UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended April 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-26277
WPCS INTERNATIONAL INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 98-0204758
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
140 South Village Avenue
Suite 20
Exton, Pennsylvania 19341
(Address of principal executive offices)
(610) 903-0400
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 after the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date: 20,849,976 shares issued and
outstanding as of July 15, 2004.
PART I
ITEM 1. - BUSINESS
This Annual Report on Form 10-KSB (including the section regarding Management's
Discussion and Analysis of Financial Condition and Results of Operations)
contains forward-looking statements regarding our business, financial condition,
results of operations and prospects. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not deemed to represent an all-inclusive means of identifying
forward-looking statements as denoted in this Annual Report on Form 10-KSB.
Additionally, statements concerning future matters are forward-looking
statements.
Although forward-looking statements in this Annual Report on Form 10-KSB reflect
the good faith judgment of our Management, such statements can only be based on
facts and factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, without
limitation, those specifically addressed under the heading "Risks Related to Our
Business" below, as well as those discussed elsewhere in this Annual Report on
Form 10-KSB. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-KSB. We file reports with the Securities and Exchange
Commission ("SEC"). We make available on our website under "Investor
Relations/SEC Filings," free of charge, our annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after we electronically file
such materials with or furnish them to the SEC. Our website address is
www.wpcs.com. You can also read and copy any materials we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
You can obtain additional information about the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including us.
We undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Annual Report on Form 10-KSB. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this annual Report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and prospects.
Description of the Business
Overview
WPCS International Incorporated is a project engineering company that focuses on
the implementation requirements of specialty communication systems, wireless
fidelity (WiFi) deployment and fixed wireless deployment. We provide a range of
specialty communication services including project management, site design,
structured cabling, product integration, network security, and technical
support. These projects may require the integration of multiple communication
components and engineering services in order to complete the customer's
requirements for the deployment of a specialty communication system, a WiFi or
fixed wireless system.
On May 17, 2002, pursuant to an agreement and plan of merger, Phoenix Star
Ventures Inc., a publicly held Delaware corporation, through its wholly owned
subsidiary WPCS Acquisition Corp., acquired WPCS Holdings Inc., a Delaware
corporation by issuing 5,500,000 shares of its common stock to shareholders of
WPCS Holdings, Inc. in exchange of all the outstanding shares of WPCS Holdings,
Inc. Concurrently with the acquisition, Phoenix Star Ventures Inc. changed its
name to WPCS International Incorporated.
On November 13, 2002, we entered into an agreement and completed a merger with
Invisinet, Inc. ("Invisinet"). Invisinet provides wireless infrastructure
services for both WiFi applications and fixed wireless technology services to
its customers. The acquisition of Invisinet broadens our customer base and
expands our technical resources capable of deploying wireless systems. For the
year ended April 30, 2004, the acquisition of Invisinet increased sales by
approximately $2.5 million as compared to the same period in the prior year. To
complete the merger, we acquired 100% of the common stock of Invisinet by
issuing 1,000,000 shares of our common stock with a fair value of $1,750,000,
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based on the average value of our common stock as of a few days before and after
the merger was announced. Based on the net assets acquired of Invisinet, we have
recognized goodwill of approximately $1.6 million.
On December 30, 2002, we acquired all of the outstanding common stock of Walker
Comm, Inc. ("Walker"). The acquisition of Walker gives us the ability to provide
specialty communication systems to our customers along with strengthening our
project management capabilities. For the year ended April 30, 2004, the
acquisition of Walker increased sales by approximately $9.7 million as compared
to the same period in the prior year. The aggregate consideration we paid for
Walker was approximately $5,113,000. To complete the merger, all of the issued
and outstanding shares of common stock of Walker were exchanged for aggregate
merger consideration consisting of $500,000 in cash and our common stock with a
value of approximately $4,574,000, or 2,486,000 shares valued at $1.84 per share
based on the average value of our common stock as of a few days before and after
the merger was announced. Based on the net assets acquired of Walker, we
recognized goodwill of approximately $4.2 million.
On August 22, 2003, we acquired all of the outstanding common stock of Clayborn
Contracting Group, Inc. ("Clayborn"). The acquisition of Clayborn gives us
additional expertise in engineering and deployment services for specialty
communication systems and additional wireless opportunities to pursue. For the
year ended April 30, 2004, the acquisition of Clayborn increased our revenue
approximately $4.3 million as compared to the same period in the prior year. The
aggregate consideration we paid for Clayborn was approximately $2,929,000. We
acquired all of the issued and outstanding shares of Clayborn in exchange for
$900,000 cash consideration and $61,000 in transaction costs, and 826,446 newly
issued shares of our common stock with a fair value of approximately $868,000
based on the average value of our common stock as of a few days before and after
the merger terms were agreed to and announced. An additional $1,100,000 is due
by September 30, 2007, payable in quarterly distributions, by payment to the
Clayborn shareholders of 50% of the quarterly post tax profits of Clayborn.
Based on the net assets acquired of Clayborn, we recognized goodwill of
approximately $1.8 million.
On April 2, 2004, we acquired all of the issued and outstanding common stock of
Heinz Corporation ("Heinz"). Heinz is a St. Louis, Missouri based provider of
in-building wireless infrastructure services for both cellular and WiFi
applications including consulting, integration and installation services for
wireless infrastructure. The acquisition of Heinz gives us additional project
engineering expertise for wireless infrastructure services, broadens our
customer base, and expands our geographical presence in the Midwest. We acquired
all of the issued and outstanding shares of Heinz for $1,000,000, as follows:
(1) $700,000 of our common stock, based on the closing price of our common stock
on March 30, 2004 of $0.98 per share, for an aggregate of 714,286 newly issued
shares of our common stock and (2) $300,000 total cash consideration, of which
$100,000 was paid at closing and a $200,000 non-interest bearing promissory
note. Of the $200,000, $75,000 is payable on the first and second anniversaries
of the closing date and $50,000 is payable on the third anniversary of the
closing date. Based on the preliminary information currently available, we
expect to recognize goodwill of approximately $1,000,000. 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.
Our Business
We generate our revenue by providing project engineering and deployment services
for specialty communication systems, wireless fidelity (WiFi) and fixed wireless
systems. We have two reportable segments, specialty communication systems and
wireless infrastructure services.
Specialty Communication Systems
As a complete project engineering company, we focus on the implementation
requirements of specialty communication systems. We are a certified design and
installation company for several manufacturers offering a wide range of products
and services. Specialty communication services include project management,
installation, wireless distribution systems, registered communications
distribution design, and network integration of voice, data, MATV, CATV, video
and security systems, including fiber optic cabling and outside plant trenching.
Cabling systems are designed, installed and tested to industry standards. Our
installers are members of the IBEW union, and are trained and certified in the
latest technologies and safety to adhere to general OSHA guidelines, as well as
union and industry rules and regulations pertaining to areas associated with
communications. Technicians are also trained and certified in installing copper
and fiber optic networks to support Ethernet, Token-Ring, CAT 5, CAT 6, voice
and video conferencing. We can also provide in-house CAD specialists to diagram
3
changes or modifications to customer specifications. The specialty communication
segment represents approximately 79% of total sales.
Wireless Infrastructure Services
Connecting a company's network is critical in achieving the timely flow of
information. Today, a company's network expands beyond its existing headquarters
to remote offices and remote users. The networking applications are larger and
the demand for high-speed connectivity to move data back and forth is growing
dramatically. Until recently, a company's only alternative in obtaining
high-speed connectivity was to contact the telephone company and have a
high-speed landline service installed so that connectivity could be achieved
between its locations. The issue today is that these high-speed landlines take
too much time to install, are not available in all locations, do not solve
remote application usage and are costly to use on a monthly basis. Expensive and
inflexible land line services are moving users toward cost effective high-speed
broadband wireless infrastructure services.
Wireless infrastructure services include the internal and external design and
installation of a fixed wireless solution to support data, voice or video
transmission between two or more points without the utilization of landline
infrastructure. Wireless infrastructure services includes radio frequency
engineering, site survey, which determines "line of sight" issues, site design
that determines terrain status and where mounting and alignment will occur and
spectrum analysis to study the performance of licensed and unlicensed
frequencies for a specific area. Also, we will mount and align equipment and
integrate the products into one system, and finally test, document and support
the installation. We also provide network security, training and technical
support. Wireless infrastructure services offer the user lower costs compared to
landline, high-speed connectivity, immediate installation and network ownership.
The products offered as part of the system include microwave radios, repeaters,
amplifiers, antennas, cables and specialty components. The specific products
used and serviced vary depending on the connection speed required and distances
between points, accordingly, we are technology and vendor independent. We
believe that this aligns our goals with those of the customers and enables us to
objectively evaluate and recommend specific component products or technologies.
The wireless infrastructure segment represents approximately 21% of total sales.
Sales and Marketing
In both segments, we primarily service major corporations, government entities
and educational institutions in the United States. We also perform limited
services internationally, which account for less than 1% of total sales. We
market and sell services through a direct sales team of sales and project
engineering professionals. Sales personnel work collaboratively with senior
management, project managers and project engineers to develop new sales leads
and procure new contracts. We generate revenue opportunities through formal bid
responses, end user referrals, contracting assignments from technology providers
and subcontracting assignments from general infrastructure providers. We also,
through our subsidiaries, are listed on the Federal GSA schedule for government
contracts.
Customers
We provide specialty communication systems, wireless fidelity (WiFi) deployment
and fixed wireless deployment to many major corporations, government entities
and educational institutions. At April 30, 2004, we had a backlog of unfilled
orders believed to be firm of approximately $16.5 million, representing the
uncompleted portion of services to be performed under job-specific contracts or
purchase orders. We expect these projects to be completed and the backlog fully
converted to revenue within the next twelve months.
Competition
The markets in the specialty communication systems and wireless infrastructure
services segments are relatively competitive and fragmented and are represented
typically by numerous service providers, ranging from small independent firms
servicing local markets to larger firms servicing regional and national markets.
We also face competition from existing or prospective clients which employ
in-house personnel to perform some of the same types of services we provide.
Historically, there have been relatively few significant barriers to entry into
the markets in which we operate, and, as a result, any organization that has
adequate financial resources and access to technical expertise may become one of
our competitors. Overall, we believe that there are no dominant competitors in
either of the segments that we provide products and services.
4
We believe that the principal competitive factors in our markets include the
ability to deliver results within budget (time and cost), reputation,
accountability, staffing flexibility, project management expertise, industry
experience and competitive pricing. In addition, expertise in new and evolving
technologies has become increasingly important. We believe that the ability to
integrate these technologies from multiple vendors gives us a competitive
advantage. Our ability to compete also depends on a number of additional factors
which are outside of our control, including:
o competitive pricing for similar services;
o the ability and willingness of our competitors to finance
customers' projects on favorable terms;
o the ability of our customers to perform the services themselves;
and
o the responsiveness of our competitors to customer needs.
We believe that our principal competitive advantage is the ability to integrate
multiple component products and services across the vast majority of wireless
infrastructure services and specialty communication systems. We have a trained
and certified staff, the ability to provide national coverage and a strong
customer base. We use proven methodologies to rapidly design, install, integrate
and manage a communications deployment.
Acquisition Strategy
The primary goal is to build us into a recognized leader in specialty
communication systems, wireless fidelity (WiFi) deployment and fixed wireless
deployment. To meet this challenge, we are planning to make acquisitions of
companies familiar with the deployment of these products and services. The goal
for each acquisition will be to expand the product and services offering,
strengthen our project services capabilities, expand the customer base and add
accretive revenue and earnings.
Management Strategy
In anticipation of internal growth and future acquisitions, we will organize
resources to manage our development effectively. Our Chief Executive Officer is
responsible for strategic direction, operations, corporate governance and
building shareholder value.
Our Chief Financial Officer is responsible for overall financial management,
financial reporting and corporate administration. An Executive VP, who is also
the strategic development officer, is focused on strategic issues such as
acquisition candidates, investor relations, corporate marketing and major
account opportunities.
Our other Executive VP's are tasked with business integration, creating
operational efficiencies and operations management for a set number of acquired
companies. As each acquisition occurs, personnel will increase in a variety of
capacities.
Employees
As of April 30, 2004, we employed 175 full time employees, of whom 135 are
project engineers, 16 are project managers, 19 are in administration and 5 are
executives. A majority of the project engineers are represented by the
International Brotherhood of Electrical Workers. We also have non-union
employees. We believe our relations with all of our employees are good.
Risk Related to Business
You should carefully consider the following risk factors and all other
information contained herein as well as the information included in this Annual
Report in evaluating our business and prospects. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties, other than those we describe below, that are not presently known
to us or that we currently believe are immaterial, may also impair our business
operations. If any of the following risks occur, our business and financial
results could be harmed. You should refer to the other information contained in
this Annual Report, including our consolidated financial statements and the
related notes.
5
We have a history of operating losses and may never become profitable.
We incurred a net loss of approximately $124,000 for the year ended April 30,
2004. There can be no assurance that we will achieve or sustain profitability or
positive cash flow from operating activities in the future. If we cannot achieve
operating profitability or positive cash flow from operating activities, we may
not be able to meet our working capital requirements. If we are unable to meet
our working capital requirements, we are likely to reduce or cease all or part
of our operations.
We may be unable to obtain the additional capital required to grow our business.
We may have to curtail our business if we cannot find adequate funding.
Our ability to grow depends significantly on our ability to expand our
operations through internal growth and by acquiring other companies or assets
that require significant capital resources. We may need to seek additional
capital from public or private equity or debt sources to fund our growth and
operating plans and respond to other contingencies such as:
o shortfalls in anticipated revenues or increases in expenses;
o the development of new services; or
o the expansion of our operations, including the recruitment of
additional personnel.
We cannot be certain that we will be able to raise additional capital in the
future on terms acceptable to us or at all. If alternative sources of financing
are insufficient or unavailable, we may be required to modify our growth and
operating plans in accordance with the extent of available financing.
Our success is dependent on growth in the deployment of wireless networks, and
to the extent that such growth slows down, our business may be harmed.
The wireless industry has historically experienced a dramatic rate of growth
both in the United States and internationally. Recently, however, many end users
have been re-evaluating their network deployment plans in response to downturns
in the capital markets, changing perceptions regarding industry growth, the
adoption of new wireless technologies, increased price competition and a general
economic slowdown in the United States and internationally. It is difficult to
predict whether these changes will result in a downturn in the wireless
industry. If the rate of growth should slow down and end users continue to
reduce their capital investments in wireless infrastructure or fail to expand
their networks, our operating results may decline which could cause a decline in
our profits.
The uncertainty associated with rapidly changing wireless technologies may also
continue to negatively impact the rate of deployment of wireless networks and
the demand for our services. End users face significant challenges in assessing
their bandwidth demands and in acceptance of rapidly changing enhanced wireless
capabilities. If end users continue to perceive that the rate of acceptance of
next generation wireless products will grow more slowly than previously
expected, they may, as a result, continue to slow their deployment of next
generation wireless technologies. Any significant slowdown will reduce the
demand for our services and would result in negative net growth, net losses, and
potentially a reduction in our business operations.
The increase of services offered by equipment vendors could cause a reduction in
demand for our services.
Recently, the wireless equipment vendors have increased the services they offer
for their technology. This activity and the potential continuing trend towards
offering services may lead to a greater ability among equipment vendors to
provide a comprehensive range of wireless services, and may simplify integration
and installation, which could lead to a reduction in demand for our services.
Moreover, by offering certain services to end users, equipment vendors could
reduce the number of our current or potential customers and increase the
bargaining power of our remaining customers, which may result in a decline in
our net revenue and profits.
6
Our quarterly results fluctuate and may cause our stock price to decline.
Our quarterly operating results have fluctuated in the past and will likely
fluctuate in the future. As a result, we believe that period to period
comparisons of our results of operations are not a good indication of our future
performance. A number of factors, many of which are outside of our control, are
likely to cause these fluctuations.
The factors outside of our control include:
o Wireless market conditions and economic conditions generally;
o Timing and volume of customers' specialty communication projects;
o The timing and size of wireless deployments by end users;
o Fluctuations in demand for our services;
o Changes in our mix of customers' projects and business activities;
o The length of sales cycles;
o Adverse weather conditions, particularly during the winter season,
could effect our ability to render specialty communication services in
certain regions of the United States;
o The ability of certain customers to sustain capital resources to pay
their trade accounts receivable balances;
o Reductions in the prices of services offered by our competitors; and
o Costs of integrating technologies or businesses that we add.
The factors substantially within our control include:
o Changes in the actual and estimated costs and time to complete
fixed-price, time-certain projects that may result in revenue
adjustments for contracts where revenue is recognized under the
percentage of completion method;
o The timing of expansion into new markets, both domestically and
internationally;
o Costs incurred to support internal growth and acquisitions;
o Fluctuations in operating results caused by acquisitions; and
o The timing and payments associated with possible acquisitions.
Because our operating results may vary significantly from quarter to quarter,
our operating results may not meet the expectations of securities analysts and
investors, and our common stock could decline significantly which may expose us
to risks of securities litigation, impair our ability to attract and retain
qualified individuals using equity incentives and make it more difficult to
complete acquisitions using equity as consideration.
Failure to keep pace with the latest technological changes could result in
decreased revenues.
The market for our services is characterized by rapid change and technological
improvements. Failure to respond in a timely and cost-effective way to these
technological developments could result in serious harm to our business and
operating results. We have derived, and we expect to continue to derive, a
substantial portion of our revenues from creating wireless networks that are
based upon today's leading technologies and that are capable of adapting to
future technologies. As a result, our success will depend, in part, on our
ability to develop and market service offerings that respond in a timely manner
to the technological advances of our customers, evolving industry standards and
changing client preferences.
Failure to properly manage projects may result in costs or claims.
Our engagements often involve large scale, highly complex projects involving
wireless networks and specialty communication systems utilizing leading
technology. The quality of our performance on such projects depends in large
part upon our ability to manage the relationship with our customers, and to
effectively manage the project and deploy appropriate resources, including
third-party contractors, and our own personnel, in a timely manner. Any defects
or errors or failure to meet clients' expectations could result in claims for
substantial damages against us. Our contracts generally limit our liability for
damages that arise from negligent acts, error, mistakes or omissions in
rendering services to our clients. However, we cannot be sure that these
contractual provisions will protect us from liability for damages in the event
we are sued. In addition, in certain instances, we guarantee customers that we
will complete a project by a scheduled date or that the network will achieve
certain performance standards. As a result, we often have to make judgments
concerning time and labor costs. If the project
7
or network experiences a performance problem, we may not be able to recover the
additional costs we will incur, which could exceed revenues realized from a
project. Finally, if we miscalculate the resources or time we need to complete a
project with capped or fixed fees, our operating results could seriously
decline.
Potential future acquisitions could be difficult to integrate, disrupt our
business, dilute stockholder value and adversely affect our operating results.
Since November 1, 2002, we have acquired four companies and we intend to further
expand our operations through acquisitions over time. This may require
significant management time and financial resources because we may need to
integrate widely dispersed operations with distinct corporate cultures. Our
failure to manage future acquisitions successfully could seriously harm our
operating results. Also, acquisition costs could cause our quarterly operating
results to vary significantly. Furthermore, our stockholders would be diluted if
we financed the acquisitions by incurring convertible debt or issuing
securities. Although we currently only have operations within the United States,
if we were to acquire an international operation; we will face additional risks,
including:
o difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
o different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
Our principal officers and directors own a controlling interest in our voting
stock and investors will not have any voice in our management.
Our officers and directors, in the aggregate, beneficially own approximately
48.2% of our outstanding common stock. As a result, these stockholders, acting
together, will have the ability to control substantially all matters submitted
to our stockholders for approval, including:
o election of our board of directors;
o removal of any of our directors;
o amendment of our certificate of incorporation or bylaws; and
o adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving
us.
As a result of their ownership and positions, our directors and executive
officers collectively are able to influence all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. In addition, sales of significant amounts of shares held
by our directors and executive officers, or the prospect of these sales, could
adversely affect the market price of our common stock. Management's stock
ownership may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in our Securities is Limited, Which Makes Transactions in our
Stock Cumbersome and May Reduce the Value of an Investment in our Stock.
Since our common stock is not listed or quoted on any exchange or on NASDAQ, and
no other exemptions currently apply, trading in our common stock on the
Over-The-Counter Bulletin Board is subject to the "penny stock" rules of the
SEC. These rules require, among other things, that any broker engaging in a
transaction in our securities provide its customers with a risk disclosure
document, disclosure of market quotations, if any, disclosure of the
compensation of the broker and its salespersons in the transaction, and monthly
account statements showing the market values of our securities held in the
customer's accounts. The brokers must provide bid and offer quotations and
compensation information before making any purchase or sale of a penny stock and
also provide this information in the customer's confirmation. Generally, brokers
may be less willing to execute transactions in securities subject to the "penny
stock" rules. This may make it more difficult for investors to dispose of our
common stock and cause a decline in the market value of our stock.
8
ITEM 2 - PROPERTIES
Our principal executive offices are located in approximately 2,000 square feet
of office space in Exton, Pennsylvania. The lease for such space expires in
November 2004. The aggregate annual base rental for this space is $28,000.
In conjunction with acquisitions that occurred in fiscal 2003 and 2004, we
assumed the operating leases of additional office space in the following
locations:
Location Lease Expiration Date Minimum Annual Rental
- --------- --------------------- ---------------------
Fairfield, California (a) February 28, 2011 $56,000
Rocklin, California January 31, 2006 $13,000
San Leandro, California July 31, 2006 $13,000
Denville, New Jersey (b) Month-to-month $11,000
Auburn, California (b) Month-to-month $64,440
St. Louis, Missouri (c) August 31, 2004 $49,124
(a) The leases for our Fairfield, California location is with trusts, of
which certain officers and shareholders are the trustees.
(b) The leases for our Denville, New Jersey and Auburn, California
locations are month to month; therefore the minimum annual rental
price assumes we rent the property for the entire year.
(c) The lease for our St. Louis, Missouri location expires within the
fiscal year; therefore the minimum annual rental price assumes we rent
the property for the entire year.
We believe that our existing facilities are suitable and adequate to meet our
current business requirements.
ITEM 3 - LEGAL PROCEEDINGS
From time to time, the Company may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm the Company's business. The
Company is currently not aware of any such legal proceedings or claims that we
believe will have, individually or in the aggregate, a material adverse affect
on our business, financial condition or operating results.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 21, 2004, a majority of the shareholders of the Company approved an
increase in the total number of authorized common shares from 30,000,000 to
75,000,000.
9
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
During the fiscal year ended April 30, 2004, our common stock was quoted on the
over-the-counter bulletin board under the symbol "WPCS". The following table
sets forth the range of the high and low bid quotations for our common stock for
the periods indicated. Such market quotations reflect inter-dealer prices,
without mark-up, mark-down or commission and may not necessarily represent
actual transactions.
High Low
2004 ----- -----
First Quarter $1.88 $.39
Second Quarter 1.73 1.02
Third Quarter 1.70 .91
Fourth Quarter 1.44 .90
As of July 15, 2004, there were approximately 85 holders of record of our common
stock and the closing bid quotation of our common stock was $0.80 per share.
Dividend Policy
We have never paid any cash dividends on our capital stock and do not anticipate
paying any cash dividends on the Common Shares in the foreseeable future. We
intend to retain future earnings to fund ongoing operations and future capital
requirements of our business. Any future determination to pay cash dividends
will be at the discretion of the Board and will be dependent upon our financial
condition, results of operations, capital requirements and such other factors as
the Board deems relevant.
Issuance of Securities
On April 1, 2004, we issued 714,286 newly issued shares of common stock to one
individual in connection with our acquisition of Heinz Corporation. The issuance
was exempt pursuant to Section 4(2) of the Securities Act of 1933.
10
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
WPCS International Incorporated is a project engineering company that focuses on
the implementation requirements of specialty communication systems, wireless
fidelity (WiFi) deployment and fixed wireless deployment. We provide a range of
specialty communication services including project management, site design,
structured cabling, product integration, network security, and technical
support. These projects may require the integration of multiple communication
components and engineering services in order to complete the customer's
requirements.
Significant Transactions and Events
On May 17, 2002, pursuant to the agreement and plan of merger, Phoenix Star
Ventures Inc., a publicly held corporation, acquired WPCS Holdings Inc., a
Delaware corporation, by issuing 5,500,000 shares of its common stock to
shareholders of WPCS Holdings in exchange of all the outstanding shares of WPCS
Holdings. The shareholders of WPCS Holdings, after the acquisition, owned the
majority of the combined company. Accordingly, the combination has been
accounted for as a reverse acquisition, whereby, for accounting purposes, WPCS
Holdings is the accounting acquirer and Phoenix Star Ventures is the accounting
acquiree. Concurrently with the acquisition, Phoenix Star Ventures, the parent
company, changed its name to WPCS International Incorporated.
On November 13, 2002, we entered into an agreement and completed a merger with
Invisinet, Inc. Invisinet provides wireless infrastructure services for both
WiFi applications and fixed wireless technology services to its customers. The
acquisition of Invisinet broadens our customer base and expands our technical
resources capable of deploying wireless systems. For the year ended April 30,
2004, the acquisition of Invisinet increased our revenue by approximately $2.5
million as compared to the same period in the prior year. To complete the
merger, we acquired 100% of the common stock of Invisinet by issuing 1,000,000
shares of our common stock with a fair value of $1,750,000, based on the average
value of our common stock as of a few days before and after the merger was
announced. Based on the net assets acquired of Invisinet, we have recognized
goodwill of approximately $1.6 million.
On December 30, 2002, we acquired all of the outstanding common stock of Walker
Comm, Inc. The acquisition of Walker gives us the ability to provide specialty
communication systems to our customers along with strengthening our project
management capabilities. For the year ended April 30, 2004, the acquisition of
Walker increased our revenue approximately $9.7 million as compared to the same
period in the prior year. The aggregate consideration we paid for Walker was
approximately $5,113,000. To complete the merger, all of the issued and
outstanding shares of common stock of Walker were exchanged for aggregate merger
consideration consisting of $500,000 in cash and our common stock with a value
of approximately $4,574,000, or 2,486,000 shares valued at $1.84 per share based
on the average value of our common stock as of a few days before and after the
merger was announced. Based on the net assets acquired of Walker, we recognized
goodwill of approximately $4.2 million.
On August 22, 2003, we acquired all of the outstanding common stock of Clayborn
Contracting Group, Inc. ("Clayborn"). The acquisition of Clayborn gives us
additional expertise in engineering and deployment services for specialty
communication systems and additional wireless opportunities to pursue. For the
year ended April 30, 2004, the acquisition of Clayborn increased our revenue
approximately $4.3 million as compared to the same period in the prior year. The
aggregate consideration we paid for Clayborn was approximately $2,929,000. We
acquired all of the issued and outstanding shares of Clayborn in exchange for
$900,000 cash consideration and $61,000 in transaction costs, and 826,446 newly
issued shares of our common stock with a fair value of approximately $868,000
based on the average value of our common stock as of a few days before and after
the merger terms were agreed to and announced. An additional $1,100,000 is due
by September 30, 2007, payable in quarterly distributions, by payment to the
Clayborn shareholders of 50% of the quarterly post tax profits of Clayborn.
Based on the net assets acquired of Clayborn, we recognized goodwill of
approximately $1.8 million.
On April 2, 2004, we acquired all of the issued and outstanding common stock of
Heinz Corporation ("Heinz"). Heinz is a St. Louis, Missouri based provider of
in-building wireless infrastructure services for both cellular and WiFi
applications including consulting, integration and installation services for
wireless infrastructure. The acquisition of Heinz gives us additional project
engineering expertise for wireless infrastructure services, broadens our
customer base, and expands our geographical presence in the Midwest. We acquired
all of the issued and outstanding shares of Heinz for $1,000,000, as follows:
11
(1) $700,000 of our common stock, based on the closing price of our common stock
on March 30, 2004 of $0.98 per share, for an aggregate of 714,286 newly issued
shares of our common stock and (2) $300,000 total cash consideration, of which
$100,000 was paid at closing and a $200,000 non-interest bearing promissory
note. Of the $200,000, $75,000 is payable on the first and second anniversaries
of the closing date and $50,000 is payable on the third anniversary of the
closing date. Based on the preliminary information currently available, we
expect to recognize goodwill of approximately $1,000,000. 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.
Results of Operations
Management currently considers the following events, trends and uncertainties to
be important to understand its results of operations and financial condition:
o For the year ended April 30, 2004, revenue was approximately $22.1
million compared to $5.4 million for the same period a year ago. The
increase in revenue for the year was primarily attributed to strategic
acquisitions of approximately $13.6 million and secondarily from
organic growth of approximately $3.1 million.
o As a result of the acquisitions of Invisinet on November 13, 2002 and
Walker on December 30, 2002, we experienced significant growth in our
overall business and commenced operations in two segments, wireless
infrastructure services and specialty communication systems.
o With the acquisition of Clayborn in the second quarter of fiscal 2004,
and Heinz in the fourth quarter of fiscal 2004, we experienced
additional expansion of the specialty communication and wireless
infrastructure segments, respectively.
o As of April 30, 2004, the specialty communication segment represents
approximately 79% of total revenue, and wireless infrastructure
services represent approximately 21% of total revenue.
o Furthermore, we plan to evaluate additional acquisition opportunities
in fiscal 2005 in an attempt to build out a national, strategically
located workforce that will allow our segments to leverage, to the
extent feasible, related internal synergies, and to take advantage of
expected growth in the wireless infrastructure and specialty
communication markets.
o As of April 30, 2004, our backlog has increased to approximately $16.5
million. Our backlog is comprised of the uncompleted portion of
services to be performed under job-specific contracts or purchase
orders. The increase in backlog is the result of new contracts awarded
to us by our customers. We expect this backlog to be fully recognized
as revenue within the next twelve months.
o Our selling, general and administrative expenses decreased as a
percentage of revenue for the year ended April 30, 2004, as compared
to the same period in the prior year.
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Fiscal Year ended April 30, 2004 Compared to Fiscal Year Ended April 30, 2003
Consolidated results for the year ended April 30, 2004 and 2003 were as
follows.
Year Ended
April 30,
2004 2003
-------------- --------------
REVENUE $22,076,246 $5,422,858
-------------- --------------
COSTS AND EXPENSES:
Cost of revenue 16,076,155 73% 3,768,495 70%
Selling, general and administrative expenses 5,560,583 25% 1,860,827 34%
Provision for doubtful accounts 91,137 0% 38,779 1%
Depreciation and amortization 382,510 2% 116,501 2%
-------------- --------------
Total costs and expense 22,110,385 100% 5,784,602 107%
-------------- --------------
OPERATING LOSS (34,139) 0% (361,744) -7%
OTHER (INCOME) EXPENSE:
Interest expense, net 14,048 0% - 0%
-------------- --------------
LOSS BEFORE PROVISION FOR INCOME TAXES (48,187) 0% (361,744) -7%
Income tax provision (76,000) 0% (19,550) 0%
-------------- --------------
NET LOSS (124,187) -1% (381,294) -7%
Imputed dividends accreted on Convertible Series B
Preferred stock
- 0% (173,000) -3%
-------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
($124,187) -1% ($554,294) -10%
============== ==============
Revenue
We generate our revenue by providing project engineering and deployment services
for specialty communication systems, wireless fidelity (WiFi) and fixed wireless
systems. These projects may require the integration of multiple communication
components and engineering services in order to complete the customer's
requirements. We record profits on these projects 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.
Revenue was approximately $22,076,000 and $5,423,000 for the years ended April
30, 2004 and 2003, respectively. The primary reasons for the increase in revenue
comparing 2004 to 2003 are attributable to the full year effect of the Invisinet
and Walker acquisitions and the two acquisitions we made in August 2003 of
Clayborn and April 2004 of Heinz. These four acquisitions in the aggregate
accounted for approximately $13.6 million of the increase in revenue over the
prior year. Approximately $3.1 million of the increase in revenue over the prior
year was due to internal growth.
13
Total revenue from the specialty communication segment for the year ended April
30, 2004 was approximately $17.5 million or 79% of total revenue. Wireless
infrastructure segment revenue for the year ended April 30, 2004 was
approximately $4.6 million or 21% of total revenue for the year.
Cost of Revenue
In the case of the wireless infrastructure segment, cost of revenue consists of
component material costs, direct labor costs and costs incurred for third party
sub-contractor services. For the specialty communication segment, cost of sales
consists of direct costs on contracts, including materials, labor, and other
overhead costs. Our cost of revenue was $16.1 million or 72.8% of revenue for
the year ended April 30, 2004, compared to $3.8 million or 69.5% for the year
ended April 30, 2003. The dollar increase in our total cost of revenue is due to
the corresponding increase in revenue as a result of the acquisitions of
Invisinet, Walker, Clayborn and Heinz. The increase in cost of revenue as a
percentage of revenue is due to the revenue mix of the recent acquisitions.
Selling, general and administrative expenses
For the year ended April 30, 2004, selling, general and administrative expenses
were $5.6 million, or 25.2% of revenue, compared to $1.9 million, or 34.3% of
revenue for the year ended April 30, 2003. The percentage decrease is due to the
management of our cost structure as we leverage our incremental revenue dollars
in fiscal 2004. For the year ended April 30, 2004, included in selling, general
and administrative expenses are $2.1 million for salaries, commissions and
payroll taxes. The increase in salaries and payroll taxes is due to the increase
in headcount as a result of the acquisition of Invisinet, Walker, Clayborn and
Heinz. In addition, Walker employs union employees for whom it incurred $1.2
million in union benefits during the year. Professional fees were $566,000, with
the increase due primarily to an increase in investor relations, accounting and
legal fees and also includes $209,000 of non-cash charges for the grant of stock
options to non-employees. Insurance costs were $730,000 and rent for office
facilities was $250,000. Other selling, general and administrative expenses
totaled $792,000. For the year ended April 30, 2004, total selling, general and
administrative expenses for the specialty communication segment were $3.9
million and $944,000 for the wireless infrastructure segment.
For the year ended April 30, 2003, included in the selling, general and
administrative expenses are $714,000 paid for salaries, commissions and payroll
taxes, $374,000 for professional fees and $239,000 in union benefits. Insurance
costs amounted to $146,000 and rent for our office facilities amounted to
$100,000. Other selling, general and administrative expenses amounted to
$288,000. For the year ended April 30, 2003, total selling, general and
administrative expenses for the specialty communication segment were $967,000
and $651,000 for the wireless infrastructure segment.
For the years ended April 30, 2004 and 2003, the provision for doubtful accounts
was approximately $91,000 and $39,000, respectively. The increase in the
provision is due to the internal growth in accounts receivable between fiscal
years. The provision represents accounts receivable which we consider
uncollectible, based on a number of factors, including length of time a customer
account is past due, previous loss history, and the customer's ability to pay
its obligations.
Depreciation and amortization
Depreciation for the year ended April 30, 2004 was $228,000 as compared to
$75,000 for the prior year. The increase is due to the acquisition of fixed
assets on acquiring Invisinet, Walker, Clayborn and Heinz. The amortization
expense for the year ended April 30, 2004 was $154,000 as compared to $41,000 in
the prior year. We acquired customer lists from Invisinet, Walker and Clayborn
which are being amortized over a period of five years from the date of their
acquisition.
Net loss
We incurred a net loss of approximately $124,000 for the year ended April 30,
2004. The net loss included a non-recurring non-cash charge of approximately
$209,000 for the grant of stock options to certain consultants to purchase
1,452,000 shares of our common stock. In accordance with SFAS No. 123, stock
options granted to non-employees are required to be expensed based on the fair
value of the equity instruments or fair value of the consideration received. The
net loss also included a provision for income taxes of $76,000, which includes
income tax expenses to provide for state income taxes and certain book-to-tax
permanent differences, offset by an income tax benefit. The benefit resulted
from the reversals of certain temporary differences not being currently taxable
14
as the taxable loss for the current year was in excess of the reversals. The
resulting net operating losses have been fully reserved as the ultimate
realization of these losses is certain.
For the year ended April 30, 2003, we incurred a net loss of approximately
$381,000.
Liquidity and capital resources
At April 30, 2004, we had working capital of approximately $2.4 million, which
consisted of current assets of approximately $10.4 million and current
liabilities of $8.0 million. Current assets included $2.0 million in cash and
cash equivalents, $8.0 million in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts, $105,000 in
inventories, $264,000 in prepaid expenses, and $60,000 in deferred income tax
assets. Current liabilities included $551,000 due on the lines of credit,
$97,000 in current lease obligations and equipment loans payable, $6.9 million
in accounts payable, accrued expenses and billings in excess of costs and
estimated earnings on uncompleted contracts, $88,000 payable to shareholders of
the Company, $224,000 in income taxes payable and $196,000 in current portion of
deferred tax liabilities. The increase in accounts receivable at April 30, 2004
compared to April 30, 2003 is due primarily to recent acquisitions and
secondarily by internal growth.
Operating activities provided $937,000 in cash during the year ended April 30,
2004. This was mainly comprised of a $124,000 net loss for the year ended April
30, 2004, offset by $464,000 in net non-cash charges, $2.4 million net increase
in accounts receivable, $1.4 million increase in costs and estimated earnings in
excess of billings on uncompleted contracts, $2.4 million increase in accounts
payable and accrued expenses, $1.9 million increase in billings in excess of
costs and estimated earnings on uncompleted contracts, $200,000 increase in
income taxes payable, and $63,000 increase in other assets.
Our investing activities utilized approximately $1.4 million in cash, which
consisted of $900,000 paid for the acquisition of Clayborn and $61,000 of
related acquisition costs, offset by $239,000 of cash received; and $100,000
paid for the acquisition of Heinz and $17,000 of related acquisition costs,
offset by $8,000 of cash received. We paid $485,000 in earn-out provisions
related to the Walker acquisition and an additional $12,000 in acquisition
costs. Additionally, $86,000 was paid for property and equipment additions.
Our financing activities generated cash of approximately $2.3 million during the
year ended April 30, 2004. This was comprised primarily of net proceeds of $2.2
million received from the completion of the sale of our common stock in a
private placement. We sold 100 units (the "Units") to accredited investors at a
price of $25,000 per Unit (the "Offering"), or an offering of $2,500,000. Each
Unit consisted of (i) 44,444 shares of our common stock, and (ii) warrants to
purchase 44,444 shares of common stock, exercisable for a period of three years
at an exercise price of $0.90 per share (the "Warrants"). The Warrants may be
redeemed in whole or in part at the option of the Company for $0.01, if the
closing price of our common stock is at least $1.25 per share on average for 10
consecutive trading days, ending not earlier than 30 days before the Warrants
are called for redemption. If we decide to redeem the Warrants, we will provide
written notice to each warrant holder that the Warrants will be redeemed at a
price of $0.01 per warrant on a fixed date, not less than thirty days from
mailing of the notice. Warrant holders would have until the end of business on
the day before redemption to exercise their Warrants at an exercise price of
$0.90. Since we cannot redeem Warrants until our stock price is trading at
$1.25, which is higher than the Warrant exercise price of $0.90, if we decide to
redeem the Warrants, we believe most, if not all, warrant holders will elect to
exercise their warrants.
In connection with the Offering, the placement agent was issued warrants to
purchase 665,000 shares of our common stock at an exercise price of $0.75 per
share. Other financing activities included borrowings on the lines of credit of
$461,000, repayment of advances from officers of $100,000, net repayment of
equipment notes of approximately $237,000 related primarily to the acquisitions
of Clayborn and Heinz, and payment of capital lease obligations of approximately
$2,000.
Our capital requirements depend on numerous factors, including the market for
our services, the resources we devote to developing, marketing, selling and
supporting our products and services, the timing and extent of establishing
additional markets and other factors. To address our working capital needs and
growth in our revenue and customer base, on October 29, 2003, Walker obtained a
revolving line of credit facility with a commercial bank in the amount of
$750,000. The borrowing limit is up to 70% of eligible Walker accounts
receivable. As of April 30, 2004, the borrowing base was $750,000 and the
outstanding balance was $531,000. The line of credit is collateralized by all of
Walker's accounts receivable, inventory and equipment, and bears interest at the
Wall Street Journal Prime Index Rate plus 1.5% (5.50% as of April 30, 2004). In
15
addition, the Company and certain executive officers of ours have personally
guaranteed this line of credit facility. This line is subject to annual renewal
and matures on November 5, 2004. In connection with the acquisition of Heinz, we
assumed a revolving line of credit facility with a commercial bank in the amount
of $200,000. As of April 30, 2004, the borrowing base was $200,000 and the
outstanding balance was $20,000. The line of credit is collateralized by real
estate property owned by the President of Heinz and his personal guarantee, and
bears interest at 4.0% as of April 30, 2004. We indemnified the President of
Heinz for any personal liability arising from this line of credit facility. This
line is subject to annual renewal and matures on November 16, 2004.
We also anticipate obtaining a working capital line of credit, to assist with
working capital needs as our business and customer base expands, however, we
make no assurance that we will be able to obtain a line of credit on acceptable
terms, or at all.
At April 30, 2004, we had cash and cash equivalents of $1,985,000, and for the
year ended April 30, 2004, cash provided from operations was $937,000. We have
$950,000 in revolving lines of credit available. Accordingly, we believe these
internally available funds, and expected financing activities, will provide us
sufficient capital to meet our short-term needs for the next twelve months.
These funding needs include working capital and capital expenditures, and the
expected payment of quarterly distributions of post tax profits to Clayborn
shareholders for the next twelve months. The total distribution to Clayborn
shareholders is $1,100,000, which is due by September 30, 2007. Our future
operating results may be affected by a number of factors including our success
in bidding on future contracts and our continued ability to manage controllable
costs effectively. To the extent we grow by future acquisitions that involve
consideration other than stock, our cash requirements may increase.
We will continue to explore opportunities to raise additional funds on
acceptable terms for a number of uses. We may not be able to obtain additional
funds on acceptable terms, or at all. Additional capital resources would be
devoted to search for, investigate and potentially acquire new companies that
have a strategic fit. In connection with a potential acquisition, we would also
expect to issue additional common stock equity or convertible debt securities,
which may result in additional dilution to our shareholders.
Critical Accounting Policies
Financial Reporting Release No. 60, published by the SEC, recommends that all
companies include a discussion of critical accounting policies used in the
preparation of their financial statements. The Company's significant accounting
policies are summarized in Note 2 of its consolidated financial statements.
While all these significant accounting policies impact its financial condition
and results of operations, the Company views certain of these policies as
critical. Policies determined to be critical are those policies that have the
most significant impact on the Company's consolidated financial statements and
require management to use a greater degree of judgment and estimates. Actual
results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that
applying any other reasonable judgments or estimate methodologies would cause a
material effect on the Company's consolidated results of operations, financial
position or liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
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. The most significant estimates relate to estimation of percentage of
completion on uncompleted contracts, valuation of inventory, allowance for
doubtful accounts and estimated life of customer lists. Actual results could
differ from those estimates.
16
Accounts receivable
Accounts receivable are due within contractual payment terms and are stated at
amounts due from customers net of an allowance for doubtful accounts. Credit is
extended based on evaluation of a customer's financial condition. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes off accounts receivable when they become
uncollectible, and payment subsequently received on such receivables are
credited to the allowance for doubtful accounts.
Goodwill and other Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that their carrying value may not be recoverable from the
estimated future cash flows expected to result from their use and eventual
disposition. Our long-lived assets subject to this evaluation include property
and equipment and amortizable intangible assets. We assess the impairment of
goodwill annually in our fourth fiscal quarter and whenever events or changes in
circumstances indicate that it is more likely than not that an impairment loss
has been incurred. Intangible assets other than goodwill are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value may not be fully recoverable. We are required to make judgments
and assumptions in identifying those events or changes in circumstances that may
trigger impairment. Some of the factors we consider include:
o Significant decrease in the market value of an asset
o Significant changes in the extent or manner for which the asset is
being used or in its physical condition
o A significant change, delay or departure in our business strategy
related to the asset
o Significant negative changes in the business climate, industry or
economic condition
o Current period operating losses or negative cash flow combined with a
history of similar losses or a forecast that indicates continuing
losses associated with the use of an asset
Our evaluation includes an analysis of estimated future discounted net cash
flows expected to be generated by the assets over their remaining estimated
useful lives. If the estimated future discounted net cash flows are
insufficient to recover the carrying value of the assets over the remaining
estimated useful lives, we will record an impairment loss in the amount by which
the carrying value of the assets exceeds the fair value. We determine fair value
based on discounted cash flows using a discount rate commensurate with the risk
inherent in our current business model. If, as a result of our analysis, we
determine that our amortizable intangible assets or other long-lived assets have
been impaired; we will recognize an impairment loss in the period in which the
impairment is determined. Any such impairment charge could be significant and
could have a material adverse effect on our financial position and results of
operations. Major factors that influence our cash flow analysis are our
estimates for future revenue and expenses associated with the use of the asset.
Different estimates could have a significant impact on the results of our
evaluation.
We performed our annual review for goodwill impairment in the fourth quarter of
fiscal 2004 and tested for goodwill impairment in each reporting unit that
contains goodwill. Our tests found that no impairment existed. Our impairment
review is based on comparing the fair value to the carrying value of the
reporting units with goodwill. The fair value of a reporting unit is measured at
the business unit level using a discounted cash flow approach that incorporates
our estimates of future revenues and costs for those business units. Reporting
units with goodwill include Invisinet and Heinz within our wireless
infrastructure segment and Walker and Clayborn within our specialty
communications segment. Our estimates are consistent with the plans and
estimates that we are using to manage the underlying businesses. If we fail to
deliver products and services for these business units, or market conditions for
these businesses fail to improve, our revenue and cost forecasts may not be
achieved and we may incur charges for goodwill impairment, which could be
significant and could have a material adverse effect on our net equity and
results of operations.
Deferred Income Taxes
We determine deferred tax liabilities and assets at the end of each period based
on the future tax consequences that can be attributed to net operating loss and
credit carryovers and differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, using
17
the tax rate expected to be in effect when the taxes are actually paid or
recovered. The recognition of deferred tax assets is reduced by a valuation
allowance if it is more likely than not that the tax benefits will not be
realized. The ultimate realization of deferred tax assets depends upon the
generation of future taxable income during the periods in which those temporary
differences become deductible.
We consider past performance, expected future taxable income and prudent and
feasible tax planning strategies in assessing the amount of the valuation
allowance. Our forecast of expected future taxable income is based over such
future periods that we believe can be reasonably estimated. Changes in market
conditions that differ materially from our current expectations and changes in
future tax laws in the U.S. may cause us to change our judgments of future
taxable income. These changes, if any, may require us to adjust our existing tax
valuation allowance higher or lower than the amount we have recorded.
Revenue recognition
We generate our revenue by providing project engineering and installation
services for specialty communication systems, including wireless fidelity (WiFi)
and fixed wireless deployment. We provide a range of specialty communication
services including project management, site design, structured cabling, product
integration, network security and technical support. These projects may require
the integration of multiple communication components and engineering services in
order to complete the project.
We record profits on these projects 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. We include in operations
pass-through revenue and costs on cost-plus contracts, which are
customer-reimbursable materials, equipment and subcontractor costs, when we
determine that we are responsible for the engineering specification, procurement
and management of such cost components on behalf of the customer.
We have numerous contracts that are in various stages of completion. Such
contracts require estimates to determine the appropriate cost and revenue
recognition. We have 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.
Recently issued accounting pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task
Force Issue No. 94-3 and requires that a liability for a cost associated with
and exit or disposal activity be recognized when the liability is incurred. This
statement also establishes that fair value is the objective for initial
measurement of the liability.
SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002. The impact of the adoption of SFAS No. 146 did not have
a material impact on the Company's consolidated financial position, results of
operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123,"Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and the related SFAS No. 123. The adoption of SFAS No. 148 did
not have a material effect on the Company's consolidated financial position,
results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, ("FIN No. 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN No. 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN No. 45 are effective for any guarantees issued or
18
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending December 15, 2002. The
adoption of the disclosure requirements of FIN No. 45 did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46")
"Consolidation of Variable Interest Entities." In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables real estate or
other property. A variable interest entity may be essentially passive or it may
engage in activities on behalf of another company. Until now, a company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN No. 46 changes
that by requiring a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. FIN No. 46's consolidation requirements apply
immediately to variable interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year on interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
FIN No. 46 did not have a material effect on our consolidated financial
position, results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003. The adoption of this statement did not have a material
impact on our consolidated financial position, results of operations or cash
flows.
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect
Management's current views with respect to future events and financial
performance. Those statements include statements regarding the intent, belief or
current expectations of the Company and members of its management team as well
as the assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission. Important factors currently known to
Management could cause actual results to differ materially from those in
forward-looking statements. The Company undertakes no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes in the future operating results over time.
The Company believes that its assumptions are based upon reasonable data derived
from and known about its business and operations and the business and operations
of the Company. No assurances are made that actual results of operations or the
results of the Company's future activities will not differ materially from its
assumptions.
19
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet as of April 30, 2004 and 2003 F-3 - F-4
Consolidated Statements of Operations for the years ended
April 30, 2004 and 2003 F-5
Consolidated Statement of Shareholders' Equity for the years ended April
30, 2004 and 2003 F-6 - F-7
Consolidated Statements of Cash Flows for the years ended
April 30, 2004 and 2003 F-8 - F-10
Notes to Consolidated Financial Statements F-11 - F-24
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of WPCS International Incorporated
We have audited the accompanying consolidated balance sheets of WPCS
International Incorporated and Subsidiaries as of April 30, 2004 and 2003, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. 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 Overnight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of WPCS
International Incorporated and Subsidiaries as of April 30, 2004 and 2003, and
their consolidated results of operations and cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/ s / J.H. COHN LLP
Roseland, New Jersey
July 28, 2004
F-2
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, APRIL 30,
ASSETS 2004 2003
------------------- -------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,984,636 $ 167,547
Accounts receivable, net of allowance of $61,779
and $11,779 at April 30, 2004 and 2003,
respectively 5,909,879 2,397,236
Costs and estimated earnings in excess of billings
on uncompleted contracts 2,123,031 408,194
Inventory 104,799 77,775
Prepaid expenses 264,076 143,113
Deferred income taxes 60,000 70,000
------------------- -------------------
Total current assets 10,446,421 3,263,865
PROPERTY AND EQUIPMENT, net 1,005,760 647,951
CUSTOMER LISTS 603,333 499,000
GOODWILL 8,681,870 5,388,882
OTHER ASSETS 144,713 21,528
------------------- -------------------
Total assets $ 20,882,097 $ 9,821,226
=================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, APRIL 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
------------------- -------------------
CURRENT LIABILITIES:
Borrowings under lines of credit $ 551,000 $ -
Current maturities of capital lease obligation 2,534 2,294
Current maturities of loans payable 94,056 21,268
Accounts payable and accrued expenses 4,732,200 1,278,443
Billings in excess of costs and estimated earnings on
uncompleted contracts 2,162,452 215,819
Due to officer - 100,000
Due to shareholders 88,157 58,207
Income taxes payable 223,753 23,700
Deferred income taxes 196,100 129,000
------------------- -------------------
Total current liabilities 8,050,252 1,828,731
Capital lease obligation, net of current portion 2,073 4,608
Loans payable, net of current portion 170,362 -
Due to shareholders, net of current portion 1,026,755 -
Deferred income taxes 344,900 527,000
------------------- -------------------
Total liabilities 9,594,342 2,360,339
------------------- -------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock - $0.0001 par value, 5,000,000 shares
authorized, none issued - -
Common Stock - $0.0001 par value, 75,000,000 shares
authorized, 20,849,976 shares and
13,078,844 shares issued and outstanding, respectively 2,085 1,308
Additional paid-in capital 11,991,476 8,002,639
Unearned consulting services (38,559) -
Accumulated deficit (667,247) (543,060)
------------------- -------------------
Total shareholders' equity 11,287,755 7,460,887
------------------- -------------------
Total liabilities and shareholders' equity $ 20,882,097 $ 9,821,226
=================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
April 30,
2004 2003
-------------- ---------------
REVENUE $22,076,246 $5,422,858
-------------- ---------------
COSTS AND EXPENSES:
Cost of revenue 16,076,155 3,768,495
Selling, general and administrative expenses 5,560,583 1,860,827
Provision for doubtful accounts 91,137 38,779
Depreciation and amortization 382,510 116,501
-------------- ---------------
Total costs and expenses 22,110,385 5,784,602
-------------- ---------------
OPERATING LOSS (34,139) (361,744)
OTHER EXPENSE:
Interest expense 14,048 -
-------------- ---------------
LOSS BEFORE PROVISION FOR INCOME TAXES (48,187) (361,744)
Income tax provision (76,000) (19,550)
-------------- ---------------
NET LOSS (124,187) (381,294)
Imputed dividends accreted on Convertible Series B Preferred stock - (173,000)
-------------- ---------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ($124,187) ($554,294)
============== ===============
Basic net loss per common share ($0.01) ($0.05)
============== ===============
Basic weighted average number of common shares outstanding 18,260,359 10,376,685
============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Unearned Total
Preferred Stock Common Stock Paid-In Consulting Shareholders' Accumulated
Shares Amount Shares Amount Capital Services Equity Deficit
-------- ------- ----------- -------- ---------- ---------- ------------ -----------
BALANCE, MAY 1, 2002 - $0 5,500,000 $550 $4,450 $0 $11,234 $ 16,234
Effect of reverse acquisition 250 1 1,025,632 103 (80,919) - - (80,815)
Return and retirement of common
stock in connection with reverse
acquisition - - (500,000) (50) 50 - - -
Sale of Series B Preferred Stock
sold through private placement 455 - - - 455,000 - - 455,000
Series B Preferred Stock issued
in consideration for payment of
accounts payable 64 0 - - 64,000 - - 64,000
Conversion of Series A Preferred
Stock to common stock (250) (1) 3,000,000 300 (299) - - -
Imputed Series B Preferred Stock
dividend attributable to beneficial
conversion feature - - - - 173,000 - (173,000) -
Sale of Series C Preferred Stock sold
through private placement 1,000 - - - 1,000,000 - - 1,000,000
Issuance of common stock upon
acquisition of Invisinet, Inc. - - 1,000,000 100 1,749,900 - - 1,750,000
Issuance of common stock upon
acquisition of Walker Comm, Inc. - - 2,486,000 249 4,574,000 - - 4,574,249
Conversion of Series B Preferred
Stock to common stock (519) - 567,212 56 (56) - - -
Stock options granted to an officer
in connection with the acquisition
of Invisinet, Inc. - - - - 63,513 - - 63,513
Net loss - - - - - - (381,294) (381,294)
-------- ------- ----------- -------- ---------- ---------- ------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
Additional Unearned Total
Preferred Stock Common Stock Paid-In Consulting Shareholders' Accumulated
Shares Amount Shares Amount Capital Services Equity Deficit
------- ------- ----------- ------- ------------ ---------- ------------ ------------
BALANCE, APRIL 30, 2003 1,000 $0 13,078,844 $1,308 $ 8,002,639 $0 ($543,060) $ 7,460,887
Conversion of Series C
Preferred Stock to common stock (1,000) - 1,786,000 179 (179) - - -
Issuance of common stock through
private placement - - 4,444,400 444 2,173,824 - - 2,174,268
Issuance of common stock,
acquisition of Clayborn
Contracting Group, Inc. - - 826,446 83 867,685 - - 867,768
Issuance of common stock,
acquisition of Heinz
Corporation - - 714,286 71 699,929 - - 700,000
Fair value of stock options
granted to nonemployees - - - - 196,166 - - 196,166
Issuance of stock options for
consulting services - - - - 51,412 (51,412) - 0
Amortization of unearned
consulting services - - - - - 12,853 - 12,853
Net loss - - - - - - (124,187) (124,187)
------- ------- ----------- ------- ------------ ---------- ------------ ------------
BALANCE, APRIL 30, 2004 0 $0 20,849,976 $2,085 $11,991,476 ($38,559) ($667,247) $11,287,755
======= ======= =========== ======= ============ ========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
April 30,
2004 2003
---------------- ----------------
OPERATING ACTIVITIES :
Net loss ($124,187) ($381,294)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 382,510 116,501
Provision for doubtful accounts 91,137 38,779
Gain on disposition of fixed assets - (2,085)
Fair value of stock options granted 209,019 -
Deferred income taxes (218,800) -
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (2,422,541) (676,341)
Costs and estimated earnings in excess of billings on uncompleted contracts (1,379,816) (10,087)
Inventory 11,976 2,428
Prepaid expenses (51,319) (99,789)
Other assets (24,032) (75)
Accounts payable and accrued expenses 2,354,024 182,614
Billings in excess of costs and estimated earnings on uncompleted contracts 1,908,541 (155,539)
Income taxes payable 200,053 19,550
---------------- ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 936,565 (965,338)
---------------- ----------------
INVESTING ACTIVITIES:
Proceeds from disposition of fixed assets - 41,607
Acquisition of property and equipment (86,011) (3,065)
Proceeds from repayment of note receivable - 172,514
Acquisition of Clayborn, net of cash received (722,177) -
Acquisition of Heinz, net of cash received (109,194) -
Acquisition earn-out and other transaction costs (497,677) (375,993)
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (1,415,059) (164,937)
---------------- ----------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended
April 30,
2004 2003
---------------- ----------------
FINANCING ACTIVITIES:
Cash received in reverse acquisition - 3,257
Restricted cash - (200,000)
Proceeds from advances from officers - 100,000
Repayment of advances from officers (100,000) (20,743)
Proceeds from sale of preferred stock - 1,455,000
Proceeds from sale of common stock 2,174,268 -
Borrowings on line of credit 461,000 -
Repayment of equipment loans payable (237,390) (53,169)
Payments of capital lease obligations (2,295) (2,077)
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,295,583 1,282,268
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,817,089 151,993
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 167,547 15,554
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $1,984,636 $ 167,547
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended
April 30,
2004 2003
---------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 15,770 $ 8,131
================ ================
Income taxes $ 105,193 $1,380
================ ================
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for net noncash assets received in acquisitions $1,567,768 $6,324,249
================ ================
Earn-out consideration unpaid relating to acquisitions $1,114,912 $ 58,207
================ ================
Issuance of note for net noncash assets received in acquisition $ 182,648 $ -
================ ================
Issuance of note for property and equipment $ 32,339 $ -
================ ================
Equipment acquired under capital lease $ - $ 9,468
================ ================
Issuance of 64 shares of Series B preferred stock as payment of advances from
shareholder and accounts payable $ - $ 64,000
================ ================
Imputed Series B preferred stock dividend attributable to a beneficial conversion
feature $ - $ 173,000
================ ================
Conversion of Series A preferred stock to common stock $ - $ 300
================ ================
Conversion of Series B preferred stock to common stock $ - $ 56
================ ================
Conversion of Series C preferred stock to common stock $ 179 $ -
================ ================
Stock options issued related to an acquisition $ - $ 63,513
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of WPCS
International Incorporated ("WPCS") and its wholly owned subsidiaries, WPCS
Incorporated , Invisinet Inc. ("Invisinet") from November 13, 2002 (date of
acquisition), Walker Comm Inc. ("Walker") from December 30, 2002 (date of
acquisition), Clayborn Contracting Group, Inc. from August 22, 2003 (date of
acquisition), and Heinz Corporation ("Heinz") from April 2, 2004 (date of
acquisition), collectively the "Company".
The Company is a project engineering company that focuses on the implementation
requirements of specialty communication systems, wireless fidelity ("WiFi")
deployment and fixed wireless deployment. The Company provides a range of
specialty communication services including project management, site design,
structured cabling, product integration, network security and technical support.
On May 17, 2002, Phoenix Star Ventures, Inc. ("PSVI") a publicly held "shell
company", became the legal acquirer of WPCS Holdings, Inc. ("Holdings") by
issuing 5,500,000 shares of its common stock to the shareholders of Holdings in
exchange for all of the outstanding common shares of Holdings. The former
shareholders of Holdings, immediately after the business combination, owned the
majority of the combined companies. Accordingly, the business combination has
been accounted for as a reverse acquisition, whereby, for accounting purposes,
Holdings is the accounting acquirer and PSVI is the accounting acquiree. The
consolidated financial statements of the Company include the accounts of PSVI
since its acquisition. The cost of the acquisition approximated the fair value
of the net assets of PSVI that were acquired and accordingly, assets,
liabilities and the outstanding preferred stocks of PSVI were initially recorded
at historical carrying values.
On May 24, 2002, PSVI's principal shareholder returned 500,000 shares of its
common stock to the Company, without compensation. Subsequently, these common
shares were retired and cancelled.
On November 13, 2002, the Company acquired all of the outstanding shares of
Invisinet from its shareholders in exchange for an aggregate of 1,000,000 newly
issued shares of the Company's common stock. An additional 150,000 shares of the
Company's common stock were to be issued to a shareholder, provided Invisinet
achieved certain financial targets over a two year period beginning on the first
anniversary date of the merger. On May 27, 2003, the Company and the shareholder
mutually agreed to cancel the issuance of these shares and in exchange, issued
options to purchase 300,000 shares of the Company's common stock.
On December 30, 2002, the Company acquired all of the outstanding shares of
Walker in exchange for an aggregate of 2,486,000 newly issued shares of the
Company's common stock and $500,000 cash consideration. An additional $500,000
is payable contingent upon Walker achieving certain net profits, to be paid in
quarterly distributions equal to 75% of net income, which would increase the
purchase price. At April 30, 2004, $500,000 has been charged to goodwill
relating to this earn-out provision.
On August 22, 2003, the Company acquired all of the outstanding shares of
Clayborn in exchange for an aggregate of 826,446 newly issued shares of the
Company's common stock and $900,000 cash consideration. An additional $1,100,000
is due by September 30, 2007, payable in quarterly distributions, by payment to
the Clayborn shareholders of 50% of the quarterly post-tax profits of Clayborn.
On April 2, 2004, the Company acquired all of the issued and outstanding common
stock of Heinz. The Company acquired all of the issued and outstanding shares
of Heinz for $1,000,000, as follows: (1) $700,000 of the Company's common stock,
based on the closing price of our common stock on March 30, 2004 of $0.98 per
share, for an aggregate of 714,286 newly issued shares of the Company's common
stock and (2) $300,000 total cash consideration, of which $100,000 was paid at
closing and a $200,000 non-interest bearing promissory note. Of the $200,000,
$75,000 is payable on the first and second anniversaries of the closing date and
$50,000 is payable on the third anniversary of the closing date.
F-11
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
All significant intercompany transactions and balances have been eliminated in
these consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly-liquid investments with an
original maturity of three months or less.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
reduces credit risk by placing its temporary cash and investments with major
financial institutions with high credit ratings. At times, such amounts may
exceed Federally insured limits. The Company reduces credit risk related to
accounts receivable by routinely assessing the financial strength of its
customers and maintaining an appropriate allowance for doubtful accounts based
on its history of write-offs, current economic conditions and an evaluation of
the credit risk related to specific customers.
Accounts Receivable
Accounts receivable are due within contractual payment terms and are stated at
amounts due from customers net of an allowance for doubtful accounts. Credit is
extended based on evaluation of a customer's financial condition. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes off accounts receivable when they become
uncollectible, and payment subsequently received on such receivables are
credited to the allowance for doubtful accounts. Included in the accounts
receivable is retainage receivable of $561,288 which is expected to be collected
within one year.
Inventory
Inventory consists of parts and supplies and is stated using the weighted
average cost method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided for, using straight-line methods, in amounts sufficient to relate the
cost of depreciable assets to operations over their estimated service lives.
Repairs and maintenance are charged to operations as incurred.
Goodwill
Effective May 1, 2002, the Company adopted Statement of Financial Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. In accordance with the
guidelines of this accounting standard, goodwill and indefinite-lived intangible
assets are no longer amortized but are assessed for impairment on at least an
annual basis. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment.
F-12
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 142 requires that goodwill be tested for impairment upon adoption and
at least annually thereafter, utilizing a two-step methodology. The initial step
requires the Company to determine the fair value of the business acquired
(reporting unit) and compare it to the carrying value, including goodwill, of
such business (reporting unit). If the fair value exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying value of the
reporting unit exceeds its fair value, the goodwill of the unit may be impaired.
The amount, if any, of the impairment is then measured in the second step.
The Company completed the initial step of impairment testing which indicated
that no goodwill impairment existed as of April 30, 2004. The Company determined
the fair value of the businesses acquired for purposes of this test primarily by
using a discounted cash flow valuation technique. Significant estimates used in
the valuation include estimates of future cash flows, both future short-term and
long-term growth rates, and estimated cost of capital for purposes of arriving
at a discount factor. The fair value of the Company's reporting units derived
using discounted cash flow models exceeded the carrying values of the reporting
units. Accordingly, step two was unnecessary and no impairment was recognized in
the consolidated statement of operations for the years ended April 30, 2004 and
2003. On an ongoing basis, the Company expects to perform its annual impairment
test during the fourth quarter absent any interim impairment indicators.
Goodwill through the year ended April 30, 2004 consisted of the following:
Beginning balance, May 1, 2003 $5,388,882
Clayborn acquisition 1,772,806
Heinz acquisition 1,065,799
Walker earn out provision 441,793
Transaction costs 12,590
-----------------
Ending balance, April 30, 2004 $8,681,870
=================
Revenue Recognition
The Company generates its revenue by providing project engineering and
installation services for specialty communication systems, including wireless
fidelity (WiFi) and fixed wireless deployment. The Company provides a range of
specialty communication services including project management, site design,
structured cabling, product integration, network security and technical support.
These projects may require the integration of multiple communication components
and engineering services in order to complete the project.
The Company records profits on these projects 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 in operations 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.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, "Accounting of
Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
F-13
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. The recognition of deferred tax assets is reduced by a valuation allowance
if it is more likely than not that the tax benefits will not be realized. The
ultimate realization of deferred tax assets depends upon the generation of
future taxable income during the periods in which those temporary differences
become deductible.
Earnings (Loss) Per Share
Earnings (loss) per common share is computed pursuant to SFAS No. 128, "Earnings
Per Share" ("EPS"). Basic income (loss) per share is computed as net income
(loss) available to common shareholders divided by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common stock issuable through stock options,
restrictive stock awards, warrants and other convertible securities. At April
30, 2004, the Company had 3,478,475 stock options and 5,109,400 warrants
outstanding. At April 30, 2003, 77,000 stock options were outstanding. Diluted
EPS is not presented since the effect of the assumed exercise of options and the
assumed conversion of the Series C convertible preferred stock would be
antidilutive.
Stock-Based Compensation Plans
The Company maintains a stock option plan, as more fully described in Note 11 to
the consolidated financial statements, which is accounted for using the
"intrinsic value" method pursuant to the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, and, accordingly, when the exercise price of an employee stock
option granted by the Company is equal to or greater than the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. Therefore, the Company has elected the disclosure only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation."
The Company applies the intrinsic value method in accounting for its stock-based
compensation plan. Had the Company measured compensation under the fair value
based method for stock options granted, the Company's net loss attributable to
common shareholders and net loss per share attributable to common shareholders
for the years ended April 30, 2004 and 2003 would have been as follows:
2004 2003
---------------- -----------------
Net loss attributable to common shareholders, as reported ($124,187) ($554,294)
Deduct: total stock-based employee compensation expense determined under the
fair value based method for all awards, net of tax (141,109) (9,992)
---------------- -----------------
Net loss attributable to common shareholders, pro forma ($265,296) ($564,286)
================ =================
Net loss per share attributable to common shareholders
As reported ($0.01) ($0.05)
Pro forma ($0.01) ($0.05)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes Option pricing model with the following assumptions: Risk-free
interest rate ranging from 2% to 3.6%, dividend yield of 0%, expected life of 5
years and volatility of 73.2% in 2004 and 71.6% in 2003.
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
F-14
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
period. The most significant estimates relate to the calculation of percentage
of completion on uncompleted contracts, allowance for doubtful accounts,
valuation of inventory and life of customer lists. Actual results could differ
from those estimates.
Recently Issued Accounting Pronouncements
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task Force
Issue No. 94-3 and requires that a liability for a cost associated with and exit
or disposal activity be recognized when the liability is incurred. This
statement also establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The impact of the
adoption of SFAS No. 146 did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No.123." SFAS No. 148 amends SFAS No. 123,"Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 for the year ended April 30, 2004. The adoption of SFAS No. 148
did not have a material effect on the Company's consolidated financial position,
results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, ("FIN No. 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN No. 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN No. 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of the disclosure requirements of FIN No. 45 did not have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46")
"Consolidation of Variable Interest Entities." In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables real estate or
other property. A variable interest entity may be essentially passive or it may
engage in activities on behalf of another company. Until now, a company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN No. 46 changes
that by requiring a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. FIN No. 46's consolidation requirements apply
immediately to variable interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year on interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
FIN No. 46 did not have a material effect on the Company's consolidated
financial position, results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003. The adoption of this statement did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
F-15
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS
Clayborn
On August 22, 2003, the Company completed a merger with Clayborn Contracting
Group, Inc, a California corporation ("Clayborn"). The acquisition of Clayborn
gives the Company expertise in engineering and deployment services for specialty
communication systems and additional wireless opportunities to pursue.
The aggregate consideration paid by the Company for Clayborn was approximately
$2,929,000. The Company acquired all of the issued and outstanding shares of
Clayborn in exchange for $900,000 cash consideration and $61,000 of transaction
costs, and 826,446 newly issued shares of the Company's common stock with a fair
value of approximately $868,000 based on the average value of the Company's
common stock as of a few days before and after the merger terms were agreed to
and announced. An additional $1,100,000 is due by September 30, 2007, payable in
quarterly distributions, by payment to the Clayborn shareholders of 50% of the
quarterly post tax profits of Clayborn.
The acquisition of Clayborn was accounted for under the purchase accounting
method of accounting in accordance with SFAS No. 141, "Business Combinations."
Under the purchase method of accounting, assets acquired and liabilities assumed
are recorded at their estimated fair values. Goodwill and (or) other intangible
assets are recorded to the extent 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.
A valuation of certain assets was completed, including property and equipment,
backlog, list of major customers, and the Company internally determined the fair
value of its other assets and liabilities. In determining the fair value of
acquired assets, standard valuation techniques were used including the market
and cost approaches. The initial purchase price allocation has been adjusted as
a result of final valuation, with fixed assets increasing in value by $74,000,
customer lists being valued at $245,000, inventory being valued at $39,000 and
backlog being valued at $13,500, resulting in a decrease in goodwill by these
combined amounts. The aggregate changes resulted in goodwill being decreased to
$1,772,806 as of the acquisition date.
The purchase price allocation has been determined as follows:
Assets purchased:
Cash $ 134,218
Accounts receivable 575,804
Costs in excess of billings 231,562
Income tax refunds receivable 104,765
Inventory 39,000
Fixed assets 444,126
Backlog 13,500
Customer list 245,000
Other assets 97,669
Goodwill 1,772,806
------------------
3,658,450
------------------
Liabilities assumed:
Accounts payable (294,992)
Accrued expenses (136,119)
Notes payable (184,611)
Deferred tax liability (113,800)
------------------
(729,522)
------------------
Purchase price $ 2,928,928
==================
F-16
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Heinz
On April 2, 2004, the Company acquired all of the issued and outstanding common
stock of Heinz Corporation ("Heinz"). The Company acquired all of the issued and
outstanding shares of Heinz for $1,000,000, as follows: (1) $700,000 of the
Company's common stock, based on the closing price of our common stock on March
30, 2004 of $0.98 per share, for an aggregate of 714,286 newly issued shares of
the Company's common stock and (2) $300,000 total cash consideration, of which
$100,000 was paid at closing and a $200,000 non-interest bearing promissory
note. Of the $200,000, $75,000 is payable on the first and second anniversaries
of the closing date and $50,000 is payable on the third anniversary of the
closing date. The purchase price includes the present value of the note totaling
$182,648, discounted at 5%. The current and long-term discounted maturity of
this note is $71,429 and $111,219, respectively. Based on the preliminary
information currently available, the acquisition resulted in goodwill of
approximately $1,066,000. 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.
Heinz is a St. Louis, Missouri based provider of in-building wireless
infrastructure services for both cellular and WiFi applications, including
consulting, integration and installation services for wireless infrastructure.
In addition, Heinz has performed fixed wireless services, structured cabling,
and cellular base station equipment installation and testing. The acquisition of
Heinz gives the Company additional project engineering expertise for wireless
infrastructure services, broadens its customer base, and expands its
geographical presence in the Midwest.
The acquisition of Heinz was accounted for under the purchase accounting method
of accounting in accordance with SFAS No. 141, "Business Combinations." Under
the purchase method of accounting, assets acquired and liabilities assumed are
recorded at their estimated fair values. Goodwill and (or) other intangible
assets are recorded to the extent 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.
The preliminary purchase price allocation has been determined as follows:
Assets purchased:
Cash $ 8,052
Accounts receivable 605,435
Costs in excess of billings 103,459
Fixed assets 23,676
Other assets 71,128
Goodwill 1,065,799
------------------
1,877,549
------------------
Liabilities assumed:
Accounts payable (546,293)
Accrued expenses (130,694)
Line of credit (90,000)
Notes payable (80,942)
Billings in excess of cost (29,223)
------------------
(877,152)
------------------
Purchase price $ 1,000,397
==================
The following unaudited pro forma consolidated financial information for the
years ended April 30, 2004 and 2003, present the combined results of operations
of the Company, as if the acquisitions of Clayborn and Heinz had occurred on May
1, 2003
F-17
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and 2002, after giving effect to certain adjustments, including the issuance of
the Company's common stock to Clayborn and Heinz as part of the purchase price.
In addition, the unaudited pro forma consolidated financial information for the
year ended April 30, 2003 includes the combined results of the Company, as if
the acquisitions of Invisinet and Walker had occurred on May 1, 2002, including
issuance of the Company's common stock to Invisinet and Walker. The pro forma
financial information does not necessary reflect the results of operations that
would have occurred had the Company, Clayborn, Heinz, Invisinet and Walker been
a single entity during such periods.
Year ended April 30,
2004 2003
-------------- ------------
Revenue $27,236,503 $22,716,562
Net loss attributable to common shareholders ($423,186) ($1,862,417)
Weighted average number of shares used in calculations of basic loss per share 19,229,804 14,112,206
Basic net loss per share ($0.02) ($0.13)
For all acquisitions, customer lists are being amortized over a period of 5
years. The Company recorded amortization expense of $154,000 and $41,000 for the
years ended April 30, 2004 and April 30, 2003, respectively. The minimum
amortization of customer lists is $603,000 over the next five years. Any future
goodwill impairments are not deductible for income tax purposes.
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the following
at April 30, 2004:
Costs incurred on uncompleted contracts $17,574,035
Estimated contract profit 4,699,280
--------------
22,273,315
Less: billings to date 22,312,736
--------------
Net costs in excess ($39,421)
==============
Costs and estimated earnings in excess of billings $2,123,031
Billings in excess of costs and estimated earnings
on uncompleted contracts (2,162,452)
--------------
Net costs in excess ($39,421)
==============
F-18
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at April 30, 2004:
Estimated
useful life
(years) Amount
-------------- ---------------
Furniture and fixtures 5 - 7 $163,778
Vehicles 5 - 7 624,304
Machinery and equipment 5 559,256
Leasehold improvements 3 - 10 192,349
---------------
1,539,687
Less accumulated depreciation and
amortization 533,927
---------------
$1,005,760
===============
Depreciation expense for property and equipment for the years ended April 30,
2004 and 2003 was approximately $228,300 and $75,500, respectively.
Property and equipment under capital leases totaled approximately $11,000 and
accumulated depreciation on such property and equipment aggregated approximately
$4,600 at April 30, 2004.
NOTE 6 - LINE OF CREDIT
On October 29, 2003, Walker obtained a revolving line of credit facility with a
commercial bank in the amount of $750,000. The borrowing limit is up to 70% of
eligible Walker accounts receivable. As of April 30, 2004, the borrowing base
was $750,000 and the outstanding balance was $531,000. The line of credit is
collateralized by all of Walker's accounts receivable, inventory and equipment
and bears interest at the Wall Street Journal Prime Index Rate plus 1.5% (5.50%
as of April 30, 2004). In addition, the Company and certain executive officers
of the Company have personally guaranteed this line of credit facility. This
line is subject to annual renewal and matures on November 5, 2004. Accrued
interest is payable monthly.
In connection with the acquisition of Heinz, the Company assumed a revolving
line of credit facility with a commercial bank in the amount of $200,000. As of
April 30, 2004, the borrowing base was $200,000 and the outstanding balance was
$20,000. The line of credit is collateralized by real estate property owned by
the President of Heinz and his personal guarantee, and bears interest at 4.0% as
of April 30, 2004. The Company has indemnified the President of Heinz for any
personal liability arising from this line of credit facility. This line is
subject to annual renewal and matures on November 16, 2004. Accrued interest is
payable monthly.
NOTE 7 - RELATED PARTY TRANSACTIONS
In connection with the acquisition of Walker, an additional $500,000 is payable
to the Walker shareholders, provided Walker achieves certain net profits, to be
paid in quarterly distributions equal to 75% of net income. At April 30, 2004,
$500,000 has been charged to goodwill relating to this earn-out provision and
the total remaining payable to the Walker shareholders under this earn-out
provision was $14,912.
In connection with the acquisition of Walker, the Company assumed a ten-year
lease with trusts, of which, certain officers of the Company are the trustees,
for a building and land located in Fairfield, California, which is occupied by
its Walker subsidiary. For the year ended April 30, 2004, $56,000 was paid as
rent for this lease.
In connection with the acquisition of Clayborn, an additional $1,100,000 is due
by September 30, 2007, payable in quarterly distributions to the Clayborn
shareholders, by payment of 50% of the quarterly post tax profits of Clayborn.
F-19
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - RETIREMENT PLANS
Walker and Clayborn participate in an employee savings plan under Section 401(k)
of the Internal Revenue Code pursuant to which eligible employees may elect to
defer a portion of their annual salary by contributing to the plan.
Contributions by Walker and Clayborn are made at the discretion of the Board of
Directors. There were $4,000 in contributions made for the year ended April 30,
2004 and none for 2003.
The Company also contributes to multi-employer pension plans which provide
benefits to union employees covered by collective bargaining agreements. General
and administrative expenses include approximately $1,200,000 and $239,000 for
such costs for the years ended April 30, 2004 and 2003, respectively.
NOTE 9 - INCOME TAXES
The provision or income taxes for the years ended at April 30, 2004 and 2003 is
summarized as follows:
2004 2003
----------------- -------------------
Current
Federal $177,000 $ -
State 117,800 19,550
Deferred
Federal (49,000) -
State (169,800) -
----------------- -------------------
Totals $76,000 $19,550
================= ===================
The actual provisions for income taxes reflected in the consolidated statements
of operations for the years ended April 30, 2004 and 2003 differ from the
amounts computed at the federal statutory tax rates. The principal differences
between the statutory income tax expense and the effective provision for income
taxes are summarized as follows:
2004 2003
------------------- ------------------
Expected tax benefit at statutory rate (34%) ($16,000) ($122,000)
State and local taxes, net of federal tax benefit 76,000 19,550
Increase in valuation allowance 16,000 122,000
------------------- ------------------
$76,000 $19,550
=================== ==================
F-20
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences which give rise to deferred tax assets
and liabilities at April 30, 2004 is summarized as follows:
2004
------------------
Deferred tax assets:
Net operating loss carryforward $60,000
Allowance for doubtful accounts 26,000
Federal benefit of deferred state tax liabilities 34,000
Valuation allowance (60,000)
------------------
Net deferred tax assets - current 60,000
------------------
Deferred tax liabilities:
Sec 481(a) adjustment for cash to accrual basis accounting
- current (106,000)
- long term (106,000)
Non-deductible amortization of purchase price
Inventory - current (29,000)
Fixed assets - long term (132,000)
Customer lists - long term (168,000)
------------------
Total (541,000)
------------------
Net deferred tax liabilities ($481,000)
==================
The Company has net operating loss carryforwards for State tax purposes
approximating $678,000 expiring through 2011. Due to the uncertainty of
recognizing a tax benefit on these losses, the Company has provided a full
valuation allowance against these deferred tax assets.
NOTE 10 - STOCK OPTION PLAN
The Company established a nonqualified stock option plan pursuant to which
options to acquire a maximum of 5,000,000 shares of the Company's common stock
were reserved for grant (the "2002 Plan"). Under the terms of the 2002 Plan, the
options, which expire five years after grant, are exercisable at prices equal to
the fair market value of the stock at the date of the grant and become
exercisable in accordance with terms established at the time of the grant. At
April 30, 2004, there were 1,521,525 shares available for grant under the 2002
Plan.
F-21
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of activity with respect to stock options granted
under the 2002 Plan at April 30, 2004:
Options outstanding Options exercisable
Weighted-average
remaining
Shares life in Exercise
Exercise prices under option years Shares price
- --------------------- ----------------- ------------- ------------- -------------
$1.35 50,000 3.90 50,000 $1.35
$1.37 2,000 3.61 1,300 $1.37
$1.66 25,000 3.42 15,000 $1.66
$1.50 50,000 1.00 50,000 $1.50
$1.25 25,000 4.01 12,500 $1.25
$1.00 350,000 0.07 350,000 $1.00
$0.45 700,000 0.07 700,000 $0.45
$0.45 300,000 2.07 133,333 $0.45
$0.75 634,000 4.09 581,167 $0.75
$0.75 250,000 4.12 54,688 $0.75
$1.07 150,000 4.27 150,000 $1.07
$1.55 100,000 4.27 100,000 $1.55
$2.33 100,000 4.27 100,000 $2.33
$1.20 137,475 4.34 22,913 $1.20
$1.00 265,000 4.61 109,665 $1.00
$1.25 150,000 1.61 150,000 $1.25
$0.97 75,000 4.92 75,000 $0.97
$0.91 115,000 4.92 2,396 $0.91
----------------- -------------
Total 3,478,475 2,657,962
================= =============
The weighted-average fair value of options on the grant date was $0.36 and
$1.06, respectively, for options granted during the years ended April 30, 2004
and 2003.
NOTE 11 - SHAREHOLDERS' EQUITY
On June 25, 2003, (and amended July 24, 2003), the Company offered in a private
placement, up to 100 units (the "Units") for sale to accredited investors at a
price of $25,000 per Unit (the "Offering"). Each Unit consists of (i) 44,444
shares of the Company's common stock and (ii) warrants to purchase 44,444 shares
of common stock, exercisable for a period of three years at an exercise price of
$0.90 per share (the "Warrants"). The Company sold all 100 Units from the
Offering and received proceeds of $2,174,268 net of the placement agent
commissions and other issuance costs. The Warrants may be redeemed in whole or
in part at the option of the Company for $0.01, if the closing price of the
Company's common stock is at least $1.25 per share on average for 10 consecutive
trading days, ending not earlier than 30 days before the Warrants are called for
redemption. In connection with the Offering, the placement agent was issued
Warrants to purchase 665,000 shares of the Company's common stock, exercisable
for a period of three years, at an exercise price of $0.75 per share.
On April 30, 2003, all 1,000 Series C Preferred shares were converted into
1,786,000 shares of the Company's common stock.
For the fiscal year ended April 30, 2004, the Company granted options to
purchase 1,452,000 shares of its common stock to certain consultants. The
options have exercise prices ranging from $0.45 to $2.33, and vesting periods of
one to five years. The Company has valued these options using the Black-Scholes
Option pricing model and recorded $209,000 of expense for the year ended April
30, 2004.
On April 21, 2004, a majority of the shareholders of the Company approved an
increase in the total number of authorized common shares from 30,000,000 to
75,000,000.
F-22
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SEGMENT REPORTING
The Company's reportable segments are determined based upon the nature of the
services, the external customers and customer industries and the sales and
distribution methods used to market the products. The Company has two reportable
segments: wireless infrastructure services and specialty communication systems.
The Company evaluates performance based upon (loss) income before income taxes.
Corporate includes corporate salaries and external professional fees, such as
accounting, legal and investor relations costs which are not allocated to the
other subsidiaries. Corporate assets include cash, prepaid expenses and deferred
tax assets. Segment reporting commenced after the Company acquired Walker in
December 2002. Prior to that date, the Company operated as only one segment.
Segment results for the years ended April 30, 2004 and 2003 are as follows:
Year ended April 30, 2004 Year ended April 30, 2003
Wireless Specialty Wireless Specialty
Corporate Infrastructure Communication Total Corporate Infrastructure Communication Total
--------- -------------- ------------- ----- --------- -------------- ------------- -----
Revenue $ - $4,568,714 $17,507,532 $22,076,246 $ - $1,850,300 $3,572,558 $5,422,858
Depreciation
and
Amortization $98 40,054 342,358 382,510 $ - 21,544 94,957 116,501
(Loss)
income
before
income taxes ($924,625) $372,308 $504,130 ($48,187) ($223,211) ($61,185) ($77,348) ($361,744)
Goodwill $ - $2,698,343 $5,983,527 $8,681,870 $ - $1,627,044 $3,761,838 $5,388,882
Total assets $803,082 $6,387,166 $13,691,849 $20,882,097 $136,963 $2,753,206 $6,931,057 $9,821,226
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has entered into employment contracts ranging from two to four years
with its executive officers. The aggregate base salary commitments under these
contracts at April 30, 2004 are approximately $1,600,000.
Litigation
From time to time, the Company may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm the Company's business. The
Company is currently not aware of any such legal proceedings or claims that we
believe will have, individually or in the aggregate, a material adverse affect
on our business, consolidated financial condition or operating results.
F-23
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease Commitments
The Company leases its office facilities pursuant to non-cancelable operating
leases expiring through February 2011. The Company also has non-cancelable
vehicle leases. The minimum rental commitments under these non-cancelable leases
at April 30, 2004 are summarized as follows:
Year ending April 30,
2005 $215,720
2006 165,799
2007 125,814
2008 107,481
2009 102,854
Thereafter 196,421
-------------------
Total minimum lease payments $914,089
===================
Rent expense for all operating leases was approximately $260,000 and $100,000 in
2004 and 2003, respectively.
Walker Comm, Inc. Acquisition
In connection with the acquisition of Walker, an additional $500,000 is payable
to the Walker shareholders, provided Walker achieves certain net profits, to be
paid in quarterly distributions equal to 75% of net income. Through April 30,
2004, $485,088 was paid and $14,912 was payable to the Walker shareholders
against this earn-out provision. Accordingly, goodwill was increased by
$500,000.
In connection with the acquisition of Walker, the Company assumed a ten-year
lease with trusts, of which, certain officers of the Company are the trustees,
for a building and land located in Fairfield, California, which is occupied by
its Walker subsidiary. For the year ended April 30, 2004, $56,000 was paid as
rent for this lease.
Clayborn Contracting Group, Inc. Acquisition
In connection with the acquisition of Clayborn, an additional $1,100,000 is due
by September 30, 2007, payable in quarterly distributions to the Clayborn
shareholders, by payment of 50% of the quarterly post tax profits of Clayborn.
F-24
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. NONE
ITEM 8A - CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. An evaluation was performed
under the supervision and with the participation of our management, including
the chief executive officer and the chief financial officer, of the
effectiveness of the design and operation of our disclosure procedures. Based on
management's evaluation as of the end of the period covered by this Annual
Report, our principal executive officer and chief financial officer have
concluded that our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) were sufficiently effective to ensure that the information
required to be disclosed by us in the reports that we file under the Exchange
Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and
completeness.
Changes in internal controls. There have been no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referred to above, nor were
there any significant deficiencies or material weaknesses in our internal
controls. Accordingly, no corrective actions were required or undertaken.
ITEM 9 - DIRECTORS AND OFFICERS OF THE REGISTRANT
The following persons are our executive officers and directors as of the date
hereof:
NAME AGE OFFICES HELD
- -------------------- -------- --------------------------------------
Andrew Hidalgo 48 Chairman, Chief Executive Officer and Director
Donald Walker 41 Executive Vice President
E.J. von Schaumburg 37 Executive Vice President
James Heinz 42 Executive Vice President
Joseph Heater 40 Chief Financial Officer
Norm Dumbroff 43 Director
Neil Hebenton 48 Director
Gary Walker 49 Director
William Whitehead 48 Director
Andrew Hidalgo, Chairman and Chief Executive Officer
Mr. Hidalgo became Chairman of the Board and Chief Executive Officer of the
Company in June 2002. He is responsible for the Company's operations and
direction. From September 2000 until June 2002, Mr. Hidalgo was President of
Wireless Professional Communication Services, Inc. From November 1999 to
September 2000, Mr. Hidalgo was Chairman and Chief Executive Officer of CommSpan
Incorporated. From December 1997 to November 1999, Mr. Hidalgo was Senior Vice
President at Applied Digital Solutions, a communications infrastructure company,
where he was responsible for implementing a strategic direction involving
acquisitions, business integration and sales development while managing overall
operations for the company's five core business divisions and 25 subsidiary
companies. Prior to that, Mr. Hidalgo held various positions in operations,
sales and marketing with the 3M Company, Schlumberger and General Electric. He
attended Fairfield University in Fairfield, Connecticut where he majored in
Marketing and Finance.
Donald Walker, Executive Vice President
Mr. Walker has been Executive Vice President since December 2002. Mr. Walker was
the founder of Walker Comm, Inc. and its Chief Executive Officer from November
1996 until it's acquisition by WPCS in December 2002. He has over twenty-one
years of project management experience and is a Registered Communications
Distribution Designer (RCDD). In addition, Mr. Walker is a committee member with
the National Electrical Contractors Association (NECA). Mr. Walker began his
project engineer career at General Dynamics where he developed his engineering
skills while managing large projects and coordinating technical staff.
20
E.J. von Schaumburg, Executive Vice President
Mr. von Schaumburg has been Executive Vice President since November 2002. He is
responsible for the strategic development of WPCS including major accounts and
corporate marketing. From July 2000 until November 2002, Mr. Von Schaumburg was
President of Invisinet, Inc. He is a twelve-year veteran of the wireless
industry and founding member of the Wireless Ethernet Compatibility Alliance
(WECA). From February 1989 until July 2000, Mr. von Schaumburg worked for eight
years as a Business Development Manager for AT&T and three years as a divisional
CFO for Lucent Technologies. Mr. von Schaumburg holds a B.S. in Finance from St.
Bonaventure University and an M.B.A. from Fairleigh Dickinson University.
James Heinz, Executive Vice President
Mr. Heinz has been Executive Vice President since April 2004. Mr. Heinz was the
founder of Heinz Corporation and its President since January 1994 until its
acquisition by WPCS in April 2004. He has over twenty years of project
engineering experience in civil and commercial construction projects with over
ten years specifically dedicated to wireless infrastructure services. He is the
Chairman of the Construction Advisory Board for Southern Illinois University and
a general advisory member of the School of Engineering. He holds a B.S. degree
in construction management from Southern Illinois University.
Joseph Heater, Chief Financial Officer
Mr. Heater has been Chief Financial Officer since July 2003. From November 2001
to June 2003, Mr. Heater was the Controller for Locus Pharmaceuticals, Inc., a
development stage pharmaceutical company. Prior to that, from April 1999 to
September 2001, Mr. Heater was Director of Finance and Corporate Controller for
esavio Corporation, an information technology consulting company providing
application development, network design, integration, and managed services.
Prior to that, from March 1995 to November 1998, Mr. Heater was Director of
Financial Planning and Assistant Corporate Controller for Airgas, Inc. Mr.
Heater holds a B.S. from the University of Nebraska and an M.B.A. from Villanova
University.
Directors:
Norm Dumbroff
Mr. Dumbroff became a Director of WPCS in 2002. He has been the Chief Executive
Officer of Wav Incorporated since April 1990, a distributor of wireless products
in North America. Prior to Wav Incorporated, Mr. Dumbroff was an engineer for
Hughes Aircraft. He holds a B.S. degree in Computer Science from Albright
College.
Neil Hebenton
Mr. Hebenton became a director of WPCS in October 2002. Since February 2002, he
has been Senior Director, Business Development, for Perceptive Informatics, Inc.
(a subsidiary of PAREXEL International Corp.), a company offering clinical trial
data management software applications to pharmaceutical and biotechnology
companies. From January 1998 to January 2002, he was the Managing Director for
the U.K. based FW Pharma Systems, a multi-million dollar application software
company serving the pharmaceutical and biotechnology sectors. Prior to that, Mr.
Hebenton has held a variety of operational, scientific and marketing positions
in Europe with Bull Information Systems (BULP-Paris, Frankfurt, Zurich) and
Phillips Information Systems. He received his B.S. in Mathematics from the
University of Edinburgh, Scotland.
Gary Walker
Mr. Walker has been a director of WPCS since December 2002. He is currently the
president of the Walker Comm subsidiary for WPCS International, a position he
has held since November 1996. Prior to his involvement at Walker Comm, Mr.
Walker had a distinguished career with the U.S. Navy and also held an elected
political position in Fairfield, California. He holds a B.A. in Business
Management from St. Mary's College in Moraga, California.
21
William Whitehead
Mr. Whitehead became a director of WPCS in October 2002. Since October 1998, he
has been the Chief Financial Officer for Neutronics Incorporated, a
multi-million dollar process and safety systems manufacturer. Mr. Whitehead has
held a variety of financial management positions with Deloitte & Touche and was
Division Controller for Graphic Packaging Corporation from April 1990 to March
1998. After attending West Point, Mr. Whitehead received a B.S. in Accounting
from the Wharton School at the University of Pennsylvania and received his
M.B.A. from the Kellogg Graduate School at Northwestern University.
Board of Directors
All of our directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Our executive officers
are elected annually by the Board of Directors to hold office until the first
meeting of the Board following the next annual meeting of stockholders and until
their successors are chosen and qualified.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5, and amendments thereto,
furnished to us during fiscal year 2003 and 2004, we are not aware of any
director, officer or beneficial owner of more than ten percent of our Common
Stock that failed to file reports required by Section 16(a) of the Securities
Exchange Act of 1934 on a timely basis during fiscal year 2004.
22
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation received during
the fiscal years ended April 30, 2004, 2003, and 2002 by the Company's Chief
Executive Officer and each of the Company's four other most highly compensated
executive officers based on salary and bonus earned during the 2004 fiscal year.
Summary Compensation Table
Annual Compensation Long Term Compensation
--------------------------------------- --------------------------------------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Awards Options (5) Payouts Compensation($)
- ------------------------------------ ------ --------- -------- ---------------- ----------- -------------- ---------- -------------
Andrew Hidalgo
Chairman, Chief Executive Officer 2004 154,400 17,000 - - - - -
and Director 2003 141,000 - - - - - -
Stephen C. Jackson
President 2002 36,000 - - - - - -
Donald Walker
Executive Vice President (1) 2004 140,000 26,962 - - 200,000 - -
2003 41,160 2,669 - - - - -
Gary Walker
President-Walker and Director (2) 2004 140,000 26,962 - - 200,000 - -
2003 42,333 2,669 - - - - -
E.J. von Schaumburg
Executive Vice President (3) 2004 120,000 51,000 - - 400,000 - -
2003 55,000 23,375 - - - - -
Joseph Heater
Chief Financial Officer (4) 2004 95,500 8,000 - - 400,000 - -
(1) Mr. Walker has served as Executive Vice President since December 30, 2002.
(2) Mr. Walker has served as President, Walker and Director since December 30,
2002.
(3) Mr. von Schaumburg has served as Executive Vice President since November
13, 2002.
(4) Mr. Heater has served as Chief Financial Officer since July 15, 2003.
(5) The number of securities under options granted reflects the number of WPCS
shares that may be purchased upon the exercise of options. The Company does
not have any outstanding stock appreciation rights.
23
Option Grants During 2004 Fiscal Year
The following table provides information related to options granted to the named
executive officers during the 2004 fiscal year. The Company does not have any
outstanding stock appreciation rights.
No. of Securities % of Total Options
Underlying Granted to Employees
Options Granted in Exercise Expiration
Name (#) Fiscal Year Price ( $/Sh) Date
- ---------------------------- ------------------- ----------------------- --------------- --------------
Andrew Hidalgo - - - -
Donald Walker 200,000 9.9% 0.75 6/3/2008
Gary Walker 200,000 9.9% 0.75 6/3/2008
E.J. von Schaumburg 300,000 14.8% 0.45 5/27/2008
E.J. von Schaumburg 100,000 4.9% 1.00 6/12/2008
Joseph Heater 250,000 12.3% 0.75 6/12/2008
Joseph Heater 150,000 7.4% 1.07 8/6/2008
Aggregated Option Exercises During 2004 Fiscal Year and Fiscal Year-End Option
Values
The following table provides information related to employee options exercised
by the named executive officers during the 2004 fiscal year and number and value
of such options held at fiscal year-end.
Number of Securities Underlying Value of Unexercised
Unexercised Options at Fiscal In-the-Money Options at Fiscal
Year- End (#) Year- End ($) (1)
Name Shares Acquired Value -------------------------------- --------------------------------
on Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ------------------- -------------- --------------- ---------------- -------------- -----------------
Andrew Hidalgo - - - - - -
Donald Walker - - - 200,000 - 78,000
Gary Walker - - - 200,000 - 78,000
E.J. von Schaumburg - - 150,000 150,000 103,500 103,500
E.J. von Schaumburg - - 100,000 - 14,000 -
Joseph Heater - - 85,000 165,000 33,150 64,350
Joseph Heater - - 150,000 - 10,500 -
(1). Value based on the closing price of $1.14 per share on April 30, 2004,
less the option exercise price.
24
EMPLOYMENT AGREEMENTS
Contract with Andrew Hidalgo
On February 1, 2004, the Company entered into a three-year employment contract
with a shareholder who is the Chairman and Chief Executive Officer of the
Company. Upon each one year anniversary of the agreement, the agreement will
automatically renew for another three years from the anniversary date. The base
salary under the agreement is $168,000 per annum plus benefits.
Contract with E.J. von Schaumburg
On November 13, 2002, the Company entered into a two-year employment contract
with an option to renew for an additional year, with the President of Invisinet,
who is also an Executive Vice President of the Company. The base salary under
the agreement is $120,000 per annum, plus benefits.
Contract with Donald Walker
On December 30, 2002, the Company entered into a four-year employment contract
with an option to renew for an additional year, with the President of Walker,
who is also an Executive Vice President of the Company. The base salary under
the agreement is $140,000 per annum, plus benefits.
Contract with Gary Walker
On December 30, 2002, the Company entered into a four-year employment contract
with an option to renew for an additional year, with the Chief Operating Officer
of Walker, who is also a Director of the Company. The base salary under the
agreement is $140,000 per annum, plus benefits.
Contract with Joseph Heater
On February 1, 2004, the Company entered into a three-year employment contract
with the Chief Financial Officer. The base salary under the agreement is
$132,000 per annum, plus benefits.
Contract with James Heinz
On April 2, 2004, the Company entered into a three-year employment contract with
James Heinz, the President of Heinz, who is also an Executive Vice President of
the Company. The base salary under the agreement is $140,000, per annum, plus
benefits.
DIRECTOR COMPENSATION
Directors serve without cash compensation and without other fixed remuneration.
Directors are entitled to receive stock options under our 2002 Stock Option as
determined by the Board of Directors. We reimburse our directors for expenses
incurred in connection with attending Board meetings.
25
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information about the shares of the Company's
common Stock that may be issued upon the exercise of options granted to
employees under the 2002 Stock Option Plan, which were approved by the Board of
Directors, as well as shares that may be issued upon the exercise of options
under the 2002 Stock Option Plan, that were issued to consultants, which were
not approved by the Board of Directors.
(c)
Number of securities
(a) (b) remaining available for
Number of securities Weighted-average future
issuance under
to be issued upon exercise price of equity compensation plans
exercise of outstanding excluding securities
outstanding options, options, warrants reflected in column (a)
Plan Category warrants and rights and rights (1)
- ----------------------------- ------------------------ --------------------- ---------------------------
Equity compensation plans
approved by security holders - - -
Equity compensation plans
not approved by security 3,478,475 $0.94 1,521,525
holders (1), (2)
------------------------ --------------------- ---------------------------
Total 3,478,475 $0.94 1,521,525
(1) The Company established a nonqualified stock option plan pursuant to which
options to acquire a maximum of 5,000,000 shares of the Company's common
stock were reserved for grant. As of April 30, 2004, included above are
2,026,475 shares issuable upon exercise of options granted to employees and
directors.
(2) Includes 1,452,000 shares issuable upon exercise of stock options granted
to outside consultants for services rendered to the Company.
Code of Ethics
WPCS adopted a Code of Ethics for its officers, directors and employees. A copy
of the Code of Ethics is incorporated by reference as an exhibit.
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information, according to information
supplied to the Company regarding the number and percentage of the Company's
common stock beneficially owned by (i) each person who is beneficial owner of
more than 5% of the common stock; (ii) by each director; (iii) by each executive
officer; and (iv) by all directors and executive officers as a group. Unless
otherwise indicated, the stockholders listed possess sole voting and investment
power with respect to the shares listed.
Security Ownership of Certain Beneficial Owners
Name and Address of Beneficial Amount and Nature of Percent of
Title of Class Owner Beneficial Ownership Class **
- --------------------- ---------------------------------- ----------------------------- --------------
Common stock Barron Partners LP (1) 2,848,150 13.7%
730 Fifth Avenue, 9th Floor
New York, NY 10019
26
Security Ownership of Management
Name and Address of Beneficial Amount and Nature of Percent of
Title of Class Owner Beneficial Ownership Class **
- --------------------- ---------------------------------- ----------------------------- --------------
Common stock Andrew Hidalgo 5,255,000 25.2%
608 Perimeter Drive
Downingtown, PA 19335
Common Stock Donald Walker (2) 1,216,645 5.8%
521 Railroad Avenue
Fairfield, CA 94533
Common Stock E.J. von Schaumburg (2) 476,000 2.3%
15 Manor Drive
Morristown, NJ 07960
Common Stock James Heinz 714,286 3.4%
1 West Waters Edge Drive
Belleville, IL 62221
Common Stock Joseph Heater (2) 235,000 1.1%
109 Brookhollow Drive
Downingtown, PA 19335
Common Stock Gary Walker (2) 1,130,759 5.4%
521 Railroad Avenue
Fairfield, CA 94533
Common stock Norm Dumbroff (2) (2) 875,000 4.2%
245 West Roosevelt Road
West Chicago, IL 60185
Common Stock Neil Hebenton (2) 37,500 *
404 Cumberland Lane
Chester Springs, PA 19425
Common stock William Whitehead (2) 108,000 *
609 Portland Drive
Downingtown, PA 19335
Common stock All directors and executive (2) 10,048,190 48.2%
officers as a group (9 persons)
* Less than 1% of the outstanding common stock
** Percentage is based on 20,849,976 shares of common stock outstanding.
(1) Includes 1,424,075 shares of common stock which may be acquired through the
exercise of warrants.
(2) Includes the following number of shares of common stock which may be
acquired by certain executive officers and directors through the exercise of
stock options which were exercisable as of July 15, 2004 or become exercisable
within 60 days of that date: Donald Walker, 200,000 shares; E.J. von Schaumburg,
325,000 shares; Joseph Heater, 235,000 shares; Gary Walker, 200,000 shares; Norm
Dumbroff, 25,000 shares; Neil Hebenton, 37,500 shares; William Whitehead,
100,000 shares; and all officers and directors as a group, 1,122,500 shares.
27
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At the time of the following transactions, there were no affiliations between us
and the other parties. As a result of these transactions, the other parties
became affiliates. The transactions were ongoing after the close resulting in
payoffs to the other parties who became affiliates.
On November 13, 2002, we acquired all of the outstanding shares of Invisinet
from its shareholders in exchange for an aggregate of 1,000,000 newly issued
shares of our common stock. An additional 150,000 shares of our common stock
were to be issued to a shareholder, provided Invisinet achieved certain
financial targets over a two year period beginning on the first anniversary date
of the merger. On May 27, 2003, we and the shareholder mutually agreed to cancel
the issuance of bonus shares and in exchange, issued options to purchase 300,000
shares of our common stock.
On December 30, 2002, we acquired all of the outstanding shares of Walker Comm
in exchange for an aggregate of 2,486,000 newly issued shares of our common
stock and $500,000 cash consideration. An additional $500,000 is payable
contingent upon Walker Comm achieving certain net profits, to be paid in
quarterly distributions equal to 75% of net income, which would increase the
purchase price. Through April 30, 2004, $485,088 was paid and $14,912 was
payable to the Walker Comm shareholders against this earn-out provision.
In connection with the acquisition of Walker Comm, we assumed a lease with
trusts, of which, certain of our officers are the trustees, for a building and
land located in Fairfield, California, which is occupied by our Walker Comm
subsidiary. The lease calls for monthly rental payments of $4,642, with annual
increases, calculated using the San Francisco-Oakland-San Jose Consolidated
Metropolitan Statistical Area Consumer Price Index. For the year ended April 30,
2004, $56,000 was paid as rent for this lease.
On August 22, 2003, we acquired all of the outstanding shares of Clayborn
Contracting Group, Inc. in exchange for an aggregate $900,000 cash consideration
and 826,446 newly issued shares of our common stock. An additional $1,100,000 is
due by September 30, 2007, payable in quarterly distributions, by payment to the
Clayborn shareholders of 50% of the quarterly post tax profits of Clayborn.
On April 2, 2004, we acquired all of the issued and outstanding common stock of
Heinz. We acquired all of the issued and outstanding shares of Heinz for
$1,000,000, as follows: (1) $700,000 of our common stock, based on the closing
price of our common stock on March 30, 2004 of $0.98 per share, for an aggregate
of 714,286 newly issued shares of the Company's common stock and (2) $300,000
total cash consideration, of which $100,000 was paid at closing and a $200,000
non-interest bearing promissory note. Of the $200,000, $75,000 is payable on the
first and second anniversaries of the closing date and $50,000 is payable on the
third anniversary of the closing date.
28
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
Exhibits:
Number Exhibit
3.1 Certificate of Incorporation, with amendments (1)
3.2 By-Laws (1)
4.1 Certificate of Designation - Series A Preferred Stock (1)
4.2 Certificate of Designation - Series B Preferred Stock (2)
4.3 Certificate of Designation - Series C Preferred Stock (3)
4.4 2002 Employee Stock Option Plan (3)
4.5 Form of 2003 Warrant (3)
10.1 Andrew Hidalgo Employment Agreement (4)
10.2 E.J. von Schaumburg Employment Agreement (3)
10.3 Donald Walker Employment Agreement (3)
10.4 Gary Walker Employment Agreement (3)
10.5 Joseph Heater Employment Agreement (4)
10.6 James Heinz Employment Agreement (4)
10.7 Agreement and Plan of Merger by and among WPCS International
Incorporated and Clayborn Contracting Group made as of the 22nd day of
August, 2003 (5)
10.8 Agreement and Plan of Merger by and among WPCS International
Incorporated and Heinz Corporation made as of the 2nd day of April,
2004 (6)
14 Code of Ethics (3)
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14
and Rule 15d-14(a), promulgated under the Securities and Exchange Act
of 1934, as amended
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14
and Rule 15d-14(a), promulgated under the Securities and Exchange Act
of 1934, as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief
Financial Officer)
1. Incorporated by reference from the Company's registration statement on
Form SB-2 (Commission File # 333-38802).
2. Incorporated by reference to the Company Annual Report on Form 10-KSB for the
year ended April 30, 2002.
3. Incorporated by reference to the Company Annual Report on Form 10-KSB for the
year ended April 30, 2003.
4. Incorporated by reference from the Company's registration statement on
Form SB-2 (Commission File # 333-109522).
5. Incorporated by reference to the Company Current Report on Form 8-K, dated as
of August 29, 2003.
6. Incorporated by reference to the Company Current Report on Form 8-K, dated as
of April 9, 2004.
Reports on Form 8-K:
Report on Form 8-K, dated March 16, 2004.
Report on Form 8-K, dated April 9, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees. The aggregate fees billed by our auditors, for professional services
rendered for the audit of our annual financial statements for the years ended
April 30, 2004 and 2003, and for the reviews of the financial statements
included in our Quarterly Reports on Form 10-QSB during that fiscal year were
$115,500, and $28,860, respectively.
Audit Related Fees. We incurred fees to auditors of $21,511 and $21,918,
respectively, for audit related fees during the fiscal years ended April 30,
2004 and 2003.
Tax Fees. We incurred fees to auditors of $2,115 and $1,170, respectively, for
tax compliance, tax advice and tax compliance services during the fiscal years
ended April 30, 2004 and 2003.
29
The Audit Committee has considered whether the provision of non-audit services
is compatible with maintaining the principal accountant's independence.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WPCS INTERNATIONAL INCORPORATED
/s/ ANDREW HIDALGO
------------------
Andrew Hidalgo,
Chief Executive Officer
(principal executive officer)
/s/ JOSEPH HEATER
-----------------
Joseph Heater,
Chief Financial Officer
(principal accounting officer)
Date: July 28, 2004
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities as on July 28, 2004.
/s/ ANDREW HIDALGO
------------------
Andrew Hidalgo,
Chairman of the Board
/s/ NORM DUMBROFF
------------------
Norm Dumbroff,
Director
Neil Hebenton,
Director
/s/ GARY WALKER
---------------
Gary Walker,
Director
/s/ WILLIAM WHITEHEAD
---------------------
William Whitehead,
Director
31