. AMAX has distinguished and established itself as a global leader in providing technology to all levels of the marketplace. As an ISO-9001 certified corporation, AMAX manufactures and markets innovative server, industrial, workstation, storage & clustering systems to meet the most stringent of quality requirements. On December 29, 2005, the Company acquired 51% of Cnet Technology, Inc., ("Cnet"), a Cayman Islands corporation headquartered in Taipei, Taiwan. The Company paid $1,000,000 in cash. The acquisition was financed by a purchase of 222,222 restricted shares of Pegasus Wireless Corporation's common stock by Jasper Knabb, the Company's President, in exchange for $2,000,000 in cash, or $9.00 per share. The additional $1 million cash will be used to obtain raw F-7
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PEGASUS WIRELESS CORP. Notes to the Consolidated Financial Statements NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED materials to begin the manufacturing of Pegasus Wireless' products that will be available for distribution within thirty days. CNet Technology, Inc. has been a leader in designing and manufacturing high-speed, cost-effective solutions for the worldwide networking and communications market. Their unique combination of sales and assembly has allowed for CNet to support a vast array of wireless demands, from the small and home offices to the vast enterprise systems that span multiple locations. Pegasus has been outsourcing the manufacturing its wireless products through various venues around the world, and now can manufacture its products in a centralized controlled environment that will greatly enhance the speed and volume of their product output. Cash Equivalents - For purposes of the statement of cash flows, the Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. Revenue Recognition - The Company recognizes revenue from product sales when units are shipped, provided no significant obligation remains and collection is probable. Inventory - The Company values its inventory at the lower of cost or market, cost determined using the standard cost method. The Company also utilizes the reserve method to account for slow moving and obsolete inventory. The reserve for inventory obsolescence was $656,000 at December 31, 2005 and June 30, 2005 respectively. Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts. Actual results could differ from those estimates. Income (Loss) Per Share - Income (loss) per share is computed using the Weighted Average Number of common shares outstanding during the fiscal year. Fully diluted includes all common shares that would be required to be issued as a result of various convertible instruments at their stated conversion rates using December 31, 2005, closing market price of the underlying common stock. Concentration of Credit Risk - The Company extends credit, based on the evaluation of each customer's financial condition, and generally requires no collateral from its customers. Credit losses, if any have been provided for in the financial statements and have been generally within management's expectations. During the years ending and at June 30, 2005 and 2004, the Company had deposits in banks in excess of the FDIC insurance limit. Intangibles - Goodwill in the amount of 5,469,609 was recorded as a result of the acquisition of AMAX in December 2005. The Company will evaluate this asset periodically to determine impairment, if any. F-8
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PEGASUS WIRELESS CORP. Notes to the Consolidated Financial Statements NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Property and Equipment - All property and equipment is recorded at cost and depreciated over their estimated useful lives, using the straight-line method. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from their respective accounts, and the resulting gain or loss is included in the results of operations. Repairs and maintenance charges which do not increase the useful lives of the assets are charged to operations as incurred. Depreciation expense was $56,661 and $109,074 for the six months ended December 31, 2005 and twelve months ended June 30, 2005, respectively. Research & Development - Research and development costs are expensed in the period incurred. NOTE 3 - ACCOUNTS RECEIVABLE The Company uses the allowance method to account for its doubtful accounts. The allowance for doubtful accounts is based on management's estimates. Accounts receivable consist of the following: December 31, 2005 June 30, 2005 ------------------- ----------------- Trade accounts receivable $ 6,791,855 $ 313,089 Allowance for doubtful accounts (115,049) (5,700) ------------------- ----------------- Total $ 6,676,806 $ 307,389 =================== ================= NOTE 4 - INVENTORY The Company values its inventory at the lower of cost or market, cost determined using the standard cost method. The Company also utilizes the reserve method to account for slow moving and obsolete inventory. Inventory consists of the following: December 31, 2005 June 30, 2005 ------------------- ----------------- Inventory $ 7,609,522 $ 1,126,215 Less: Reserve for obsolescence (1,041,248) (656,602) ------------------- ----------------- Total $ 6,568,274 $ 469,613 =================== ================= NOTE 5 - STOCKHOLDERS' EQUITY The authorized capital stock of the Company consists of 100,000,000 shares of common stock with a par value of $0.0001 and 20,000,000 shares of preferred stock with a par value of $0.0001. Rights and privileges of the preferred stock are to be determined by the Board of Directors prior to issuance. There were 71,569,039 and 34,849,760 shares of common stock outstanding at December 31, 2005 and June 30, 2005, respectively. In May 2005, the Company issued 1,230,769 shares of common stock in exchange for $800,000 in cash, or $0.65 per share. In June 2005, the Company issued 28,467,743 shares of common stock to effect the acquisition of OTC Wireless, Inc., the operating company. In August 2005, eight of the company's employees F-9
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PEGASUS WIRELESS CORP. Notes to the Consolidated Financial Statements NOTE 5 - STOCKHOLDERS' EQUITY (Continued) exercised their employee stock options. These options were issued in years prior to the reverse merger and had exercise prices ranging from $0.15 to $0.50 per share. As a result of these option exercises the Company issued 118,708 shares in exchange for $25,029 in cash. In August 2005, the Company amended its Articles of Incorporation to increase the authorized shares from 50,000,000 to 100,000,000 common and from 10,000,000 to 20,000,000 preferred shares. The par value of each remained the same at $0.0001 for each class of stock. In addition, in August 2005, the Company declared a two shares for each share held forward split of the Company's issued and outstanding common stock, which was effective at close of business August 31, 2005. Pursuant to this, the Company issued 34,968,466 shares of common stock. In December 2005, the Company issued 571,429 shares of restricted common stock to the President of the Company in exchange for $4,000,000 in cash , valued at $7.00 per share. In December 2005, the Company issued 838,454 shares of restricted common stock to complete the acquisition of AMAX, valued at $4,000,000, or $4.77 per share. In December 2005, the Company issued 222,222 shares of restricted common stock to the President of the Company in exchange for $2,000,000 in cash , valued at $9.00 per share. NOTE 6 - NOTES PAYABLE The Company is obligated for four vehicle loans, totaling $54,888, $47,154, $45,623 and $14,709. The loans call for monthly payments of $1,523, $955, $1,347 and $416 and they mature in 2008, 2010, 2008 and 2009. They bear interest at 6%, 5.6%, 5.95% and 2.9%. NOTE 7 - OPERATING LEASES The Company leases several operating facilities and various equipment from third parties under various operating leases expiring in various years through 2013. The total rental expense for the six months ended December 31, 2005 and year ended June 30, 2005 was $466,132 and $364,567 respectively. Future minimum lease payments for the remaining lease term are as follows: 2006 $ 1,637,528 2007 1,123,318 2008 1,009,173 2009 1,009,173 2010 1,009,173 Thereafter 2,775,227 ------------------------ Total $ 8,563,592 ======================== F-10
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PEGASUS WIRELESS CORP. Notes to the Consolidated Financial Statements NOTE 8 - INCOME TAXES The Company accounts for its income taxes under the asset and liability approach, whereby the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities are recognized as deferred tax assets and liabilities. The provision for income taxes for the six months ended December 31, 2005 was $94,504; ($18,960 state and $74,744 federal) and for the year ending June 30, 2005 was for state taxes of $800. NOTE 9 - DEFINED CONTRIBUTION PLAN The Company maintains a voluntary defined contribution plan, covering eligible employees. Participating employees may elect to defer and contribute a percentage of their compensation to the plan. The Company did not make any contributions to the plan for the six months ended December 31, 2005 and the year ended June 30, 2005. NOTE 10 - STOCK OPTION PLAN In 1995 the Company established an Incentive Stock Option Plan. This plan provides for the granting of incentive stock options and non-statutory stock options to employees, directors and consultants at 110% of the fair market value on the date of the grant. The options to employees vest ratably over a four-year period. The Company has authorized 3,640,000 post-split shares of common stock options. There where 1,181,584 and 1,419,000 post-split options outstanding at December 31, 2005 and June 30, 2005, respectively. NOTE 11 - STOCK OPTION PLAN FOR OFFICERS The Company's President and CFO elected in July 2004 to accept stock options in lieu of cash compensation for a period of two years, beginning in July 2004. The Chairman also elected to receive his performance based bonus for a period of two years in stock options as well. For the two years the Chairman and President are to receive 1,200,000 post-split options and the CFO 1,080,000 post-split options. All of these options are one share per option and carry a post-split exercise price of $0.325 per share. These options also carry a cash-less exercise option if elected by the officer at exercise, if the market price of the Company's common stock is at least $3.25 per share at the time of exercise, the officer can elect to return shares, to the Company in lieu of cash payment. These options are exercisable at any time after the Company's share price exceeds $2.50 per share for a full quarter, and can be exercised cash-lessly on a pro-rata basis. The performance requirement for the Chairman for year one is: a) eliminate all debt, b) take the operating company public and c) reduce the operating company loss by 40%; and for year two to double the Company's base revenue. If the expenses related to taking the operating company public are excluded, the Chairman met the requirements for the first year. F-11
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PEGASUS WIRELESS CORP. Notes to the Consolidated Financial Statements NOTE 12 - LINE OF CREDIT The Companies had a line of credit agreement with a bank, which allows the Company to borrow up to $5,000,000. Outstanding balances bear interest at the lender's prime rate and are collateralized by inventory, accounts receivable and property and equipment. The credit facility requires the Companies to maintain certain financial ratios and comply with certain covenants. This agreement was renewed in April, 2005, and now expires in June 2006. NOTE 13 - RELATED PARTY TRANSACTIONS A - Facilities operating lease - The Company leases it headquarters building from a majority stockholder. This lease calls for annual rent in the amount of $863,800. B- Related companies - The Companies record sales, accounts receivable, purchases, administrative expenses and accounts payable to and from 5 brother-sister related companies. None of these companies own any stock of the Companies, nor do the Companies have any investment in these related companies. They are related by virtue of similar/common control. Following are the transactions with these related parties for the six months ended December 31, 2005: Percent ---------------- --------------- Revenues $ 1,598,063 9.06% Accounts receivable 616,448 9.23% Purchases 337,669 2.19% Administrative expenses 142,288 10.79% Accounts payable 108,083 1.82% NOTE 14 - SUBSEQUENT EVENTS A - Significant Acquisition - On January , 2006, the Company acquired 51% of SKI Technologies, Inc., ("SKI"), a Taiwanese corporation headquartered in Taipei, Taiwan. The Company paid $650,000 in cash and issued 142,735 shares of restricted common stock, valued at $650,000, or $4.55 per share. The acquisition was financed by a purchase of 200,000 restricted shares of Pegasus Wireless Corporation's common stock by Jasper Knabb, the Company's President, in exchange for $2,000,000 in cash, or $10.00 per share. F-12
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 Item 8. Changes in and Disagreements with Accountants. None  Item 8A. Controls and Procedures Within 90 days prior to the date of this Report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer (or persons performing similar functions) of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer (or persons performing similar functions) concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports that are filed with the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last valuation. Internal Control Over Financial Reporting: There have been no significant changes in the Company's internal controls or in other factors since the date of the Chief Executive Officer and Chief Financial Officer's (or persons performing similar functions) evaluation that could significantly affect these internal controls during the period covered by this report or from the end of the reporting period to the date of this Form 10-KSB, including any corrective actions with regards to significant deficiencies and material weaknesses.  Item 8B. Other Information None. PART III  Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act DIRECTORS and EXECUTIVE OFFICERS The following table sets forth certain information with respect to each of our executive officers and directors. Our directors are generally elected at the annual shareholders' meeting and hold office until the next annual shareholders' meeting or until their successors are elected and qualified. Executive officers are elected by our board of directors and serve at its discretion. Our bylaws authorize the board of directors to be constituted of not less than one and such number as our board of directors may determine by resolution or election. As of February 15, 2006 our board of directors consists of nine members. 25
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NAME AGE POSITION ------------- ------ ----------------- Alex Tsao 52 Chief Executive Officer and Chairman of the Board of Directors Jasper Knabb 38 President and Director Stephen Durland 51 Chief Financial Officer and Director Caspar Lee 51 Director Jerry Shih 56 Director, (and President of the AMAX companies) Nicholas Peraticos 48 Director Billy Horn 42 Director Edward Celano 67 Director Michael Eaton 63 Director There are no family relationships between or among the executive officers and directors of the Company, except that Alex Tsao and Jerry Shih are brothers-in-law by marriage. Compliance with Section 16(a) of the Securities Exchange Act of 1934: Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's executive officers and directors and persons who own more than 10% of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission (hereinafter referred to as the "Commission") initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership, of Common Stock and other equity securities of the Company on Forms 3, 4 and 5, respectively. Executive officers, directors and greater than 10% shareholders are required by Commission regulations to furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, all executive officers, directors and greater than 10% beneficial owners of its common Stock, and have not complied with Section 16(a) filing requirements applicable to them during the Company's fiscal year ended June 30,2005. Business Experience Officers and Directors The following is a brief description of the business background of our executive officers, and directors: ALEX TSAO, Chairman and CEO, is the Company's founding CEO. Dr. Tsao has more than 20 years experience in the microwave communication and satellite communication industry. He has served in both technical and management positions during his association with Globalstar, Loral Space Systems and Ford Aerospace prior to OTC Wireless. From 1991 to 1993, he was the technical manager for the satellite communication payload system for Globalstar, a low earth orbit (LEO) satellite mobile communication service provider. He was involved in the system design and development for both the space and the ground segments for the geosynchronous earth orbit (GEO) communication satellite systems during his tenure with Loral Space Systems between 1988 and 1991. He was involved in the microwave communication system development while working for Ford Aerospace during the 1981 to 1988 period. Dr. Tsao received his Ph.D. degree from the University of Illinois, Champaign-Urbana in 1981 and his Master's degree from Duke University in 1978, both in Electrical Engineering. Dr. Tsao has been awarded 11 U.S. patents. 26
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JASPER KNABB, President and Director, has more than 15 years experience in the high tech industry. Mr. Knabb's involvement in the technology business encompasses PC manufacturing and sales, computer gaming software development, Internet service provider and wireless system development and marketing. Prior to Pegasus Wireless, Mr. Knabb was the President of Wireless Frontier, Inc., (OTC BB: WFRI), from 2003 to 2004 and was responsible for business development and successfully negotiating to bring the company to public via a reverse merger. Prior to Wireless Frontier, Mr. Knabb was a Managing Director at OTC Wireless responsible for business development from 2001 to 2002. Prior to OTC Wireless, Mr. Knabb founded and became the President of Beach Access, a privately held Internet Service Providing company, in 1998, and successfully sold the company in 2000. Between 1985 and 1998, he was the owner and the President of Microland, a PC retailing business, and SEI, a console game developer, both privately held companies. STEPHEN DURLAND, CFO and Director, has been the president of Durland & Company, CPAs, PA, since he founded it in 1991. Durland & Company has specialized in the audits of micro-cap public companies since its founding. In addition, its clients have had operations in 19 foreign countries, giving the firm very heavy international experience. Since 1998, Mr. Durland has been a Director of Children's Place at Homesafe, Inc., a local non-profit serving the needs of abused and/or terminally ill children. He has been a Director of Medical Makeover Corporation of America, (OTC BB: MMAM), since June 2004. He has also been a Director of ExpressAir Delivery Systems, Inc. since 1999 and Global Eventmakers, Inc. since 2003. They are private operating companies expecting to become publicly traded in 2005 via reverse merger with publicly trading shell companies. He was a Director of two other OTC BB listed companies, American Ammunition, Inc. (July 2001 - March 2002), and JAB International, Inc. (October 2000 - June 2003). He was CFO/Acting CFO for four private operating companies, Main Line Medical Acquisition, LLC, (November 2002 - April 2003), Powerhouse Management, Inc., (November 2002 - April 2003), Ong Corp., (March 2001 - June 2002) and American Hydroculture, Inc., (August 2000 - August 2001), none of which went public, and four OTC BB listed companies, American Ammunition, Inc. (July 2001 - March 2002), JAB International, Inc. (October 2000 - June 2003), Ocean Resources, Inc. (September 2002 - November 2003), and Safe Technologies, Inc. (September 2002 - December 2003). Of the public companies, all but two, (American Ammunition and Pegasus Wireless), had completed their reverse mergers well before Mr. Durland became aware of the companies. These CFO/Acting CFO positions have primarily been interim in nature to assist these companies through periods when they could either not afford or did not need a full-time CFO. All of the publicly traded companies, except Medical Makeover and Safe Technologies became public via reverse merger with public shells. Mr. Durland was not involved with any of the public shells prior to the reverse mergers. Prior to Durland & Company, he was responsible for the back-office operations and accounting for two companies with investment portfolios of $800 and $900 million and $36 billion (face amount) of futures and options transactions. Prior to that, he was a securities Registered Representative for two years. Mr. Durland received his BAS in Accounting from Guilford College in 1982 and has been a CPA in 14 states. CASPAR LEE, Director, has been the President of Paradigm Venture Partners since 2001. Paradigm is an Asia- based venture investment firm Mr. Lee co-founded. Mr. Lee has more than 25 years experience in the electronics industry and high-tech venture investment business. Between 1991 and 2001, Mr. Lee was the Senior Vice President of Hotung International Investment Group, an Asia-based investment firm with more than 170 portfolio companies in Taiwan, Singapore, Hong Kong, 27
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Malaysia, China, Israel, Canada and the U.S. Between 1987 and 1991, Mr. Lee was the President of Astra Computers, a motherboard design and manufacturing company based in Taiwan. Between 1983 and 1987, Mr. Lee was a hardware design Manager at Sytek Corp., a Mountain View, California-based broadband local area network manufacturer. From 1981 to 1983, Mr. Lee was a hardware design engineer at Ungermann-Bass Corp., Santa Clara, California. Between 1979 and 1981, Mr. Lee was a CPU design engineer at Intel Corp., Santa Clara, California. From 1978 to 1979, Mr. Lee worked as a SRAM design engineer at Texas Instruments, Houston, Texas. Mr. Lee received his Masters degree in Electrical Engineering from University of California, Berkeley in 1978 and his MBA degree from University of Santa Clara, Santa Clara, California in 1986. JERRY SHIH, Director, is the founder and, since 1985, the Chairman and CEO of AMAX Engineering Corporation, a PC system and peripheral solution provider. Mr. Shih has more than 25 years' experience in the computer manufacturing and channel distribution business. He is also the Chairman and CEO of AMAX Information Technologies, an IT solution provider; President of ASKE Media Inc., an e- commerce software solution provider and Chairman of Advanced Semiconductor Engineering Technologies, a semiconductor equipment service provider. He was an Engineering Manager at VLSI Technology between 1984 and 1985. From 1978 to 1984, he was an Engineering Manager at Signetics Corporation. He was an engineer at Mostek Corporation between 1977 and 1978. Mr. Shih received his Masters degree in Industrial Engineering from the University of Arizona in 1977. BILLY HORN President and CEO of Horn Asset, Inc. a Miami, Florida based equity hedge fund. Prior to this position Mr. Horn was a trader with two equity hedge funds for 12 years. Mr. Horn received his BA from Adelphi University, Garden City, NY. NICOLAS PERATICOS, Chairman of the Compensation Committee Managing Director of Pegasus Ocean Services, LTD, a London, England based ocean shipping agency. Mr. Peraticos has been employed by POS since 1980 and has been Managing Director since 1992. Mr. Peraticos attended the City of London Polytechnic, majoring in Business Administration and is a citizen of Great Britain. EDWARD CELANO, Chairman of the Audit Committee Senior Partner of Walters & Samuels, a New York City based real estate company. Mr. Celano's responsibilities are corporate financial services. Prior to 2003, Mr. Celano was Senior Partner of corporate finance at M.R. Weiser, CPAs for three years; Executive Vice President and Chief Loan Officer of Atlantic Bank of New York for five years; Senior Vice President at National Westminster Bank for 11 years and Vice President at Banker's Trust for 22 years. Mr. Celano received his Masters in Finance and Investments from CCNY and BA in Business Administration from St. Francis College. MICHAEL EATON, Member of the Audit Committee In 1979 Mr. Eaton founded Eaton & Burley, Solicitors, a United Kingdom based law firm specializing in the music industry. This firm has represented and does represent a number of the world's most successful popular music artists. Mr. Eaton received his Masters in Law from Jesus College , Cambridge, England and is a citizen of Great Britain. 28
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 Item 10. Executive Compensation The following summary compensation table sets forth the aggregate cash compensation paid or accrued by the Company to each of the Company's executive officers and key employees for services rendered to the Company during the Company's fiscal years ended 2005 and 2004 and all plan and non-plan compensation awarded to, earned by or paid to certain designated executive officers. Long Term Compensation Annual Compensation Awards ---------------------------------- Securities Name and Underlying Principal Position Period Salary ($) Bonus ($) Options -------------------------------------------------------------------------- Alex Tsao, CEO and 2005-B $ 60,000 $ 0 $ 0 Chairman 2005-A $ 120,000 $ 0 $ 0 2004 $ 120,000 $ 0 $ 0 2003 $ 120,000 $ 0 $ 0 Jasper Knabb, President 2005-B $ 0 $ 0 $ 0 2005-A $ 0 $ 0 $ 0 2004 $ 0 $ 0 $ 0 2003 $ 0 $ 0 $ 0 Stephen Durland, CFO 2005-B $ 0 $ 0 $ 0 2005-A $ 0 $ 0 $ 0 2004 $ 0 $ 0 $ 0 2003 $ 0 $ 0 $ 0 The Company's President and CFO elected in July 2004 to accept stock options in lieu of cash compensation for a period of two years, beginning in July 2004. The Chairman also elected to receive his performance based bonus for a period of two years in stock options as well. For the two years the Chairman and President are to receive 1,200,000 post-split options and the CFO 1,080,000 post-split options. All of these options are one share per option and carry a post-split exercise price of $0.325 per share. These options also carry a cash-less exercise option if elected by the officer at exercise, if the market price of the Company's common stock is at least $3.25 per share at the time of exercise, the officer can elect to return shares, to the Company in lieu of cash payment. These options are exercisable at any time after the Company's share price exceeds $2.50 per share for a full quarter, and can be exercised cash-lessly on a pro-rata basis. The performance requirement for the Chairman for year one is: a) eliminate all debt, b) take the operating company public and c) reduce the operating company loss by 40%; and for year two to double the Company's base revenue. If the expenses related to taking the operating company public are excluded, the Chairman met the requirements for the first year Compensation of Directors The Company has no standard arrangements for compensating the directors of the Company for their attendance at meetings of the Board of Directors. 29
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 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Security Ownership of Certain Beneficial Owners The following table summarizes certain information with respect to the beneficial ownership of company shares as of December 31, 2005, regarding the ownership of common stock by each shareholder known to be the owner of more than 5% of the outstanding shares, each director and all executive officers and directors as a group. Except as otherwise indicated, each of the shareholders has sole voting and investment power with respect to the shares of common stock beneficially owned. Alex Tsao(1) Common 7,504,516 10.5% 48499 Milmont Dr. Fremont, CA 94538 --------------------------------------------------------------------------- Jasper Knabb(1) Common 1,908,637 2.7% 48499 Milmont Dr. Fremont, CA 94538 ---------------------------------------------------------------------------- Stephen Durland(1) Common 0 0.0% 48499 Milmont Dr. Fremont, CA 94538 ---------------------------------------------------------------------------- Caspar Lee(1) Common 0 0.0% 48499 Milmont Dr. Fremont, CA 94538 ---------------------------------------------------------------------------- Jerry Shih(1) Common 1,471,863 2.1% 48499 Milmont Dr. Fremont, CA 94538 ---------------------------------------------------------------------------- All Executive Officers, Directors 10,885,016 15.3% as a group Certain Beneficial Owners ---------------------------------------------------------------------------- Name and Address of Title of Amount and Nature of Percent Beneficial Owner Class Beneficial Owner of Class ---------------------------------------------------------------------------- Vision 2000 Ventures, Ltd Common 9,072,876 12.7% 48499 Milmont Dr. Fremont, CA 94538 TOTAL 9,072,876 12.7% (1) Based upon 71,569,039 shares of the Company's common stock issued and outstanding as of December 301 2005.  Item 12. Certain Relationships and Related Transactions None 30
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 Item 13. Exhibits and Reports filed on Form 8-K (a) Exhibits Exhibit Number Description ------- ----------------------- 31.1 * Certificate of the Chief Executive Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002 31.2 * Certificate of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002 32.1 * Certificate of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 * Certificate of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ------------------------------------------------- * Filed herewith (b) Reports on Form 8-K filed in the last quarter of 2005: December 29, 2005 - Reporting the completion of acquisition Financial statements of acquired entity December 23, 2005 - Reporting the completion of acquisition Reporting the amendment to the By Laws Reporting the change of fiscal year end Financial statements of acquired entity December 22, 2005 - Reporting a press release November 1, 2005 - Reporting a press release August 8, 2005 -Reporting the stock split. May 10, 2005 - Reporting the change of the Company's independent auditor June 2, 2005 - Reporting the completion of acquisition Reporting the change of the Company's independent auditor Reporting the change of control of the Company Reporting the resignation of officers and directors Reporting the replacement of officers and directors Reporting the change of fiscal year end Reporting the amendments to the Company's Code of Ethics Financial statements of acquired entity 31
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 Item 14. Principal Accountant Fees and Services The Company paid or accrued the following fees in each of the prior two fiscal years to it's principal accountant, Pollard-Kelley Auditing Services, Inc.: Year ended Six Months ended December 31, June 30, 2005 2004 ---------------------------------- 1. Audit fees $20,000 $20,000 2. Audit-related fees - - 3. Tax fees - - 4. All other fees - - --------- --------- Totals $20,000 $20,000 --------- --------- The Company has designated a formal audit committee. In discharging its oversight responsibility as to the audit process, commencing with the engagement, the Board obtained from it's independent auditors a formal written statement describing all relationships between the auditors and the Company that might bear on the auditors' independence as required by Independence Standards Board Standard No. 1, "Independence Discussions with Audit Committees." The Board discussed with the auditors any relationships that may impact their objectivity and independence, including fees for non-audit services, and satisfied itself as to the auditors' independence. The Board also discussed with management and the independent auditors the quality and adequacy of the Company's internal controls. The Board reviewed with the independent auditors their management letter on internal controls, if one was issued by the Company's auditors. The Board discussed and reviewed with the independent auditors all matters required to be discussed by auditing standards generally accepted in the United States of America, including those described in Statement on Auditing Standards No. 61, as amended, "Communication with Audit Committees". The Board reviewed the audited financial statements of the Company as of and for the six months and year ended December 31, 2005 and June 30, 2005 with management and its independent auditors. Management has the sole ultimate responsibility for the preparation of the Company's financial statements and the respective independent auditors have the responsibility for their examination of those statements. Based on the above-mentioned review and discussions with the respective independent auditors and management, the Board of Directors approved the Company's audited financial statements and recommended that they be included in its Annual Report on Form 10-KSB for the six months and year ended December 31, 2005 and June 30, 2005, for filing with the Securities and Exchange Commission. The Company's principal accountant for the six months and year ended December 31, 2005 and June 30, 2005, Pollard-Kelley Auditing Services, Inc. did not engage any other persons or firms other than the respective principal accountant's full-time, permanent employees. 32
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 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Pegasus Wireless Corp. (Registrant) Date: March 2, 2006 /s/Alex Tsao ------------------------------------------------ Alex Tsao, CEO & Chairman of the Board /s/ Jasper Knabb ------------------------------------------------ Jasper Knabb, President and Director /s/Stephen Durland ------------------------------------------------ Stephen Durland, CFO and Director /s/Caspar Lee ------------------------------------------------ Caspar Lee, Director /s/Jerry Shih ------------------------------------------------ Jerry Shih, Director /s/Billy Horn ------------------------------------------------ Billy Horn, Director /s/Edward Celano ------------------------------------------------ Edward Celano, Director /s/Nicholas Peraticos ------------------------------------------------ Nicholas Peraticos, Director /s/Michael Eaton ------------------------------------------------ Michael Eaton, Director 33
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 SIGNATURES (Continued) In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date By: /s/Alex Tsao -------------------------- CEO & Chairman March 2, 2006 Alex Tsao By: /s/Jasper Knabb -------------------------- President & Director March 2, 2006 Jasper Knabb By: /s/Stephen Durland -------------------------- CFO & Director March 2, 2006 Stephen Durland By: /s/Caspar Lee -------------------------- Director March 2, 2006 Caspar Lee By: /s/Jerry Shih -------------------------- Director March 2, 2006 Jerry Shih By: /s/Billy Horn -------------------------- Director March 2, 2006 Billy Horn By: /s/Edward Celano -------------------------- Director March 2, 2006 Edward Celano By: /s/Nicholas Peraticos -------------------------- Director March 2, 2006 Nicholas Peraticos By: /s/Michael Eaton -------------------------- Director March 2, 2006 Michael Eaton 34

Dates Referenced Herein   and   Documents Incorporated By Reference

Referenced-On Page
This 10KSB Filing   Date First   Last      Other Filings
4/5/00419
12/18/014198-K, 8-K/A
4/2/02419
6/30/042010QSB
1/11/052
5/10/05318-K
6/2/05318-K
6/30/0553210KSB, 10KSB/A, 5, 5/A
7/1/05119
8/8/05318-K
8/31/05522
10/1/051119
11/1/05318-K
12/22/0511314, 4/A, 8-K
12/23/05314, 8-K
12/29/0511314, 8-K, 8-K/A
For The Period Ended12/31/051325
1/1/061119
1/11/0624/A, 5
2/10/06910
2/15/0625
2/24/0614
Filed On3/2/0633344
Filed As Of3/3/06
 
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