UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of the Securities and Exchange Act of 1934
Date of Report (Date of earliest reported): December 30, 2002
WPCS INTERNATIONAL INCORPORATED
(Exact name of registrant as specified in charter)
Delaware 0-26277 98-0204758
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
140 South Village Avenue, Suite 20, Exton, Pennsylvania 19341
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 903-0400
ITEM 1. ACQUISITION OR DISPOSITION OF ASSETS
Acquisition of Walker Comm, Inc.
On December 30, 2002, WPCS International Incorporated, a Delaware
corporation (the "Company"), entered into and completed an Agreement and Plan of
Merger with Walker Comm Merger Corp., a Delaware corporation wholly-owned by the
Company (the "Subsidiary"), Walker Comm, Inc., a California corporation
("Walker"), Donald C. Walker ("D. Walker"), Gary R. Walker ("G. Walker"), and
Tanya D. Sanchez ("T. Sanchez" and together with D. Walker and G. Walker, the
"Walker Shareholders"). Pursuant to the terms of the Agreement and Plan of
Merger (the "Acquisition"), the Company acquired all of the issued and
outstanding shares of capital stock of Walker from the Walker Shareholders in
exchange for an aggregate of 2,486,000 newly issued shares of the Company's
common stock (the "Shares") and $1,000,000 total cash consideration. As part of
the Acquisition, the Company's Board of Directors appointed G. Walker as a
member of the Company's Board of Directors and appointed D. Walker as the
Company's Executive Vice-President of the Project Services Division.
Walker is a full service voice, data and video contractor. Walker provides
a full line of design, installation and testing services for fiber optics, data
cabling, voice cabling and wireless solutions. Walker also offers network
configuration services and data network audits to insure maximum network
operability. Walker maintains a staff of highly trained project managers and
engineers focused on customer satisfaction. Walker has a significant and growing
customer base that includes, Cisco Systems, Stanford University and the State of
California.
The 2,486,000 shares of common stock issued in the merger were not
registered under the Securities Act of 1933, as amended (the "Act") and were
issued in the reliance upon the exemption from registration provided by section
4(2) of the Act, on the basis that the Acquisition is a transaction not
involving a public offering. All certificates evidencing the Shares bear a
customary form of investment legend and may not be sold, pledged, hypothecated
or otherwise transferred unless first registered under the Act or pursuant to an
available exemption from such registration requirements.
As part of the Acquisition, the Company caused the Subsidiary and Walker to
be merged pursuant to an Agreement of Merger filed with the Delaware and
California Secretary of States on December 30, 2002. Walker survived the merger
and the Company intends to continue to hold the surviving company as a wholly
owned subsidiary and to continue its operations.
The amount of consideration paid to the Walker Shareholders for Walker was
determined through arm's-length negotiations between these parties and the
Company. Other than as disclosed herein, there are no material relationships
between the Walker Shareholders and the Company or any of its affiliates, any
directors or officers of the Company, or any associate of such directors or
officers.
Following the closing of the merger, the Company had 13,078,844 shares of
its common stock issued and outstanding.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of businesses acquired.
1. Audited Financial Statements of Walker for the period from inception to
December 31, 2000 and for the year ended December 31, 2001- Filed herewith.
2. Unaudited Financial Statements of Walker for the ten- month period ended
October 31, 2002 - Filed herewith.
(b) Proforma Financial Information
Proforma Financial Information - Filed herewith.
(c) Exhibits.
3. Agreement and Plan of Merger by and among WPCS International
Incorporated, Walker Comm Merger Corp., Walker Comm, Inc., Donald C. Walker,
Gary R. Walker, and Tanya D. Sanchez made as of the 30th day of December, 2002
(previously filed).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
WPCS INTERNATIONAL INCORPORATED
Date: February 14, 2003 /s/ ANDREW HIDALGO
Andrew Hidalgo, President
WALKER COMM, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountant F-2
Balance Sheets as of December 31, 2001 and 2000 F-3 - F-4
Statements of Operations for the years ended
December 31, 2001 and 2000 F-5
Statements of Stockholders' Equity for the years ended
December 31, 2001 and 2000 F-6
Statements of Cash Flows for the years ended
December 31, 2001 and 2000 F-7
Notes to Financial Statements F-8 - F-13
LEONARD FRIEDMAN
CERTIFIED PUBLIC ACCOUNTANT
385 Old Westbury Road
East Meadow, New York 11554
Tel: (516) 735-0824 Fax: (516) 735-6301
E-mail: lenmar@optonline.net
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders of
Walker Comm, Inc.
I have audited the accompanying balance sheets of Walker Comm, Inc. as of
December 31, 2001 and 2000, and the related statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that I 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. I believe that my audit provides a reasonable
basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Walker Comm, Inc. as of
December 31, 2001 and 2000, and the results of their operations and their cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ LEONARD FRIEDMAN
East Meadow, New York
February 5, 2003
F-2
WALKER COMM, INC.
BALANCE SHEETS
DECEMBER 31,
ASSETS 2001 2000
------------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 137,863 $ 183,114
Contract receivable, net of allowance of $60,000
in 2001 and $35,000 in 2000 2,861,296 4,826,869
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,071,559 1,997,619
Insurance refund receivable and other current assets 401,345 25,662
------------- ------------
Total current assets 4,472,063 7,033,264
PROPERTY AND EQUIPMENT, NET 469,194 430,626
OTHER ASSETS 23,827 10,271
------------- ------------
Total Assets $ 4,965,084 $ 7,474,161
------------- ------------
The accompanying notes are an integral part of these statements.
F-3
WALKER COMM, INC.
BALANCE SHEETS
DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
------------- ------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $775,774 $3,379,587
Billings in excess of costs and estimated earnings on
uncompleted contracts 93,724 796,973
Current maturities of equipment loans payable 86,494 98,553
Income taxes payable 61,180 49,980
------------- ------------
Total current liabilities 1,017,172 4,325,093
------------- ------------
EQUIPMENT LOANS PAYABLE, less current maturities 44,484 118,183
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - no par value; 1,000
shares authorized; 100 shares issued and
outstanding in 2001 and 2000, respectively 20,000 20,000
Retained earnings 3,883,428 3,010,885
------------- ------------
Total Shareholders' Equity 3,903,428 3,030,885
------------- ------------
Total Liabilities and Shareholders' Equity $ 4,965,084 $ 7,474,161
------------- ------------
The accompanying notes are an integral part of these statements.
F-4
WALKER COMM, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
2001 2000
------------- ------------
Contract revenue earned $14,799,579 $23,665,896
Cost of revenue earned 11,137,763 19,584,117
------------- ------------
Gross profit 3,661,816 4,081,779
------------- ------------
Operating expenses
Selling 45,749 59,812
General and administrative 2,413,750 1,947,929
Depreciation and amortization 187,055 176,176
Provision for bad debts 46,126 25,000
------------- ------------
2,692,680 2,208,917
------------- ------------
Operating profit 969,136 1,872,862
------------- ------------
Other income
Interest income, net 14,607 12,487
Gain on disposition of fixed assets - 7,280
------------- ------------
14,607 19,767
------------- ------------
Earnings before income taxes 983,743 1,892,629
Income tax provision 11,200 28,330
------------- ------------
NET INCOME $ 972,543 $ 1,864,299
------------- ------------
The accompanying notes are an integral part of these statements.
F-5
WALKER COMM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001 AND 2000
CAPITAL RETAINED
STOCK EARNINGS TOTAL
---------------- --------------- ---------------
Balance January 1, 2000 $ 20,000 $ 1,365,586 $ 1,385,586
Net Income for the year - 1,864,299 1,864,299
Dividend distributions - (219,000) (219,000)
---------------- --------------- ---------------
Balance December 31, 2000 20,000 3,010,885 3,030,885
Net Income for the year - 972,543 972,543
Dividend distributions - (100,000) (100,000)
---------------- --------------- ---------------
Balance December 31, 2001 $ 20,000 $ 3,883,428 $ 3,903,428
---------------- --------------- ---------------
The accompanying notes are an integral part of these statements.
F-6
WALKER COMM, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2001 2000
------------- ------------
Cash flows from operating activities
Net income $ 972,543 $1,864,299
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 187,055 176,176
Provision for doubtful accounts 46,126 25,000
Changes in operating assets and liabilities:
Contracts receivable 1,919,447 (3,484,494)
Costs and estimated earnings in excess of
billings on uncompleted contracts 926,060 (942,129)
Insurance refund receivable and other assets (389,239) (18,154)
Accounts payable and accrued expenses (2,603,813) 2,598,107
Billings in excess of costs and estimated
earnings on uncompleted contracts (703,249) 73,237
Income taxes payable 11,200 28,330
------------- ------------
Net cash provided by operating activities 366,130 320,372
------------- ------------
Cash flows used in investing activities
Acquisition of property and equipment (225,623) (289,722)
------------- ------------
Net cash used in investing activities (225,623) (289,722)
------------- ------------
Cash flows from financing activities
Proceeds from equipment loans payable 18,600 180,438
Repayment of equipment loans payable (104,358) (103,143)
Dividends paid (100,000) (219,000)
------------- ------------
Net cash used in financing activities (185,758) (141,705)
------------- ------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (45,251) (111,055)
Cash and cash equivalents, beginning of year 183,114 294,169
------------- ------------
Cash and cash equivalents, end of year $ 137,863 $ 183,114
============= ============
The accompanying notes are an integral part of these statements.
F-7
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Walker Comm, Inc. (the "Company") is engaged in the business of fiber
optics, data and voice cable installation. The Company was incorporated in 1997
and is headquartered in Fairfield, California with satellite offices in
Livermore and Rocklin, California.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
1. Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly liquid investments
with an original maturity of three months or less.
2. Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided for, using straight-line and accelerated methods, in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Leased property under capital leases is amortized over
the shorter of the service lives of the assets or the term of the lease. Repairs
and maintenance are charged to operations as incurred.
3. Revenue recognition on Long-term Contracts
The Company records profits on long-term contracts on a
percentage-of-completion basis on the cost to cost method. Contracts in process
are valued at cost plus accrued profits less earned revenues and progress
payments on uncompleted contracts. Contracts are generally considered
substantially complete when engineering is completed and/or site construction is
completed. The Company includes pass-through revenue and costs on cost-plus
contracts, which are customer-reimbursable materials, equipment and
subcontractor costs when the Company determines that it is responsible for the
engineering specification, procurement and management of such cost components on
behalf of the customer.
The Company has numerous contracts that are in various stages of
completion. Such contracts require estimates to determine the appropriate cost
and revenue recognition. The Company has a history of making reasonably
dependable estimates of the extent of progress towards completion, contract
revenues and contract costs. However, current estimates may be revised as
additional information becomes available. If estimates of costs to complete
long-term contracts indicate a loss, provision is made currently for the total
loss anticipated. The elapsed time from award of a contract to completion of
performance may be up to two years.
F-8
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2001 and 2000
NOTE A (continued)
4. Contracts receivable
In accordance with terms of long-term contracts, certain percentages of
billings are withheld by customers until completion and acceptance of the
contracts. In conformity with industry practice, however, the full amount of
accounts receivable, including such amounts withheld, has been included in
current assets.
5. Income Taxes
The Company has elected to be treated as an "S" Corporation under the
applicable sections of the Internal Revenue Code. In general, corporate income
or loss of an "S" Corporation is allocated to the Stockholders for inclusion in
their personal Federal Income tax returns. Accordingly, there is no provision
for Federal income tax in the accompanying financial statements.
The Company has also elected to be treated as an "S" Corporation for
California state income tax purposes. However, the State of California does
impose a tax on "S" Corporation income at a reduced rate and, accordingly, a
provision for such tax is included in the accompanying financial statements.
6. Uses of Estimates and Fair Value of Financial Instruments
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Significant estimates are used when accounting for long-term contracts
including customer and vendor claims, depreciation, employee benefit plans,
taxes, and expected recoveries and contingencies, among others. Actual results
could differ from those estimates.
Management of the Company believes that the fair value of financial
instruments, consisting of cash, contracts receivable and debt, approximates
carrying value due to the immediate or short-term maturity associated with its
cash and accounts receivable and the interest rates associated with its debt.
F-9
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2001 and 2000
NOTE B - CONTRACTS RECEIVABLE
Contracts receivable consist of the following at December 31,
2001 2000
Contract billing $2,571,346 $3,999,927
Retention on contracts 349,950 861,942
--------------- --------------
2,921,296 4,861,869
Less: reserve for uncollectible accounts 60,000 35,000
--------------- --------------
$2,861,296 $4,826,869
--------------- --------------
NOTE C - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the
following at December 31,
2001 2000
Costs incurred on uncompleted contracts $6,741,687 $15,856,213
Estimated contract profit 2,289,485 2,674,688
--------------- ---------------
9,031,172 18,530,901
Less: billings to date 8,053,337 17,330,255
--------------- ---------------
977,835 1,200,646
--------------- ---------------
Costs and estimated earnings in excess of billings 1,071,559 1,997,619
Billings in excess of costs and estimated earnings
on uncompleted contracts (93,724) (796,973)
--------------- ---------------
$ 977,835 $ 1,200,646
--------------- ---------------
F-10
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2001 and 2000
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
Estimated
useful life
(years) 2001 2000
Furniture and equipment 5 - 7 $ 30,286 $19,688
Automobiles 5 - 7 558,726 535,441
Computer equipment 3 - 5 251,473 198,918
Leasehold improvements 3 - 10 149,012 7,746
989,497 761,793
Less accumulated depreciation
and amortization 520,301 331,167
----------- -------------
$ 469,196 $ 430,626
=========== =============
Depreciation and amortization expense for property and equipment for the
years ended December 31, 2001 and 2000 was approximately $187,055 and $176,176,
respectively.
NOTE E - NOTES PAYABLE
Notes payable at December 31, 2001 and 2000 consist of the following:
2001 2000
Note payable to credit unions and banks with principal
and interest due monthly through February 2004,
interest rates, fixed and variable, ranging from 6.20%
to 9.15%, collateralized by vehicles $ 130,978 $ 216,736
Less: current maturities 86,494 98,553
--------- ---------
Long-term debt $ 44,484 $ 118,183
--------- ---------
Related interest expense for the years ended December 31, 2001 and 2000 was
$14,598 and $17,514, respectively.
F-11
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2001 and 2000
NOTE F - LINE OF CREDIT
On July 10, 2002, the Company renewed its revolving credit agreement with a
major bank that provided for a borrowing facility not to exceed $1,500,000. At
December 31, 2001 this credit agreement had a borrowing facility of $1,000,000.
There were no borrowings outstanding under the agreement as of that date. The
agreement is secured by all assets of the Company along with the personal
guarantees by the two major shareholders of the Company.
NOTE G - RELATED PARTY TRANSACTIONS
On March 1, 2001, the Company entered into a ten year lease with
shareholder Gary R. Walker and Donald C. and Anita G. Walker for a building and
land located in Fairfield, California, which will serve as the Company's
headquarters. The lease calls for initial monthly rental payments of $6,934,
with annual increases, calculated using the San Francisco-Oakland-San Jose
Consolidated Metropolitan Statistical Area Consumer Price Index.
NOTE H - MAJOR CUSTOMERS
Contract revenue for the years ended December 31, 2001 and 2000 include
amounts from one major customer which accounted for 19% and 48% respectively, of
the total contract revenue in those years. There were four and two other major
customers, during 2001 and 2000 respectively, each of which accounted for 6% or
more of the total contract revenue of the Company for those periods.
NOTE I - RETIREMENT PLAN AND CONTIGENCY
The Company contributes to union-sponsored multi-employer retirement plans
in accordance with negotiated labor contracts. The retirement plans cover all of
the Company's union employees, which represent substantially all of the
Company's employees. Contributions, which are based on varying rates for the
hours worked by the employees, totaled $260,634 and $366,473 for the years ended
December 31, 2001 and 2000, respectively.
Governmental regulations impose certain requirements relative to
multi-employer plans. In the event of plan termination or employer withdrawal,
an employer may be liable for a portion of the plan's unfunded vested benefits.
As of December 31, 2001, the Company's multi-employer plans are fully funded.
The Company does not anticipate withdrawal from the plans, nor is the Company
aware of any expected plan terminations.
F-12
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2001 and 2000
NOTE J - COMMITMENTS AND CONTINGENCIES
Litigation
The Company from time to time is subject to certain legal proceedings and
claims which have arisen in the ordinary course of its business. These actions
when ultimately concluded will not, in the opinion of management, have a
material adverse effect upon the financial position, results of operations or
liquidity of the Company.
Lease Commitments
The Company leases its main office (see Note G) and sales office facilities
pursuant to non-cancelable operating leases expiring through February 2011. The
minimum rental commitments under these non-cancelable leases, at December 31,
2001, are summarized as follows:
Year ending December 31,
2002 $ 152,615
2003 151,265
2004 91,000
Thereafter 597,000
-----------
Total minimum lease payments $ 991,880
Less current maturities ===========
Rent expense for all operating leases was $157,242 and $65,681 in 2001 and
2000, respectively.
NOTE L - SUBSEQUENT EVENT
On December 30, 2002, the Board of Directors of the Company approved an
Agreement and Plan of Merger with WPCS International, Inc. The merger closed
effective December 30, 2002. The change in ownership resulting from the merger
constitutes an event of default under the line of credit agreement with the Bank
referred to in Note F.
F-13
WALKER COMM, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Condensed Balance Sheets as of September 30, 2002 (unaudited) and
December 31, 2001 F-2 - F-3
Condensed Statements of Operations for the nine months ended
September 30, 2002 and 2001 F-4
Condensed Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 F-5
Notes to Condensed Financial Statements F-6 - F-10
F-1
WALKER COMM, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
2002 2001
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 306,005 $ 137,863
Contract receivable, net of allowance of $85,000
in 2002 and $60,000 in 2001 1,554,484 2,861,296
Costs and estimated earnings in excess of billings on
uncompleted contracts 540,808 1,071,559
Insurance Refund Receivable and other current assets 378,444 401,345
---------- ----------
Total current assets 2,779,741 4,472,063
PROPERTY AND EQUIPMENT, NET 467,499 469,194
OTHER ASSETS 21,809 23,827
---------- ----------
Total Assets $ 3,269,049 $ 4,965,084
---------- ----------
The accompanying notes are an integral part of these statements.
F-2
WALKER COMM, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
2002 2001
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $557,810 $775,774
Billings in excess of costs and estimated earnings on
uncompleted contracts 152,423 93,724
Current maturities of equipment loans payable 70,317 86,494
Income taxes payable 61,180 61,180
---------- ----------
Total current liabilities 841,730 1,017,172
---------- ----------
EQUIPMENT LOANS PAYABLE, less current maturities 26,557 44,484
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - no par value; 3,000
shares authorized; 100 shares issued and
outstanding at September 30, 2002 and
December 31, 2001, respectively 20,000 20,000
Retained earnings 2,380,762 3,883,428
---------- ----------
Total Shareholders' Equity 2,400,762 3,903,428
---------- ----------
Total Liabilities and Shareholders' Equity $ 3,269,049 $ 4,965,084
---------- ----------
The accompanying notes are an integral part of these statements.
F-3
WALKER COMM, INC.
CONDENSED STATEMENTS OF OPERATIONS
Nine months ended
September 30,
2002 2001
---------- ----------
Contract revenue earned $5,815,286 $11,018,475
Cost of revenue earned 5,427,259 8,938,699
---------- ----------
Gross profit 388,027 2,079,776
---------- ----------
Operating expenses
Selling 36,397 42,639
General and administrative 1,463,792 1,617,289
Depreciation and amortization 146,542 134,931
Provision for bad debts 25,600 62,830
---------- ----------
1,672,331 1,857,689
---------- ----------
Operating profit (loss) (1,284,304) 222,087
Other income
Interest income, net 1,638 11,439
---------- ----------
1,638 11,439
---------- ----------
Earnings (loss) before income taxes (1,282,666) 233,526
Income tax provision - -
---------- ----------
NET INCOME (LOSS) $ (1,282,666) $ 233,526
---------- ----------
The accompanying notes are an integral part of these statements.
F-4
WALKER COMM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
2002 2001
---------- ----------
Cash flows from operating activities
Net income (loss) $ (1,282,666) $ 233,526
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 146,542 134,931
Provision for doubtful accounts 25,600 62,830
Changes in operating assets and liabilities
Contracts receivable 1,281,812 861,685
Costs and estimated earnings in excess of
billings on uncompleted contracts 530,751 975,915
Prepaid expenses and other assets 24,919 (30,090)
Accounts payable and accrued expenses (217,964) (1,670,948)
Billings in excess of costs and estimated
earnings on uncompleted contracts 58,699 (271,485)
---------- ----------
Net cash provided by (used in) operating activities 567,693 296,364
---------- ----------
Cash flows used in investing activities
Acquisition of property and equipment (145,447) (217,742)
---------- ----------
Net cash used in investing activities (145,447) (217,742)
---------- ----------
Cash flows from financing activities
Proceeds from equipment loans payable 32,017 18,600
Repayment of equipment loans payable (66,121) (79,932)
Dividends paid (220,000) (100,000)
---------- ----------
Net cash used in financing activities (254,104) (161,332)
---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 168,142 (82,710)
Cash and cash equivalents, beginning of year 137,863 183,114
---------- ----------
Cash and cash equivalents, end of year $ 306,005 $ 100,404
---------- ----------
The accompanying notes are an integral part of these statements.
F-5
WALKER COMM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial reporting and Securities and Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the management, the
unaudited interim consolidated financial statements reflect all adjustments,
consisting of normal recurring items, necessary to fairly present the results of
operations, financial position and cash flows for the periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year. These financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
this Form 8-K/A (Amendment No. 1) for the year ended December 31, 2001 and 2000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Walker Comm, Inc. (the "Company") is engaged in the business of fiber
optics, data and voice cable installation. The Company was incorporated in 1997
and is headquartered in Fairfield, California with satellite offices in
Livermore and Rocklin, California.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
1. Revenue recognition on Long-term Contracts
The Company records profits on long-term contracts on a
percentage-of-completion basis on the cost to cost method. Contracts in process
are valued at cost plus accrued profits less earned revenues and progress
payments on uncompleted contracts. Contracts are generally considered
substantially complete when engineering is completed and/or site construction is
completed. The Company includes pass-through revenue and costs on cost-plus
contracts, which are customer-reimbursable materials, equipment and
subcontractor costs when the Company determines that it is responsible for the
engineering specification, procurement and management of such cost components on
behalf of the customer.
The Company has numerous contracts that are in various stages of
completion. Such contracts require estimates to determine the appropriate cost
and revenue recognition. The Company has a history of making reasonably
dependable estimates of the extent of progress towards completion, contract
revenues and contract costs. However, current estimates may be revised as
additional information becomes available. If estimates of costs to complete
long-term contracts indicate a loss, provision is made currently for the total
loss anticipated. The elapsed time from award of a contract to completion of
performance may be up to two years.
F-6
WALKER COMM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002
NOTE 2 (continued)
2. Income Taxes
The Company has elected to be treated as an "S" Corporation under the
applicable sections of the Internal Revenue Code. In general, corporate income
or loss of an "S" Corporation is allocated to the Stockholders for inclusion in
their personal Federal Income tax returns. Accordingly, there is no provision
for Federal income tax in the accompanying financial statements.
The Company has also elected to be treated as an "S" Corporation for
California state income tax purposes. However, the State of California does
impose a tax on "S" Corporation income at a reduced rate.
3. Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. Significant estimates are used when accounting for long-term contracts
including customer and vendor claims, depreciation, employee benefit plans,
taxes, and expected recoveries and contingencies, among others. Actual results
could differ from those estimates.
F-7
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 2002
NOTE 3 - CONTRACTS RECEIVABLE
Contracts receivable consist of the following at September 30, 2002 and
December 31, 2001:
Contract billing ................................. $1,593,602 $2,571,346
Retention on contracts ........................... 45,882 349,950
---------- ----------
1,639,484 2,921,296
Less: reserve for uncollectible accounts ......... 85,000 60,000
---------- ----------
$1,554,484 $2,861,296
---------- ----------
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the
following at September 30, 2002 and December 31, 2001:
September 30, December 31,
2002 2001
Costs incurred on uncompleted contracts .......... $ 4,068,735 $ 6,741,687
Estimated contract profit ........................ 483,781 2,289,485
----------- -----------
4,552,516 9,031,172
Less: billings to date ........................... 4,164,131 8,053,337
----------- -----------
388,385 977,835
----------- -----------
Costs and estimated earnings in excess of billings 540,808 1,071,559
Billings in excess of costs and estimated earnings
on uncompleted contracts ....................... (152,423) (93,724)
----------- -----------
$ 388,385 $ 977,835
----------- -----------
F-8
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 2002
NOTE 5 - SUBSEQUENT EVENT
On December 30, 2002, the Board of Directors of the Company approved an
Agreement and Plan of Merger with WPCS International, Inc. The merger closed
effective December 30, 2002.
F-9
WPCS INTERNATIONAL INCORPORATED
INDEX TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL INFORMATION
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION 1-2
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET-
"WPCS" AT OCTOBER 31, 2002, "WALKER" AT SEPTEMBER 30, 2002 AND
"INVISINET" AT SEPTEMBER 30, 2002 3-4
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS -"WPCS" FOR SIX MONTHS ENDED OCTOBER 31,2002
"WALKER" FOR SIX MONTHS ENDED SEPTEMBER 30, 2002 AND
"INVISINET" FOR SIX MONTHS ENDED SEPTEMBER 30, 2002 5
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) 6-8
WPCS INTERNATIONAL INCORPORATED
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
We are providing the following unaudited pro forma condensed combined
financial information of WPCS International Inc.("WPCS") and its two new
acquisitions, Invisinet Inc. ("Invisinet") and Walker Comm, Inc. ("Walker") to
demonstrate what the results of operations and financial position of WPCS might
have been had the mergers been completed at an earlier date.
ACQUISITION OF INVISINET INC.
On November 13, 2002, Invisinet Acquisition Corp, a newly formed, wholly
owned subsidiary of WPCS acquired all of the outstanding common stock of
Invisinet. Subsequently on that date, the susidiary was merged with and into
Invisinet, with Invisinet being the surviving corporation. Invisinet then became
a wholly owned subsidiary of WPCS.
The aggregate consideration paid by WPCS for the entire equity interest in
Invisinet was approximately $1,750,000 subject to further adjustment. As a
result of and at the effective time of the merger, all of the issued and
outstanding shares of common stock of Invisinet were exchanged for aggregate
merger consideration consisting of 1,000,000 shares of common stock of WPCS with
a value of approximately, $1,750,000.
The acquisition of Invisinet was accounted for under the purchase method of
accounting in accordance with Statement of Financial Accounting Standards No.
141, Business Combinations ("SFAS 141"). Under the purchase method of
accounting, assets acquired and liabilities assumed are recorded at their
estimated fair values. Goodwill is created to the extent that the merger
consideration, including certain acquisition and closing costs, exceeds the fair
value of the net identifiable assets acquired at the date of the merger. Based
on the preliminary information currently available, the acquisition resulted in
approximately $1,637,056 of goodwill. Upon completion of a formal purchase price
allocation, there may be a decrease in the amount assigned to goodwill and a
corresponding increase in tangible or other intangible assets.
ACQUISITION OF WALKER COMM, INC.
On December30, 2002, Walker Comm Merger Corp., a newly formed, wholly owned
subsidiary of WPCS acquired all of the outstanding common stock of Walker.
Subsequently on that date, the subsidiary was merged with and into Walker, with
Walker being the surviving corporation. Walker then became a wholly owned
subsidiary of WPCS.
The aggregate consideration paid by WPCS for the entire equity interest in
Walker was approximately $5,574,000 subject to further adjustment. As a result
of and at the effective time of the merger, all of the issued and outstanding
shares of common stock, par value $1.00 per share, of Walker were exchanged for
aggregate merger consideration consisting of $500,000 in cash, $500,000 payable
in quarterly distributions equal to 75% of net income of Walker until paid in
full, and the common stock of WPCS with a value of approximately $4,574,000, or
2,486,000 shares valued at $1.84 per share.
1
The acquisition of Walker was accounted for under the purchase method of
accounting in accordance with the Statement of Financial Accounting Standards
No. 141, Business Combinations ("SFAS 141"). Under the purchase method of
accounting, assets acquired and liabilities assumed are recorded at their
estimated fair values. Goodwill is created to the extent that the merger
consideration, including certain acquisition and closing costs, exceeds the fair
value of the net identifiable assets acquired at the date of the merger. Based
on the preliminary information currently available, the acquisition resulted in
approximately $3,208,238 of goodwill. Upon completion of a formal purchase price
allocation there may be a decrease in the amount assigned to Goodwill and a
corresponding increase in tangible or other intangible assets.
The unaudited pro forma condensed consolidated balance sheet of the Company
gives effect to the merger as if it had occurred on October 31, 2002 and the
unaudited pro forma condensed consolidated statement of operations of the
Company gives effect to the merger as if it had occurred on May 1, 2001.
This unaudited pro forma condensed consolidated financial information is
based on the estimates and assumptions set forth herein and in the notes
thereto, and has been prepared utilizing (a) the interim unaudited financial
statements of WPCS included in Form 10-QSB for the six months ended October 31,
2002; and (b) the interim unaudited pro forma financial statements of Invisinet
and Walker for the six months period April 1, 2002 to September 30, 2002.
The following unaudited pro forma financial information is presented for
informational purposes only and is not necessarily indicative of (i) the results
of operations of the Company that actually would have occurred had the
acquisition been consummated on the dates indicated or (ii) the results of
operations of the Company that may occur or be attained in the future. The
following information is qualified in its entirety by reference to and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations", WPCS's audited consolidated financial
statements, including the notes thereto contained in its Annual Report on Form
10-KSB for the year ended April 30, 2002 incorporated herein by reference,
Invisinet's audited financial statements, including the notes thereto, for the
years ended December 31, 2001 and 2000, Walker's audited financial statements,
including the notes thereto, for the years ended December 31, 2001 and 2000, and
other historical financial information appearing elsewhere herein.
2
WPCS INTERNATIONAL INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA UNAUDITED BALANCE SHEET
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30, PRO FORMA
2002 2002 2002
WPCS INVISINET WALKER ADJUSTMENTS CONSOLIDATED
ASSETS
Current Assets
Cash $ 78,607 $ 34,401 $ 306,005 (e) (419,013) $ 0
Accounts receivable, net 130,966 159,438 1,554,484 - 1,844,888
Due from related party - 164,514 - - 164,514
Inventories 5,644 13,286 - - 18,930
Costs and estimated earnings in
excess
of billings on uncompleted
contracts - 540,808 540,808
Prepaid expense and other current
assets 2,559 2,372 378,444 - 383,375
------------ ---------- ----------- ------------- -----------
Total current assets 217,776 374,011 2,779,741 (419,013) 2,952,515
------------ ---------- ----------- ------------- -----------
Property and Equipment, net 25,186 5,003 467,499 497,688
Cost in excess of net assets (b)
acquired - 1,637,056
(i)
- 3,208,238 4,845,294
Other Assets 2,242 350 21,809 - 24,401
------------ ---------- ----------- ------------- -----------
$ 245,204 $ 379,364 $ 3,269,049 $ 4,426,281 $ 8,319,898
------------ ---------- ----------- ------------- -----------
3
WPCS INTERNATIONAL INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA UNAUDITED BALANCE SHEET
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
2002 2002 2002 PRO FORMA
WPCS INVISINET WALKER ADJUSTMENTS CONSOLIDATED
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank Overdraft $ 0 $ 0 $ 0 (e) $ 80,987 80,987
Accounts payable and accrued (b),(f)
expenses 72,399 227,048 557,810 60,000 917,257
Accounts payable - Related party 14,372 - 14,372
Billings in excess of costs and
estimated
earnings on uncompleted contracts 152,423 152,423
Current maturities of equipment
loans -
payable 2,183 70,317 - 72,500
Income taxes payable 61,180 61,180
(i) 774,670 774,670
Notes payable - shareholders 600,000 (a) (600,000) -
(e)
- - - 500,000 500,000
----------- ------------- ------------ ------------ --------------
Total current liabilities 74,582 841,420 841,730 815,657 2,573,389
----------- ------------- ------------ ------------ --------------
Noncurrent Liabilities
Equipment loans payable, less
current 5,783 26,557 - 32,340
Deferred taxes 4,150 - - - 4,150
----------- ------------- ------------ ------------ --------------
Total noncurrent liabilities 9,933 - 26,557 - 36,490
----------- ------------- ------------ ------------ --------------
Total liabilities 84,515 841,420 868,287 815,657 2,609,879
----------- ------------- ------------ ------------ --------------
Stockholders' equity
Preferred Stock:
Series B Convertible Preferred
Stock, 1,000 shares designated, 519
shares issued and outstanding at
October 31,2002 liquidation
preference of $519,000
Common stock 903 1,000 20,000 (d),(h) 349 1,252
(c) (1,000)
(g) (20,000)
(a) 600,000 6,164,264
(b) 1,612,956
(c) (525,528)
(g),(i) 3,799,081
(c) 525,528 (455,497)
(i) (774,670)
(455,497) (525,528) 2,380,762 (g) (1,606,092) -
----------- ------------- ------------ ------------ --------------
Total stockholders equity 160,689 (462,056) 2,400,762 3,610,624 5,710,019
----------- ------------- ------------ ------------ --------------
$ 245,204 $ 379,364 $3,269,049 4,426,281 $ 8,319,898
----------- ------------- ------------ ------------ --------------
4
WPCS INTERNATIONAL INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED PRO FORMA UNAUDITED STATEMENT OF EARNINGS
FOR THE SIX MONTHS ENDED
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
2002 2002 2002 PRO FORMA
WPCS INVISINET WALKER ADJUSTMENTS CONSOLIDATED
----------- ------------- ------------ ----------- --------------
Net sales $606,482 $656,295 3,899,536 5,162,313
Cost of sales 474,096 521,630 3,435,936 4,431,662
----------- ------------- ------------ --------------
Gross margin 132,386 134,665 463,600 - 730,651
----------- ------------- ------------ --------------
Operating expenses
Selling expenses 7,019 - 20,473 27,492
General and administrative 389,729 172,516 906,959 - 1,469,204
Provision for doubtful accounts 26,285 6,000 10,000 42,285
Depreciation and amortization 3,085 3,366 100,868 107,319
----------- ------------- ------------ --------------
Total operating expenses 426,118 181,882 1,038,300 1,646,300
----------- ------------- ------------ --------------
Loss from operations (293,732) (47,217) (574,700) (915,649)
Other income (expenses), interest - (297) 2,713 - 2,416
----------- ------------- ------------ --------------
Net loss (293,732) (47,514) (571,987) (913,233)
Imputed dividends accreted on
convertible Series B Preferred
stock (173,000) - - (173,000)
----------- ------------- ------------ --------------
Net loss attributable to common
stockholders $ (466,732) $ (47,514) $ (571,987) (1,086,233)
----------- ------------- ------------ --------------
Basic and diluted loss per
share of common stock $ (0.09)
--------------
Common shares used in the
calculation of loss
per 12,511,632
--------------
5
WPCS INTERNATIONAL INCORPORATED
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. WPCS is a publicly held corporation whose newly formed
subsidiary, on November 13, 2002, merged with Invisinet, Inc.
("Invisinet"). For accounting purposes, this transaction has been
treated as an acquisition with the net assets of Invisinet being
stated at fair value in accordance with the purchase method of
accounting.
NOTE 2. WPCS is a publicly held corporation whose newly formed
subsidiary, on December 30, 2002, merged with Walker Comm, Inc.
("Walker"). For accounting purposes, this transaction has been treated
as an acquisition with the net assets of Walker being stated at fair
value in accordance with the purchase method of accounting.
NOTE 3. The unaudited pro forma consolidated balance sheet at October 31,
2002 presented herein has been prepared as if the merger had been
consummated on October 31, 2002.
The unaudited pro forma condensed consolidated statement of
operations for the six months ended October 31, 2002 presented herein
has been prepared as if the merger described above had been
consummated as of May 1, 2002. WPCS began its operations in December
2001; therefore no pro forma financial information is presented for
any prior years.
NOTE 4. Pro forma adjustments have been made for the following:
Acquisition of Invisinet:
(a) To record the conversion of Notes Payable- Related party of
$600,000 by Invisinet into additional paid-in capital
(b) To reflect the excess of acquisition cost over the estimated
fair value of the net assets acquired (goodwill). The allocation of
the purchase price is based on financial information of Invisinet as
of September 30, 2002. Upon completion of a formal purchase price
allocation there may be a decrease in the amount assigned to goodwill
and a corresponding increase in tangible or other intangible assets.
However, we do not believe that the final purchase price allocation
will have a material impact on our pro forma results of operations or
financial position. The purchase price and purchase price allocation
are summarized as follows:
Purchase price paid as:
Common stock issued $ 1,750,000
Cash paid -
Transaction costs 25,000
-----------------
Total purchase price consideration 1,775,000
Allocated to:
Historical net book value of Walker at September 30,
2002 $ 137,944
-----------------
Cost in excess of net assets acquired $ 1,637,056
=================
6
WPCS INTERNATIONAL INCORPORATED
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(c) To reflect the elimination of the shareholders' equity
accounts of Invisinet of ($525,528) and the issuance of WPCS common
stock. To effect the merger, WPCS issued 1,000,000 shares of WPCS
common stock with a value of approximately $1,750,000, based upon the
average closing price of $1.75 per share a few days before and after
the date of merger.
(d) To reflect the issuance of 1,000,000 shares of WPCS common
stock to effect the merger as if these shares were outstanding at the
beginning of the periods presented.
Acquisition of Walker Comm, Inc.
(e) To reflect cash consideration paid $500,000 and record Note
payable to Walker shareholders in an amount of $500,000 to effect the
merger.
(f) To reflect the transaction cost payable in an amount of
$35,000.
(g) To reflect the elimination of the shareholders' equity
accounts of Walker of $2,400,762 and the issuance of WPCS common
stock. To effect the merger, WPCS issued 2,486,000 shares of WPCS
common stock with a value of approximately $4,574,000, based upon the
average closing price of $1.84 per share a few days before and after
the date of merger.
(h) To reflect the issuance of 1,000,000 shares of WPCS common
stock to effect the merger as if these shares were outstanding at the
beginning of the periods presented.
(i) To reflect the excess of acquisition cost over the estimated
fair value of the net assets acquired (goodwill). The allocation of
the purchase price is based on financial information of Walker as of
September 30, 2002. Upon completion of a formal purchase price
allocation there may be a decrease in the amount assigned to goodwill
and a corresponding increase in tangible or other intangible assets.
However, we do not believe that the final purchase price allocation
will have a material impact on our pro forma results of operations or
financial position. The purchase price and purchase price allocation
are summarized as follows:
Purchase price paid as:
Common stock issued $ 4,574,000
Cash paid 500,000
Note payable - Walker shareholders 500,000
Transaction costs 35,000
-----------------
Total purchase price consideration 5,609,000
Allocated to:
Historical net book value of Walker at September 30,
2002 $ 2,400,762
-----------------
Cost in excess of net assets acquired $ 3,208,238
-----------------
7
WPCS INTERNATIONAL INCORPORATED
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(j) To reflect $774,670 dividend payable to Walker shareholders
prior to the closing of the transaction.
NOTE 5. Both Invisinet and Walker, prior to their merger with WPCS, were
taxed as a Subchapter S corporation for income tax purposes. In lieu
of corporate income taxes, the shareholders of a Subchapter S
Corporation are taxed on their proportionate share of the Company's
taxable income. For the purpose of these pro forma condensed
consolidated financial statements, both Invisinet and Walker were
considered as C corporations in determining the appropriate tax
provisions for the period.
Based on the current losses and uncertainty of future taxable
income, no tax benefit has been recorded in these pro forma condensed
consolidated financial statements.
NOTE 6. The statement of operations of WPCS was derived from its interim
unaudited financial statements on Form 10Q-SB for the six months ended
October 31, 2002.
The statement of operations of Invisinet was derived from its
interim unaudited financial statements for the nine months ended
September 30, 2002, less unaudited financial statements for the three
months ended March 31, 2002.
The statement of operations of Walker was derived from its
interim unaudited financial statements for the nine months ended
September 30, 2002, less unaudited financial statements for the three
months ended March 31, 2002.
8