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, 2005
[ ] 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)
One East Uwchlan Avenue
Suite 301
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) 140 South Village Avenue Suite 20 Exton, Pennsylvania 19341
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:
3,821,385 shares issued and outstanding as of July 7, 2005.
PART I
ITEM 1. - DESCRIPTION OF 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 an engineering company that focuses on the
implementation requirements of wireless technology and specialty communication
systems. We provide a range of services including site design, product
integration, security, structured cabling, construction and project management.
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 wireless or specialty communication system. We have an
extensive customer base that includes many major corporations, government
entities and educational institutions in two segments.
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 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.
Historically, we have grown by acquisition and have integrated five acquisitions
to-date. As a result of the acquisitions of Invisinet, Inc. on November 13, 2002
and Walker Comm, Inc. on December 30, 2002, we experienced significant growth in
our overall business and commenced operations in two segments, specialty
communication systems and wireless infrastructure services. With the acquisition
of Clayborn Contracting Group, Inc. on August 22, 2003 and Quality
Communications & Alarm Company on November 24, 2004, we experienced additional
expansion of the specialty communication segment. With the acquisition of Heinz
on April 2, 2004, we experienced additional expansion of the wireless
infrastructure segment.
2
Fiscal 2005 Developments
Financing
- ---------
On November 16, 2004, we sold an aggregate of 2,083,887 shares of common stock
and 2,083,887 common stock purchase warrants to eight investors for $10,000,000.
The common stock and warrants were issued in a private placement transaction
pursuant to Section 4(2) under the Securities Act of 1933. Pursuant to the terms
of sale, we filed a resale registration statement on December 30, 2004 covering
the common stock and the common stock issuable upon exercise of the warrants,
which was declared effective by the Securities and Exchange Commission on
January 18, 2005.
Each warrant is exercisable for a period of five years at a price of $8.40 per
share, subject to certain adjustments. The exercise price of the warrants is
subject to adjustment for subsequent lower price issuances by us, as well as
customary adjustment provisions for stock splits, combinations, dividends and
the like. The warrants are callable by us, upon 30 days notice, should the
common stock trade at or above $25.20 for 25 out of 30 consecutive trading days.
A maximum of 20% of the warrants may be called in any three-month period.
Acquisitions
- ------------
On November 24, 2004, we acquired Quality Communications & Alarm Company, Inc.
("Quality"), a New Jersey corporation, for aggregate consideration of
approximately $7,400,000 in cash, net of acquisition transaction costs. The
acquisition of Quality gives us additional project engineering expertise for
specialty communication opportunities, broadens our customer base especially in
the public safety and gaming sector, and expands our geographic presence in the
Northeastern United States. The financing for this transaction was completed
through the issuance of the common stock described above.
Reverse Stock Split
- -------------------
Effective January 10, 2005, a majority of our shareholders approved a
one-for-twelve reverse stock split of the Company's common stock, decreasing the
number of issued and outstanding shares of common stock from 45,849,976 shares
to 3,821,385 shares. The par value of the common stock was not affected by the
reverse stock split and remains at $0.0001 per share. Consequently, the reverse
stock split has been reflected retroactively in the accompanying annual report
on Form 10-KSB, financial statements and notes for all periods presented and all
applicable references as to the number of common shares and per share
information, stock options, warrants and market prices have been restated to
reflect this reverse stock split.
Exchange Listing
- ----------------
Effective March 28, 2005, we began trading on the Nasdaq SmallCap Stock Market.
Our common stock is traded under the symbol "WPCS."
Our Business
We generate our revenue by providing engineering services that focus on wireless
technology and specialty communication systems. We have two reportable segments,
specialty communication systems and wireless infrastructure services.
Specialty Communication Systems
WPCS is a complete project engineering company with design and build
capabilities. We have certified engineers and project managers that are capable
of providing services that take advantage of today's technology while looking
forward to tomorrow's emerging technologies. We have designed and implemented
unique specialty communication systems for public safety, healthcare, homeland
security, hospitality services and gaming applications that have improved not
only communication capability, but also the customer's productivity. WPCS
maintains a union and non-union workforce that is trained and certified in OSHA
safety parameters and all regulations pertaining to communications deployment.
We are also equipped to offer the following standard services: wireless
distribution systems, RCDD design, network integration, video security, fiber
optic cabling, telecommunication systems, audio/visual systems, construction and
trenching.
3
Wireless Infrastructure Services
Wireless infrastructure services include the internal and external design and
installation of a 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 and design to determine 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 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.
Sales and Marketing and Internal Growth
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 and wireless infrastructure services
to many major corporations, government entities and educational institutions. We
had revenue to one customer totaling $4.4 million, which comprised 11.1% of our
total revenue. At April 30, 2005, we had a backlog of unfilled orders believed
to be firm of approximately $14.6 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 eight 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.
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, our local presence combined with the ability to provide
national coverage, and a strong customer base. We use proven methodologies to
rapidly design, install, integrate and manage communications deployments.
4
Acquisition Strategy
In the future, our primary goal is to focus on organic growth opportunities. We
will also consider strategic acquisitions of companies familiar with specialty
communication systems and wireless infrastructure services. The goal for each
acquisition will be to expand the product and services offerings, strengthen our
project services capabilities, expand our customer base and add accretive
revenue and earnings. In this regard, we completed the acquisition of Quality in
November 2004.
Employees
As of April 30, 2005, we employed 300 full time employees, of whom 235 are
project engineers, 25 are project managers, 35 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. The
Company has approximately 110 union employees. A contract with these union
employees expires November 30, 2008.
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.
We have a history of operating losses and may never become profitable.
We incurred a net loss of approximately $85,000 for the year ended April 30,
2005. 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
5
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
7
concerning time and labor costs. If the project 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 13, 2002, we have acquired five companies and we intend to
further expand our operations through targeted, strategic 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.
ITEM 2 - DESCRIPTION OF PROPERTIES
Our principal executive offices are located in approximately 2,550 square feet
of office space in Exton, Pennsylvania. The lease for such space expires in
February 2008. The aggregate annual base rental for this space is $48,769.
We operate our business under operating leases in the following locations:
Location Lease Expiration Date Minimum Annual Rental
-------- --------------------- ---------------------
Fairfield, California (a) February 28, 2011 $94,125
Rocklin, California January 31, 2006 $37,710
San Leandro, California July 31, 2006 $13,756
Auburn, California (b) Month-to-month $64,440
St. Louis, Missouri August 31, 2008 $56,142
Lakewood, New Jersey August 31, 2007 $90,370
(a) The lease for our Fairfield, California location is with a trust, of
which a certain officer is the trustee.
(b) The lease for our Auburn, California location is month to month;
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, we 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 our business. We are 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.
None.
8
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is listed on the Nasdaq SmallCap Stock Market 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, reflective of the
one-for-twelve reverse stock split for all periods presented. Such market
quotations reflect inter-dealer prices, without mark-up, mark-down or commission
and may not necessarily represent actual transactions.
High Low
---- ---
2005
----
First Quarter $14.88 $7.80
Second Quarter 11.28 5.76
Third Quarter 8.28 4.32
Fourth Quarter 7.80 4.50
High Low
2004 ---- ---
----
First Quarter $22.56 $4.68
Second Quarter 20.76 12.24
Third Quarter 20.40 10.92
Fourth Quarter 17.28 10.80
As of July 7, 2005, there were approximately 85 holders of record of our common
stock and the closing bid quotation of our common stock was $5.63 per share.
Dividend Policy
We have never paid any cash dividends on our capital stock and do not anticipate
paying any cash dividends on our common stock 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.
9
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
WPCS International Incorporated is an engineering company that focuses on the
implementation requirements of wireless technology and specialty communication
systems. We provide a range of services including site design, product
integration, security, structured cabling, construction and project management.
As a result of the acquisitions of Invisinet, Inc. on November 13, 2002 and
Walker Comm, Inc. on December 30, 2002, we experienced significant growth in our
overall business and commenced operations in two segments, specialty
communication systems and wireless infrastructure services. With the
acquisitions of Clayborn Contracting Group, Inc. and Heinz Corporation in fiscal
2004 and Quality Communications & Alarm Company in fiscal 2005, we experienced
additional growth in each of these segments.
Significant Transactions and Events
On August 22, 2003, we acquired all of the outstanding shares of Clayborn in
exchange for an aggregate of 68,871 newly issued shares of our common stock with
a fair value of approximately $868,000 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, as defined, of Clayborn and a final payment of any remaining
balance on that date.
On April 2, 2004, we acquired all of the outstanding common stock of Heinz for
$1,000,000, as follows: (1) $700,000 of our common stock, based on the closing
price of its common stock on March 30, 2004 of $11.76 per share, for an
aggregate of 59,524 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 was paid in April
2005, $75,000 is payable on the second anniversary of the closing date and
$50,000 is payable on the third anniversary of the closing date.
On November 16, 2004, we sold an aggregate of 2,083,887 shares of our common
stock and 2,083,887 common stock purchase warrants to eight investors for
$10,000,000. The common stock and the warrants were issued in a private
placement transaction pursuant to Section 4(2) under the Securities Act of 1933.
On November 24, 2004, we acquired all of the outstanding common stock of Quality
for aggregate consideration of approximately $7,400,000 in cash, net of
acquisition transaction costs. The acquisition of Quality gives us additional
project engineering expertise for specialty communication opportunities,
broadens our customer base especially in the public safety and gaming sector,
and expands our geographic presence in the Northeastern United States.
Effective January 10, 2005, a majority of our shareholders approved a
one-for-twelve reverse stock split of our common stock, decreasing the number of
issued and outstanding shares of common stock from 45,849,976 shares to
3,821,385 shares. The par value of the common stock was not affected by the
reverse stock split and remains at $0.0001 per share. Consequently, the reverse
stock split has been reflected retroactively in the accompanying financial
statements and notes for all periods presented and all applicable references as
to the number of common shares and per share information, stock options,
warrants and market prices have been restated to reflect this reverse stock
split.
On March 28, 2005, we began trading on the Nasdaq SmallCap Stock Market. Our
Common Stock is traded under the symbol "WPCS."
Results of Operations
Management currently considers the following events, trends and uncertainties to
be important to understand its results of operations and financial condition:
10
o For the years ended April 30, 2005 and 2004, revenue was approximately
$40,100,000 and $22,100,000, respectively. The increase in revenue was
attributable to organic growth expansion of our customer base and new
contract awards of approximately $7,600,000 and strategic acquisitions
of approximately $10,400,000.
o We operate in two segments, specialty communication systems and
wireless infrastructure services. With the acquisition of Clayborn in
the second quarter of fiscal 2004 and Quality in the third quarter of
fiscal 2005, we experienced additional expansion of the specialty
communication segment. With the acquisition of Heinz in the fourth
quarter of fiscal 2004, we experienced additional expansion of the
wireless infrastructure segment.
o For the years ended April 30, 2005 and 2004, the specialty
communication segment represents approximately 79% of total revenue,
and wireless infrastructure services represent approximately 21% of
total revenue.
o Our primary goal is to focus on organic growth opportunities. We will
also consider strategic acquisitions of companies familiar with
wireless infrastructure and specialty communication systems. The goal
for any future acquisition will be to expand the product and service
offerings, to strengthen our project services capabilities, expand our
customer base and add accretive revenue and earnings.
o As of April 30, 2005, our backlog is approximately $14,600,000. Our
backlog is comprised of the uncompleted portion of services to be
performed under job-specific contracts or purchase orders. We expect
this backlog to be fully recognized as revenue within the next eight
months.
o Our selling, general and administrative expenses decreased as a
percentage of revenue for the year ended April 30, 2005, as compared
to the prior year.
Fiscal Year ended April 30, 2005 Compared to Fiscal Year Ended April 30, 2004
Consolidated results for the year ended April 30, 2005 and 2004 were as follows.
Certain reclassifications have been made to prior year financial statements to
conform to the current presentation.
Year Ended
April 30,
2005 2004
--------------- ---------------
REVENUE $40,148,233 100% $22,076,246 100%
--------------- ---------------
COSTS AND EXPENSES:
Cost of revenue 32,445,470 81% 17,286,099 78%
Selling, general and administrative expenses 7,028,850 17% 4,441,776 20%
Depreciation and amortization 682,397 2% 382,510 2%
--------------- ---------------
Total costs and expenses 40,156,717 100% 22,110,385 100%
--------------- ---------------
OPERATING LOSS (8,484) 0% (34,139) 0%
OTHER EXPENSE:
Interest expense 24,702 0% 14,048 0%
--------------- ---------------
LOSS BEFORE INCOME TAX PROVISION (33,186) 0% (48,187) 0%
Income tax provision 52,096 0% 76,000 1%
--------------- ---------------
NET LOSS ($85,282) 0% ($124,187) -1%
=============== ===============
11
Revenue
We generate our revenue by providing engineering and deployment services for
wireless infrastructure services and specialty communication systems. We provide
a range of engineering services including site design, construction, product
integration, structured cabling, network security, project management and
technical support.
Revenue for the year ended April 30, 2005 was approximately $40,148,000, as
compared to $22,076,000 for the prior year. The increase in revenue was
attributable to organic growth expansion of our customer base and new contract
awards of approximately $7,600,000 from Walker and Clayborn, and approximately
$10,400,000 from the acquisitions of Heinz and Quality.
Total revenue from the specialty communication segment for the years ended April
30, 2005 and 2004 was approximately $31,497,000 or 78.5% and $17,508,000 or
79.3% of total revenue, respectively. Wireless infrastructure segment revenue
for the years ended April 30, 2005 and 2004 was approximately $8,651,000 or
21.5% and $4,568,000 or 20.7% of total revenue, respectively.
Cost of Revenue
Cost of revenue consists of direct costs on contracts, including materials,
direct labor, third party subcontractor services, Walker union benefits and
other overhead costs. Our cost of revenue was approximately $32,445,000 or 80.8%
of revenue for the year ended April 30, 2005, compared to $17,286,000 or 78.3%
for the prior year. The dollar increase in our total cost of revenue is due to
the corresponding increase in revenue during the year ended April 30, 2005 as a
result of organic growth in revenue from Walker and Clayborn and the
acquisitions of Clayborn, Heinz and Quality. In addition, the increase in total
cost of revenue is due to an increase in costs incurred on certain Walker
contracts that were recognized during the year of approximately $1,200,000. In
direct response to these additional costs, we have made certain personnel
changes and initiated additional project management training. The increase in
cost of revenue as a percentage of revenue is due primarily to an increase in
costs incurred on certain Walker contracts, offset by the revenue mix
attributable to the acquisitions of Heinz and Quality.
The specialty communication segment cost of revenue and cost of revenue as a
percentage of revenue for the year ended April 30, 2005 and 2004 was
approximately $25,919,000 and 82.3% and $13,831,000 and 79.0%, respectively. As
discussed above, the dollar increase in our total cost of revenue is due to the
corresponding increase in revenue during the year ended April 30, 2005 as a
result of organic growth in revenue from Walker and Clayborn, and the
acquisitions of Clayborn and Quality. In addition, the increase in total cost of
revenue is due to an increase in costs incurred on certain Walker contracts that
were recognized during the year of approximately $1,200,000. The increase in
cost of revenue as a percentage of revenue is due to an increase in the costs
incurred on certain Walker contracts recognized during the period, partially
offset by lower cost of revenue on revenues attributable to the Quality
acquisition.
Wireless infrastructure segment cost of revenue and cost of revenue as a
percentage of revenue for the year ended April 30, 2005 and 2004 was
approximately $6,526,000 and 75.4% and $3,455,000 and 75.6%, respectively. The
dollar increase in our total cost of revenue is due to the corresponding
increase in revenue during the year ended April 30, 2005 as a result of the
acquisition of Heinz. The decrease in cost of revenue as a percentage of revenue
is due to the revenue mix attributable to the acquisition of Heinz.
Selling, general and administrative expenses
For the year ended April 30, 2005, total selling, general and administrative
expenses were $7,029,000, or 17.5% of total revenue compared to $4,442,000 or
20.1% of revenue for the prior year. The percentage decrease is due to the
management of our cost structure as we leverage incremental revenue dollars in
fiscal 2005. Included in selling, general and administrative expenses for the
year ended April 30, 2005 are $3,656,000 for salaries, commissions, and payroll
taxes. The increase in salaries and payroll taxes compared to the prior year is
due to the increase in headcount as a result of the acquisitions of Clayborn,
Heinz and Quality. Professional fees were $537,000, which include accounting,
legal and investor relation fees. Insurance costs were $1,164,000 and rent for
office facilities was $358,000. Automobile and other travel expenses were
12
$422,000 and telecommunication expenses were $196,000. Other selling, general
and administrative expenses totaled $696,000. For the year ended April 30, 2005,
total selling, general and administrative expenses for the specialty
communication and wireless infrastructure segments were $4,658,000 and
$1,180,000, respectively.
For the year ended April 30, 2004, selling, general and administrative expenses
were $4,442,000 or 20.1% of revenue. Included in the selling, general and
administrative expenses was $2,100,000 for salaries, commissions and payroll
taxes, $566,000 in professional fees and insurance costs of $730,000. Rent for
our office facilities amounted to $250,000. Automobile and other travel expenses
were $259,000 and telecommunication expenses were $133,000. Other selling,
general and administrative expenses totaled $404,000. For the year ended April
30, 2004, total selling, general and administrative expenses for the specialty
communication and wireless infrastructure segments were $2,805,000 and $712,000,
respectively.
Depreciation and amortization
For the year ended April 30, 2005 and 2004, depreciation was approximately
$372,000 and $228,000, respectively. The increase in depreciation is due to the
acquisition of fixed assets from acquiring Clayborn, Heinz, and Quality. The
amortization of customer lists and backlog for the year ended April 30, 2005 was
$310,000 as compared to $154,000 for the same period of the prior year. The
increase in amortization is due to the acquisition of customer lists from
Clayborn, Heinz and Quality, and backlog from Heinz. All customer lists are
amortized over a period of five to six years from the date of their acquisition.
Backlog is amortized over a period of one year from the date of acquisition.
Net loss
Net loss was approximately $85,000 for the year ended April 30, 2005. Net loss
included federal and state income tax provisions of approximately $52,000. The
variation in effective tax rates between periods is primarily due to the
Clayborn and Heinz acquisitions and certain book-to-tax permanent differences.
We incurred a net loss of approximately $124,000 for the year ended April 30,
2004.
Liquidity and capital resources
At April 30, 2005, we had working capital of approximately $5,145,000, which
consisted of current assets of approximately $13,339,000 and current liabilities
of $8,194,000.
Operating activities used $2,682,000 in cash during the year ended April 30,
2005. This was mainly comprised of $85,000 of net loss plus $601,000 in net
non-cash charges, a $1,899,000 increase in accounts receivable, a $1,214,000
decrease in costs and estimated earnings in excess of billings on uncompleted
contracts, a $537,000 increase in inventory, $337,000 decrease in accounts
payable and accrued expenses, $1,147,000 decrease in billings in excess of costs
and estimated earnings on uncompleted contracts payable, $329,000 decrease in
income taxes payable and a $163,000 net increase in other assets.
Our investing activities utilized $7,025,000 in cash during the year ended April
30, 2005, which consisted of $216,000 paid for property and equipment,
$6,709,000 for the acquisition of Quality, net of cash acquired of $164,000,
$82,000 for the acquisition of Heinz and $18,000 of acquisition earn-out
payments and other acquisition transaction costs.
Our financing activities provided cash of $8,711,000 during the year ended April
30, 2005. Financing activities included net proceeds from the issuance of common
stock of $9,114,000, repayments on lines of credit of $304,000, and repayments
of equipment loans and capital lease obligations of approximately $99,000.
Our capital requirements depend on numerous factors, including the market for
our services, the resources we devote to developing, marketing, selling and
supporting our business, the timing and extent of establishing additional
markets and other factors. On June 3, 2005, we entered into a credit agreement
with a new commercial bank. The credit agreement (the "Credit Agreement"),
provides for a revolving line of credit in an amount not to exceed $5,000,000,
together with a letter of credit facility not to exceed $500,000. We also
entered into security agreements, pursuant to which each subsidiary granted a
security interest to the bank in all of their assets.
Pursuant to the terms of the Credit Agreement, we are permitted to borrow up to
$3,000,000 under the revolving credit line, based upon eligible receivables.
Once we have provided financial statements which evidence that we have earnings
before interest, taxes, depreciation and amortization of (i) $750,000 for the
13
quarter ended July 31, 2005, (ii) $750,000 for the quarter ended October 31,
2005, and (iii) $2,500,000 for the year ended April 30, 2006, the revolving
commitment amount will be increased to $5,000,000. The Credit Agreement contains
customary covenants, including but not limited to (i) restrictions on the
permitted ratio of total unsubordinated liabilities to tangible net worth plus
subordinated indebtedness, (ii) the Company's total tangible net worth, (iii)
working capital, (iv) minimum earnings before interest, taxes, depreciation and
amortization, and (v) dividend restrictions. The loan commitment shall expire on
August 31, 2008. We may prepay the loan at any time.
Loans under the Credit Agreement bear interest at a rate equal to either the
bank's reference rate plus one half (0.5%) percent, or LIBOR plus two and
three-quarters (2.75%) percent, as we may request. We paid a facility fee to the
bank of $50,000 on the closing date.
We used the initial funds provided by the loan, in the gross amount of
$3,000,000, to repay existing bank debt at Walker of approximately $672,000, for
the payment of approximately $742,000 to the former shareholders of our Quality
subsidiary for monies due to them pursuant to the terms of the purchase of their
company, and for working capital. A $500,000 letter of credit was re-issued in
favor of Walker's surety bonding company as collateral for performance and
payment bond requirements.
On November 16, 2004, we sold an aggregate of 2,083,887 shares of our common
stock and 2,083,887 common stock purchase warrants to eight investors for
$10,000,000. The common stock and the warrants were issued in a private
placement transaction pursuant to Section 4(2) under the Securities Act of 1933.
Pursuant to the terms of sale, we filed a resale registration statement on
December 30, 2004 covering the common stock and the common stock issuable upon
exercise of the warrants, which was declared effective by the SEC on January 18,
2005.
Each warrant is exercisable for a period of five years at a price of $8.40 per
share, subject to certain adjustments. The exercise price of the warrants is
subject to adjustment for subsequent lower price issuances, as well as customary
adjustment provisions for stock splits, combinations, dividends and the like.
The warrants are callable, upon 30 days notice, should the common stock trade at
or above $25.20 per share for 25 out of 30 consecutive trading days. A maximum
of 20% of the warrants may be called in any three-month period.
In connection with sale of the common stock and warrants, we effectuated a
one-for-twelve reverse split of our outstanding common stock on January 10,
2005. We also completed listing of our common stock on the Nasdaq SmallCap Stock
Market.
On November 24, 2004, we acquired Quality for the aggregate consideration of
approximately $7,400,000 in cash, net of acquisition transaction costs. A formal
purchase price allocation has been completed and the amounts assignable to
tangible assets, other intangible assets and goodwill have been determined. The
acquisition of Quality gives us additional project engineering expertise for
specialty communication opportunities, broadens our customer base especially in
the public safety sector and gaming industry, and expands our geographic
presence in the Northeastern United States. The financing for this transaction
was completed through the issuance of the common stock as described above.
At April 30, 2005, we had cash and cash equivalents of $989,000, working capital
of approximately $5,145,000 and revolving lines of credit available of $318,000.
With the additional capital resources raised from the issuance of the common
stock, funds available from the recently obtained Credit Agreement and
internally available funds, we believe that we have sufficient capital to meet
our needs through April 30, 2006. 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.
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. While all these significant
accounting policies impact our financial condition and results of operations, we
view certain of these policies as critical. Policies determined to be critical
are those policies that have the most significant impact on our consolidated
financial statements and require management to use a greater degree of judgment
and estimates. Actual results may differ from those estimates.
14
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 our 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 revenue and expenses during the reporting
period. The most significant estimates relate to the 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.
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 a significant
decrease in the market value of an asset, significant changes in the extent or
manner for which the asset is being used or in its physical condition, a
significant change, delay or departure in our business strategy related to the
asset, significant negative changes in the business climate, industry or
economic condition, or 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.
We performed our annual review for goodwill impairment in the fourth quarter of
fiscal 2005 and 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, Clayborn and Quality 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
15
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 deployment services
for wireless infrastructure services and specialty communication systems. We
provide a range of engineering services including site design, construction,
product integration, structured cabling, network security, project management
and technical support.
We record revenue and profit on these contracts on a percentage-of-completion
basis on the cost-to-cost method. Contracts in process are valued at cost plus
accrued profits less earned revenues and progress payments on uncompleted
contracts. Contracts are generally considered substantially complete when
engineering is completed and/or site construction is completed. 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. Cost estimates are reviewed monthly on a contract-by-contract
basis, and are revised periodically throughout the life of the contract such
that adjustments to profit resulting from revisions are made cumulative to the
date of the revision. Significant management judgments and estimates, including
the estimated cost to complete projects, which determines the project's percent
complete, must be made and used in connection with the revenue recognized in the
accounting period. 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 December 2004, the FASB issued SFAS No. 123(R) (revised 2004), "Share-Based
Payment", which amends FASB Statement No. 123 and will be effective for public
companies that are small business insurers at the beginning of the next fiscal
year that begins after December 15, 2005. The new standard will require us to
expense the fair value of employee stock options and other share-based payments
over the vesting period. The FASB believes the use of a binomial lattice model
for option valuation is capable of more fully reflecting certain characteristics
of employee share options compared to the Black-Scholes options pricing model.
The new standard may be adopted in one of three ways - the modified prospective
transition method, a variation of the modified prospective transition method or
the modified retrospective transition method. We are currently evaluating how we
will adopt the standard and evaluating the effect that the adoption of SFAS
123(R) will have on our financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4." This statement amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges..." SFAS No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of SFAS 151 shall be applied
prospectively and are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005, with earlier application permitted for inventory
costs incurred during fiscal years beginning after the date this Statement was
issued. The adoption of SFAS No. 151 is not expected to have a material impact
on our financial position or results of operations.
16
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
No. 153 is not expected to have a material impact on our financial position or
results of operations.
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.
17
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 Sheets as of April 30, 2005 and 2004 F-3 - F-4
Consolidated Statements of Operations for the years ended
April 30, 2005 and 2004 F-5
Consolidated Statement of Shareholders' Equity for the years ended
April 30, 2005 and 2004 F-6 - F-7
Consolidated Statements of Cash Flows for the years ended
April 30, 2005 and 2004 F-8 - F-10
Notes to Consolidated Financial Statements F-11 - F-25
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
WPCS International Incorporated
We have audited the accompanying consolidated balance sheets of WPCS
International Incorporated and Subsidiaries as of April 30, 2005 and 2004, 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of WPCS
International Incorporated and Subsidiaries as of April 30, 2005 and 2004, 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 15, 2005
F-2
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, APRIL 30,
ASSETS 2005 2004
------------------- -------------------
CURRENT ASSETS:
Cash and cash equivalents $ 989,252 $ 1,984,636
Accounts receivable, net of allowance of $75,786 and $61,779
at April 30, 2005 and 2004, respectively 9,907,316 5,909,879
Costs and estimated earnings in excess of billings on
uncompleted contracts 908,955 2,123,031
Inventory 885,624 104,799
Prepaid expenses and other current assets 536,331 264,076
Deferred income taxes 112,000 60,000
------------------- -------------------
Total current assets
13,339,478 10,446,421
PROPERTY AND EQUIPMENT, net 1,560,271 1,005,760
CUSTOMER LISTS 1,158,388 603,333
GOODWILL 13,961,642 8,681,870
OTHER ASSETS 156,932 144,713
------------------- -------------------
Total assets $ 30,176,711 $ 20,882,097
=================== ===================
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 SHAREHOLDERS' EQUITY 2005 2004
------------------- -------------------
(Note 1)
CURRENT LIABILITIES:
Borrowings under lines of credit $ 382,281 $ 551,000
Current maturities of capital lease obligation 2,073 2,534
Current maturities of loans payable 187,420 94,056
Accounts payable and accrued expenses 5,338,813 4,732,200
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,204,491 2,162,452
Due to shareholders 915,290 88,157
Income taxes payable 24,790 223,753
Deferred income taxes 139,000 196,100
------------------- -------------------
Total current liabilities
8,194,158 8,050,252
Capital lease obligation, net of current portion - 2,073
Loans payable, net of current portion 261,455 170,362
Due to shareholders, net of current portion 927,005 1,026,755
Deferred income taxes 439,000 344,900
------------------- -------------------
Total liabilities
9,821,618 9,594,342
------------------- -------------------
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, 3,821,385
and 1,737,498 shares issued and outstanding at April 30, 2005 and
2004, respectively 382 174
Additional paid-in capital 21,107,240 11,993,387
Unearned consulting services - (38,559)
Accumulated deficit (752,529) (667,247)
------------------- -------------------
Total shareholders' equity 20,355,093 11,287,755
------------------- -------------------
Total liabilities and shareholders' equity $ 30,176,711 $ 20,882,097
=================== ===================
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,
2005 2004
------------------- -------------------
(Note 1)
REVENUE $40,148,233 $22,076,246
------------------- -------------------
COSTS AND EXPENSES:
Cost of revenue 32,445,470 17,286,099
Selling, general and administrative expenses 7,028,850 4,441,776
Depreciation and amortization 682,397 382,510
------------------- -------------------
Total costs and expenses 40,156,717 22,110,385
------------------- -------------------
OPERATING LOSS (8,484) (34,139)
OTHER EXPENSE:
Interest expense 24,702 14,048
------------------- -------------------
LOSS BEFORE INCOME TAX PROVISION (33,186) (48,187)
Income tax provision 52,096 76,000
------------------- -------------------
NET LOSS ($85,282) ($124,187)
=================== ===================
Basic and diluted net loss per common share ($0.03) ($0.08)
=================== ===================
Basic and diluted weighted average number of common
shares outstanding 2,679,529 1,521,697
=================== ===================
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Preferred Stock Common Stock Additional Unearned Total
------------------------ ----------------------- Paid-In Consulting Accumulated Shareholders'
Shares Amount Shares Amount Capital Services Deficit Equity
----------- ------------ ----------- ----------- ------------ ------------- -------------- ---------------
BALANCE, MAY 1, 2003
(Note 1) 1,000 $ - 1,089,903 $ 109 $8,003,838 $ - $ (543,060) $7,460,887
Conversion of Series C
Preferred Stock to
common stock (1,000) - 148,833 15 (15) - - -
Net proceeds from
issuance of common
stock through
private placement - - 370,367 37 2,174,231 - - 2,174,268
Issuance of common
stock, acquisition
of Clayborn Contracting
Group, Inc. - - 68,871 7 867,761 - - 867,768
Issuance of common
stock, acquisition
of Heinz Corporation - - 59,524 6 699,994 - - 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) - -
Amortization of
unearned consulting
services - - - - - 12,853 - 12,853
Net loss - - - - - - (124,187) (124,187)
----------- ------------ ----------- ----------- ------------ ------------- -------------- ---------------
BALANCE, APRIL 30, 2004
(Note 1) - $ - 1,737,498 $ 174 $11,993,387 $ (38,559) $ ( 667,247) $ 11,287,755
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
Preferred Stock Common Stock Additional Unearned Total
------------------------ ----------------------- Paid-In Consulting Accumulated Shareholders'
Shares Amount Shares Amount Capital Services Deficit Equity
----------- ------------ ----------- ----------- ------------ ------------- -------------- --------------
Net proceeds from issuance
of common stock through
private placement - - 2,083,887 208 9,113,853 - - 9,114,061
Amortization of unearned
consulting services - - - - - 38,559 - 38,559
Net loss - - - - - - (85,282) (85,282)
----------- ------------ ----------- ----------- ------------ ------------- -------------- --------------
BALANCE, APRIL 30, 2005 - $ - 3,821,385 $382 $21,107,240 $ - ($752,529) $ 20,355,093
=========== ============ =========== =========== ============ ============= ============== ==============
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,
2005 2004
------------------- -------------------
OPERATING ACTIVITIES :
Net loss $ (85,282) $ ( 124,187)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 682,397 382,510
Provision for doubtful accounts 14,007 91,137
Amortization of unearned consulting services 38,559 -
Fair value of stock options granted - 209,019
Deferred income taxes (134,000) (218,800)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable (1,898,625) (2,422,541)
Costs and estimated earnings in excess of billings on uncompleted contracts 1,214,076 (1,379,816)
Inventory (536,772) 11,976
Prepaid expenses (14,306) (51,319)
Other assets (148,596) (24,032)
Accounts payable and accrued expenses (337,355) 2,354,024
Billings in excess of costs and estimated earnings on uncompleted contracts (1,146,930) 1,908,541
Income taxes payable (328,751) 200,053
------------------- -------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,681,578) 936,565
------------------- -------------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (215,844) (86,011)
Acquisition of Clayborn, net of cash received - (722,177)
Acquisition of Quality, net of cash received (6,708,904) -
Acquisition of Heinz, net of cash received (82,283) (109,194)
Acquisition earn-out and other transaction costs (17,553) (497,677)
------------------- -------------------
NET CASH USED IN INVESTING ACTIVITIES (7,024,584) (1,415,059)
------------------- -------------------
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
April 30,
2005 2004
------------------- -------------------
FINANCING ACTIVITIES:
Repayment of advances from officers - (100,000)
Net proceeds from issuance of common stock 9,114,061 2,174,268
(Repayments) borrowings under lines of credit (303,848) 461,000
Repayments of loans payable (96,901) (237,390)
Payments of capital lease obligations (2,534) (2,295)
------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 8,710,778 2,295,583
------------------- -------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (995,384) 1,817,089
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,984,636 167,547
------------------- -------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $989,252 $ 1,984,636
=================== ===================
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,
2005 2004
------------------- -------------------
(Note 1)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 32,196 $ 15,770
=================== ===================
Income taxes $ 434,289 $ 105,193
=================== ===================
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with acquisitions
of Clayborn and Heinz $ - $ 1,567,768
=================== ===================
Conversion of Series C preferred stock to common stock $ - $ 15
=================== ===================
Unpaid earn-out consideration related to acquisitions $ - $ 1,114,912
=================== ===================
Unpaid purchase price adjustments related to acquisition $ 742,295 $ -
=================== ===================
Issuance of note for net noncash assets received in acquisition $ - $ 182,648
=================== ===================
Reversal of accruals established in purchase accounting $ 40,022 $ -
=================== ===================
Issuance of notes for property and equipment $ 192,210 $ 32,339
=================== ===================
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"), Walker Comm Inc. ("Walker"),
Clayborn Contracting Group, Inc. ("Clayborn") from August 22, 2003 (date of
acquisition), Heinz Corporation ("Heinz") from April 2, 2004 (date of
acquisition), and Quality Communications & Alarm Company ("Quality") from
November 24, 2004 (date of acquisition), collectively the "Company". Certain
reclassifications have been made to prior period financial statements to conform
to the current presentation.
The Company is an engineering company that focuses on the implementation
requirements of wireless technology and specialty communication systems. The
Company provides a range of services including site design, product integration,
security, structured cabling, construction, project management and technical
support.
Effective January 10, 2005, a majority of the Company's shareholders approved a
one-for-twelve reverse stock split of the Company's common stock, decreasing the
number of issued and outstanding shares of common stock from 45,849,976 shares
to 3,821,385 shares. The par value of the common stock was not affected by the
reverse stock split and remains at $0.0001 per share. Consequently, the reverse
stock split has been reflected retroactively in the accompanying financial
statements and notes for all periods presented and all applicable references as
to the number of common shares and per share information, stock options,
warrants and market prices have been restated to reflect this reverse stock
split. In addition, shareholders' equity has been restated for all periods
presented for the aggregate par value of the number of common shares that were
reclassified to additional paid-in capital as a result of the reverse stock
split.
On August 22, 2003, the Company acquired all of the outstanding shares of
Clayborn in exchange for an aggregate of 68,871 newly issued shares of the
Company's common stock with a fair value of approximately $868,000 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, as defined, of Clayborn and a final
payment of any remaining balance on that date.
On April 2, 2004, the Company acquired all of the outstanding common stock of
Heinz for $1,000,000, as follows: (1) $700,000 of the Company's common stock,
based on the closing price of its common stock on March 30, 2004 of $11.76 per
share, for an aggregate of 59,524 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 was paid in April 2005 and $75,000 is payable on the second anniversary
of the closing date and $50,000 is payable on the third anniversary of the
closing date.
On November 24, 2004, we acquired all of the issued and outstanding common stock
of Quality. The aggregate consideration paid by the Company to the Quality
selling shareholders, net of acquisition transaction costs was $7,442,295, of
which $6,700,000 was paid at closing. Additional purchase price adjustments of
$742,295 were paid in June 2005 to settle working capital adjustments and income
tax reimbursements related to the Company electing to make an Internal Revenue
Code 338 (h) (10) election. For income tax purposes, this election results in a
stepped up basis of assets and liabilities and will result in future income tax
deductions.
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 at time of purchase 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 $1,333,413 which is expected to be
collected within one year.
Inventory
As a result of the acquisition of Quality, inventory consists primarily of
materials, parts and supplies principally valued using the first-in-first-out
(FIFO) 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 charge the
cost of depreciable assets to operations over their estimated service lives.
Repairs and maintenance costs are charged to operations as incurred.
Goodwill
In accordance with the guidelines of Statement of Financial Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," 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
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment.
F-12
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, 2005 and 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, 2005 and 2004. 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 years ended April 30, 2005 and 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
----------------
Beginning balance, May 1, 2004 8,681,870
Reversal of accruals established in purchase accounting (40,022)
Heinz acquisition cost adjustments (183,480)
Quality acquisition 5,496,064
Transaction costs 7,210
----------------
Ending balance, April 30, 2005 $ 13,961,642
================
Revenue Recognition
The Company generates its revenue by providing engineering and deployment
services for wireless infrastructure services and specialty communication
systems The Company provides a range of engineering services including site
design, construction, product integration, structured cabling, network security,
project management and technical support.
The Company records revenue and profit on these contracts on a
percentage-of-completion basis using 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. Cost estimates are reviewed monthly on a contract-by-contract
basis, and are revised periodically throughout the life of the contract such
that adjustments to profit resulting from revisions are made cumulative to the
date of the revision. Significant management judgments and estimates, including
the estimated cost to complete projects, which determines the project's percent
complete, must be made and used in connection with the revenue recognized in the
accounting period. 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.
F-13
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Concentrations
For the year ended April 30, 2005, the Company had revenue from one customer
totaling approximately $4,400,000, which comprised 11.1% of total revenue.
Management believes there is no significant business vulnerability regarding the
concentration of revenue due to the Company's strong relationship with this
customer and the customer's financial strength.
The Company has approximately 110 union employees. A contract with these union
employees expires November 30, 2008.
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
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) 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, 2005, the Company had 454,896
stock options and 2,572,171 warrants outstanding which are potentially dilutive
securities. At April 30, 2004, the Company had 299,322 stock options and 425,784
warrants outstanding which are potentially dilutive securities. Basic and fully
diluted EPS is the same since the effect of the assumed exercise of stock
options and warrants would be antidilutive.
Stock-Based Compensation Plans
SFAS 123(R) (revised December 2004), Share-Based Payment, an amendment of SFAS
123, Accounting for Stock-Based Compensation, established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As a result of the amendments to SFAS
123, the Company will be required to expense the fair value of employee stock
options beginning with its fiscal year ending April 30, 2007. The new standard
will require the Company to expense the fair value of employee stock options and
other share-based payments over the vesting period. The FASB believes the use of
a binomial lattice model for option valuation is capable of more fully
reflecting certain characteristics of employee share options compared to the
Black-Scholes options pricing model. The new standard may be adopted in one of
three ways - the modified prospective transition method, a variation of the
modified prospective transition method or the modified retrospective transition
method. We are currently evaluating how we will adopt the standard and
evaluating the effect that the adoption of SFAS 123(R) will have on our
financial position or results of operations.
As currently permitted by SFAS 123, the Company has elected to continue to
account for its stock-based compensation plans in accordance with the
intrinsic-value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees. Under
APB 25, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. The
exercise price of all options granted to employees has been equal to or greater
than the fair market value at the date of grant and, accordingly, the Company
has not recognized compensation expense associated with its stock option plan.
By making that election, the Company is required under SFAS 123 to provide pro
forma disclosures of net loss and net loss per common share as if the fair value
based method of accounting had been applied. The following table illustrates the
effect on net loss and net loss per common share for fiscal 2005 and 2004 as if
the Company had applied the fair value recognition provisions of SFAS 123 to
stock-based compensation.
F-14
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies the intrinsic value method in accounting for its stock-based
compensation plan. Had the Company measured compensation under the fair value
method for stock options granted and amortized the cost over the related vesting
period, the Company's net loss and net loss per share attributable to common
shareholders would have been as follows:
2005 2004
---- ----
Net loss, as reported ($85,282) ($124,187)
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax (452,820) (300,838)
---------- ----------
Net loss, Pro forma ($538,102) ($425,025)
========== ==========
Basic net loss per share:
As reported ($0.03) ($0.08)
Pro forma ($0.20) ($0.28)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes Option pricing model. The following assumptions were used for the
year ended April 30, 2005: risk-free interest rate range of 3.51% to 4.22%,
dividend yield of 0%, expected life of 5 years and volatility range 28.4% to
44.9%. For the year ended April 30, 2004, risk-free interest rate range of 2.80%
to 3.61%, dividend yield of 0%, expected life of 5 years and volatility range
71.0% to 73.2% were used.
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 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 November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4." This statement amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges..." SFAS No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity
of the production facilities. The provisions of SFAS 151 shall be applied
prospectively and are effective for inventory costs incurred during fiscal years
beginning after June 15, 2005, with earlier application permitted for inventory
costs incurred during fiscal years beginning after the date this Statement was
issued. The adoption of SFAS No. 151 is not expected to have a material impact
on our financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS
No. 153 is not expected to have a material impact on our financial position or
results of operations.
F-15
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS
In accordance with SFAS No. 141, "Business Combinations," acquisitions of
businesses are accounted for under the purchase method of accounting. Under the
purchase method of accounting, assets acquired and liabilities assumed are
recorded at their estimated fair values. Goodwill is recorded to the extent the
purchase price consideration, including certain acquisition and closing costs,
exceeds the fair value of the net identifiable assets acquired at the date of
the acquisition.
Clayborn
On August 22, 2003, the Company completed a merger with Clayborn, a California
corporation. 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
$2,932,000. The Company acquired all of the issued and outstanding shares of
Clayborn in exchange for $900,000 cash consideration and $64,000 of transaction
costs, and 68,871 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 , as defined, of Clayborn and a final payment of any
remaining balance on that date.
The adjusted 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 1,775,447
------------------
3,661,091
------------------
Liabilities assumed:
Accounts payable (294,992)
Accrued expenses (136,119)
Notes payable (184,611)
Deferred tax liability (113,800)
------------------
(729,522)
------------------
Purchase price $ 2,931,569
==================
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 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
$11.76 per share, for an aggregate of 59,524 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 was paid in April 2005, $75,000 is payable on the
second anniversary 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 initial current and
long-term discounted present value at April 2, 2004 of this note was $71,429 and
$111,219, respectively.
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.
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 income approaches. The initial purchase price allocation in 2004 has been
adjusted as a result of final valuation in 2005, with fixed assets increasing in
value by $24,000, customer lists being valued at $220,000 and backlog being
valued at $65,000, resulting in a decrease in goodwill by these combined
amounts. Accordingly, a deferred tax liability of $119,000 was recorded since
the amortization of customer lists and backlog is not available as a tax
deduction to the Company. The aggregate changes resulted in goodwill being
decreased to approximately $847,000 as of the acquisition date.
The final purchase price allocation, as adjusted, has been determined as
follows:
Assets purchased:
Cash $ 8,052
Accounts receivable 593,667
Costs in excess of billings 103,459
Fixed assets 47,440
Customer lists 220,000
Backlog 65,000
Other assets 71,128
Goodwill 846,866
---------------------
1,955,612
---------------------
Liabilities assumed:
Accounts payable (494,503)
Accrued expenses (130,694)
Line of credit (90,000)
Notes payable (80,942)
Billings in excess of cost (29,223)
Deferred tax liability (119,000)
---------------------
(944,362)
---------------------
Purchase price $ 1,011,250
=====================
F-17
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quality
On November 24, 2004, the Company acquired all of the issued and outstanding
common stock of Quality. The aggregate consideration paid by the Company to the
Quality selling shareholders, net of acquisition transaction costs of $172,578,
was $7,442,295, of which $6,700,000 was paid at closing. Additional purchase
price adjustments of $742,295 were paid in June 2005 to settle working capital
adjustments and income tax reimbursements related to the Company electing to
make an Internal Revenue Code 338 (h) (10) election. For income tax purposes,
this election results in a stepped up basis of assets and liabilities and will
result in future income tax deductions.
Quality is a Lakewood, New Jersey based provider of specialty communication
services. The acquisition of Quality gives the Company additional project
engineering expertise for specialty communication opportunities, broadens its
customer base especially in the public safety sector and gaming industry, and
expands its geographic presence in the Northeastern United States. The financing
for this transaction was completed through the issuance of common stock as
described in Note 11.
A valuation of certain assets was completed, including property and equipment,
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 income
approaches.
The final purchase price allocation has been determined as follows:
Assets purchased:
Cash $ 163,674
Accounts receivable 2,124,587
Inventory 244,053
Fixed assets 495,145
Prepaid expenses 70,447
Customer lists 580,000
Other assets 6,000
Goodwill 5,496,064
---------------------
9,179,970
---------------------
Liabilities assumed:
Accounts payable (912,736)
Accrued expenses (271,991)
Income taxes payable (84,663)
Line of credit borrowings (135,129)
Notes payable (160,578)
---------------------
(1,565,097)
---------------------
Purchase price $ 7,614,873
=====================
F-18
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial information presents the combined
results of operations of the Company and Quality as if the acquisition had
occurred on May 1, 2004, and the Company, Clayborn, Heinz and Quality, as if the
acquisitions had occurred on May 1, 2003, 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 and the issuance of common stock
described in Note 11 to finance the acquisition of Quality. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company, Clayborn, Heinz, and Quality been a
single entity during these periods.
2005 2004
----------------- ----------------
Revenue $ 46,810,720 $ 35,830,021
Net income $ 59,741 $ 167,227
Weighted average number of shares used in calculation:
Basic net income per share 3,821,385 3,821,385
Diluted net income per share 3,871,845 4,069,476
Pro forma net income per common share
Basic $ 0.02 $ 0.04
Diluted $ 0.02 $ 0.04
For all acquisitions, customer lists are amortized over a period of five to six
years and backlog is amortized over a period of one year from the date of
acquisition. The Company recorded amortization expense related to customer lists
and backlog of $310,000 and $154,000 for the years ended April 30, 2005 and
2004, respectively. With the exception of goodwill related to the Quality
acquisition, any future goodwill impairments will not be 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:
2005 2004
-------------------- ---------------------
Costs incurred on uncompleted contracts $ 25,474,753 $ 17,574,035
Estimated contract profit 4,983,102 4,699,280
-------------------- ---------------------
30,457,855 22,273,315
Less: billings to date 30,753,391 22,312,736
-------------------- ---------------------
Net billings in excess ($295,536) ($39,421)
==================== =====================
Costs and estimated earnings in excess of billings $ 908,955 $ 2,123,031
Billings in excess of costs and estimated earnings
on uncompleted contracts (1,204,491) (2,162,452)
-------------------- ---------------------
Net billings in excess ($295,536) ($39,421)
==================== =====================
F-19
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:
Estimated
useful life
(years) 2005 2004
-------------- --------------- ----------------
Furniture and fixtures 5 - 7 $135,383 $ 163,778
Computers and software 3 373,325 247,062
Office equipment 5 - 7 46,480 30,437
Vehicles 5 - 7 1,141,011 624,304
Machinery and equipment 5 310,681 281,757
Leasehold improvements 3 - 10 218,938 192,349
--------------- ----------------
2,225,818 1,539,687
Less accumulated depreciation
and amortization 665,547 533,927
--------------- ----------------
$ 1,560,271 $ 1,005,760
=============== ================
Depreciation and amortization expense for property and equipment for the years
ended April 30, 2005 and 2004 was approximately $372,000 and $228,000,
respectively.
NOTE 6 - LINE OF CREDIT
Walker maintained a revolving line of credit facility with a commercial bank,
with a borrowing limit up to 70% of eligible Walker accounts receivable. As of
April 30, 2005, the borrowing base was $700,000 and the outstanding balance was
approximately $382,000. Effective August 30, 2004, the amount available to
Walker was decreased from $1,200,000 to $700,000 to support a $500,000 letter of
credit issued in favor of Walker's surety bonding company. In August 2004,
Walker was awarded a contract of approximately $5,000,000, which required
performance and payment bonds. In order to provide the bonds, the surety bonding
company required a letter of credit for 10% of the total contract award. The
line of credit was collateralized by all of Walker's accounts receivable,
inventory and equipment and bore interest at the Wall Street Journal Prime
Index Rate plus 1.5% (7.25% as of April 30, 2005). In addition, the Company and
certain executive officers of the Company personally guaranteed this line of
credit facility. On June 3, 2005, this line of credit was paid off in connection
with the credit agreement described below.
On June 3, 2005, the Company entered into a credit agreement with a new
commercial bank. The credit agreement (the "Credit Agreement"), provides for a
revolving line of credit in an amount not to exceed $5,000,000, together with a
letter of credit facility not to exceed $500,000. The Company also entered into
security agreements with the bank, pursuant to which each subsidiary granted a
security interest to the bank in all of their assets.
Pursuant to the terms of the Credit Agreement, the Company is permitted to
borrow up to $3,000,000 under the revolving credit line, based upon eligible
receivables. Once the Company has provided financial statements to the bank
which evidence that the Company has earnings before interest, taxes,
depreciation and amortization of (i) $750,000 for the quarter ended July 31,
2005, (ii) $750,000 for the quarter ended October 31, 2005, and (iii) $2,500,000
for the year ended April 30, 2006, the revolving commitment amount will be
increased to $5,000,000. The Credit Agreement contains customary covenants,
including but not limited to (i) restrictions on the permitted ratio of total
unsubordinated liabilities to tangible net worth plus subordinated indebtedness,
(ii) the Company's total tangible net worth, (iii) working capital, (iv) minimum
earnings before interest, taxes, depreciation and amortization, and (v) dividend
restrictions. The loan commitment shall expire on August 31, 2008. The Company
may prepay the loan at any time.
Loans under the Credit Agreement bear interest at a rate equal to either the
bank's reference rate plus one half (0.5%) percent, or LIBOR plus two and
three-quarters (2.75%) percent, as the Company may request. The Company paid a
facility fee to the bank of $50,000 on the closing date.
F-20
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company used the initial funds provided by the loan, in the gross amount of
$3,000,000, to repay existing bank debt at Walker of approximately $672,000, for
the payment of approximately $742,000 to the former shareholders of our Quality
subsidiary for monies due to them pursuant to the terms of the purchase of their
company, and for working capital. A $500,000 letter of credit was also re-issued
in favor of Walker's surety bonding company for performance and payment bond
collateral requirements described above.
NOTE 7 - RELATED PARTY TRANSACTIONS
In connection with the acquisition of Walker, the Company assumed a ten-year
lease with a trust, of which, a certain officer of the Company is the trustee,
for a building and land located in Fairfield, California, which is occupied by
its Walker subsidiary. For the years ended April 30, 2005 and 2004 the rent paid
for this lease was $88,000 and $56,000, respectively.
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, as defined,
of Clayborn and the payment of the remainder on that date.
In connection with the acquisition of Heinz, a $200,000 non-interest bearing
promissory note was issued. Of the $200,000, $75,000 was paid in April 2005,
$75,000 is payable on the second anniversary of the closing date and $50,000 is
payable on the third anniversary of the closing date.
In connection with the acquisition of Quality, approximately $742,000 of
additional purchase price consideration was paid to the selling shareholders in
June 2005 for working capital adjustments and income tax reimbursements.
NOTE 8 - RETIREMENT PLANS
The Company and its subsidiaries participate in employee savings plans 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
plans. There were $8,800 and $4,000 in contributions made for the years ended
April 30, 2005 and 2004, respectively.
The Company also contributes to multi-employer pension plans which provide
benefits to union employees covered by a collective bargaining agreement. Cost
of revenue includes approximately $2,178,000 and $1,210,000 for such costs for
the years ended April 30, 2005 and 2004, respectively.
NOTE 9 - INCOME TAXES
The provision for income taxes for the years ended at April 30, 2005 and 2004 is
summarized as follows:
2005 2004
---------------- ----------------
Current
Federal $ 99,000 $ 177,000
State 87,096 117,800
Deferred
Federal (76,000) (49,000)
State (58,000) (169,800)
---------------- ----------------
Totals $ 52,096 $ 76,000
================ ================
F-21
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The actual provisions for income taxes reflected in the consolidated statements
of operations for the years ended April 30, 2005 and 2004 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:
2005 2004
-------------- --------------
Expected tax benefit at statutory rate (34%) ($12,000) ($16,000)
State and local taxes, net of federal tax benefit 19,000 76,000
Increase in valuation allowance 12,000 16,000
Other 33,096 -
-------------- --------------
$ 52,096 $76,000
============== ==============
The tax effects of temporary differences which give rise to deferred tax assets
and liabilities is summarized as follows:
2005 2004
-------------------------------
Deferred tax assets:
Net operating loss carryforward $ 113,000 $ 60,000
Allowance for doubtful accounts 29,000 26,000
Reserve for loss on work-in-progress 13,000 -
Customer lists 10,000 -
Federal benefit of deferred state tax liabilities 20,000 34,000
Valuation allowance (73,000) (60,000)
-------------------------------
Net deferred tax assets - current 112,000 60,000
-------------------------------
Deferred tax liabilities:
Sec 481(a) adjustment for cash to accrual basis accounting
- current (104,000) (106,000)
- long term - (106,000)
Non-deductible amortization of purchase price
Inventory - current (15,000) (29,000)
Fixed assets - long term (117,000) (132,000)
Goodwill - long term (65,000) -
Federal benefit of deferred state tax liabilities - current (20,000) -
Customer lists - long term (257,000) (168,000)
-------------------------------
Total (578,000) (541,000)
-------------------------------
Net deferred tax liabilities $ (466,000) $ (481,000)
===============================
At April 30, 2005, the Company has net operating loss carryforwards for state
tax purposes approximating $1,170,000 expiring through 2025. Due to the
uncertainty of recognizing a tax benefit on these losses in certain states, the
Company has provided a valuation allowance of $73,000 against the total deferred
tax asset of $113,000 related to these losses.
NOTE 10 - STOCK OPTION PLAN
The Company established a nonqualified stock option plan pursuant to which
options to acquire a maximum of 416,667 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, 2005, there were 5,771 shares available for grant under the 2002 Plan.
From time to time, the Company issues stock options to employees outside the
plan. In 2005, the Company issued 44,000 stock options to employees outside the
plan.
F-22
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the activity of the employee stock option plan
for the year ended April 30, 2005 and 2004:
Number of Weighted-average
Shares Exercise Price
------------- ----------------
Outstanding, May 1, 2003 6,418 $17.41
Granted 334,864 $12.31
Cancelled (41,960) $12.97
-------------
Outstanding, April 30, 2004 299,322 $12.49
Granted 266,890 $6.15
Cancelled (111,316) $6.58
-------------
Outstanding, April 30, 2005 454,896 $8.77
============= ================
The following is a summary of the status of stock options outstanding at April
30, 2005:
Options outstanding Options exercisable
------------------------------------------- --------------------------------
Weighted-average
Shares under remaining life in
Exercise prices option years Shares Exercise price
- ---------------------- ---------------- ----------------------- ----------- ------------------
$4.80 - 5.35 80,764 4.75 52,336 $4.80 - 5.35
6.10 - 9.00 257,131 4.08 241,174 6.10 - 9.00
10.92 - 14.40 77,248 3.38 61,263 10.92 - 14.40
15.00 - 18.60 29,335 1.62 29,335 15.00 - 18.60
19.92 - 27.96 10,418 3.10 10,418 19.92 - 27.96
---------------- -----------
Total 454,896 394,526
================ ===========
The weighted-average fair value of options on the grant date was $6.15 and
$12.31, respectively, for options granted during the years ended April 30, 2005
and 2004.
NOTE 11 - SHAREHOLDERS' EQUITY
On November 16, 2004, the Company sold an aggregate of 2,083,887 shares of
common stock and 2,083,887 common stock purchase warrants to eight investors for
$10,000,000, The common stock and the warrants were issued in a private
placement transaction pursuant to Section 4(2) under the Securities Act of 1933.
Pursuant to the terms of sale, the Company filed a resale registration statement
on December 30, 2004 covering the common stock and the common stock issuable
upon exercise of the warrants, which was declared effective by the SEC on
January 18, 2005.
Each warrant is exercisable for a period of five years at a price of $8.40 per
share, subject to certain adjustments. The exercise price of the warrants is
subject to adjustment for subsequent lower price issuances by the Company, as
well as customary adjustment provisions for stock splits, combinations,
dividends and the like. The warrants are callable by the Company, upon 30 days
notice, should the common stock trade at or above $25.20 per share for 25 out of
30 consecutive trading days. A maximum of 20% of the warrants may be called in
any three-month period.
The Company paid the placement agent of the offering a cash fee of $650,000 or
6.5% of the proceeds of the offering. In addition, the placement agent received
warrants to purchase 62,500 shares of common stock, exercisable for a period of
five years at an exercise price of $8.40 per share. The Company also paid a
finders' fee of $100,000 to another third party in connection with the offering
and incurred other related costs of $112,095. Accordingly, the Company received
net proceeds of $9,137,905 from the offering.
F-23
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the sale of the common stock and warrants, the Company
effectuated a one-for-twelve reverse stock split of its outstanding common stock
on January 10, 2005.
The following table summarizes the activity of the common stock purchase
warrants for the year ended April 30, 2005 and 2004:
Number of Weighted Average
Shares Exercise Price
------------- ---------------
Outstanding, May 1, 2003 - $ -
Issued 425,784 $ 10.57
-------------
Outstanding, April 30, 2004 425,784 $ 10.57
Issued 2,146,387 $ 8.40
-------------
Outstanding, April 30, 2005 2,572,171 $ 8.76
============= ===============
NOTE 12 - SEGMENT REPORTING
The Company's reportable segments are determined and reviewed by management
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. Management 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 results for the
years ended April 30, 2005 and 2004 are as follows:
As of/Year ended April 30, 2005 As of/Year ended April 30, 2004
Wireless Specialty Wireless Specialty
Corporate Infrastructure Communication Total Corporate Infrastructure Communication Total
--------- -------------- ------------- ----- --------- -------------- ------------- -----
Revenue $ - $8,651,555 $31,496,678 $40,148,233 $ - $4,568,714 $17,507,532 $22,076,246
Depreciation
and
Amortization $ 20,423 161,485 500,489 682,397 $ 98 40,054 342,358 382,510
(Loss)
income ($1,206,486) $ 783,014 $ 390,286 ($33,186) ($924,882) $ 361,160 $ 515,535 ($48,187)
before
income taxes
Goodwill $ - $2,479,410 $11,482,232 $13,961,642 $ - $2,698,343 $ 5,983,527 $ 8,681,870
Total assets 1,169,887 $4,604,335 $24,402,489 $30,176,711 $803,082 $6,387,166 $13,691,849 $20,882,097
F-24
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2005 are approximately $1,800,000.
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.
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, 2005 are summarized as follows:
Year ending April 30,
2006 $ 386,054
2007 328,490
2008 237,096
2009 121,568
2010 105,941
Thereafter 90,480
-------------------
Total minimum lease payments $ 1,269,629
===================
Rent expense for all operating leases was approximately $358,000 and $260,000 in
2005 and 2004, respectively.
Walker Comm, Inc. Acquisition
In connection with the acquisition of Walker, the Company assumed a ten-year
lease with a trust, of which, a certain officer of the Company is the trustee,
for a building and land located in Fairfield, California, which is occupied by
its Walker subsidiary.
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 as defined, of
Clayborn and the payment of the remainder on that date.
Heinz Corporation Acquisition
In connection with the acquisition of Heinz, a $200,000 non-interest bearing
promissory note was issued. Of the $200,000, $75,000 is payable on the second
anniversary of the closing date and $50,000 is payable on the third anniversary
of the closing date.
F-25
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as of April 30,
2005 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
controls and procedures. Based on that evaluation , our principal executive
officer and chief financial officer have concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) were sufficiently
effective as of that date 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.
In connection with its review of the Company's financial statements for the
three and nine months ended January 31, 2005, J.H. Cohn LLP, the Company's
independent registered public accounting firm brought to the attention of the
Company's management and Audit Committee that the Company had initially
understated its provision for income taxes by improperly reversing deferred tax
liabilities arising from an acquisition. The Company subsequently adopted
additional procedures to address this deficiency, including consulting a third
party income tax consultant to review the Company's income tax provision.
Changes in internal controls. There were no changes in the Company's internal
controls over financial reporting, except for the changes in procedures referred
to in the preceding paragraph, that occurred during the quarter ended April 30,
2005, that has materially affected or is reasonably likely to materially affect
the Company's internal control over financial reporting.
ITEM 8B - OTHER INFORMATION
None
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTRS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The following persons are our executive officers and directors as of the date
hereof:
NAME AGE OFFICES HELD
- ---------------------------- -------- --------------------------
Andrew Hidalgo 49 Chairman, Chief Executive
Officer and Director
Joseph Heater 41 Chief Financial Officer
Donald Walker 42 Executive Vice President
James Heinz 43 Executive Vice President
Richard Schubiger 39 Executive Vice President
Norm Dumbroff 44 Director
Neil Hebenton 49 Director
Gary Walker 50 Director
William Whitehead 49 Director
Andrew Hidalgo, Chairman and Chief Executive Officer
Mr. Hidalgo has been Chairman of the Board and Chief Executive Officer of the
Company since its inception in May 2002 and served in the same capacity with the
predecessor companies WPCS, Inc. and WPCS Holdings, Inc. since September 2000.
He is responsible for the Company's operations and direction. Prior to that, Mr.
Hidalgo held various positions in operations, sales and marketing with Applied
Digital Solutions, the 3M Company, Schlumberger and General Electric. He
attended Fairfield University in Fairfield, Connecticut where he majored in
Marketing and Finance.
18
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.
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.
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. Mr. Heinz has over twenty years of project
engineering experience in civil and commercial construction projects with over
ten years specifically dedicated to wireless infrastructure services. Mr. Heinz
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.
Richard Schubiger, Executive Vice President
Mr. Schubiger has been Executive Vice President since November 2004. Mr.
Schubiger was a co-founder of Quality Communications and its President since
December 1995 until its acquisition by WPCS in November 2004. Mr. Schubiger has
over twenty years of experience in the wireless communications industry and has
been involved with all facets including sales, service, design and project
management. Prior to establishing Quality Communications, Mr. Schubiger worked
for Motorola, Inc., designing and supporting major wireless systems for
commercial and government users. Mr. Schubiger had a distinguished career in the
United States Marine Corps where he served as a wireless engineering specialist
involved with deployments throughout North America, Asia and Europe
Directors:
Norm Dumbroff
Mr. Dumbroff became a Director of WPCS in November 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.
19
Gary Walker
Mr. Walker became a director of WPCS in 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.
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. Directors serve without
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.
The following is a summary of the committees our directors serve.
Audit Committee
- ----------------
We have an Audit Committee currently consisting of William Whitehead , Norm
Dumbroff and Neil Hebenton, with Mr. Whitehead elected as Chairman of the
Committee. Our board of directors has determined that each of Messrs. Whitehead,
Dumbroff and Hebenton are "independent" as that term is defined under applicable
SEC rules and under the current listing standards of the Nasdaq Stock Market.
Mr. Whitehead is our audit committee financial expert. The Audit Committee was
expanded in December 2004 and met once after formation and prior to the filing
of this Form 10-KSB. The Board of Directors has adopted a written charter
setting forth the authority and responsibilities of the Audit Committee.
The Audit Committee's responsibilities include: (i) reviewing the independence,
qualifications, services, fees, and performance of the independent auditors,
(ii) appointing, replacing and discharging the independent auditors, (iii)
pre-approving the professional services provided by the independent auditors,
(iv) reviewing the scope of the annual audit and reports and recommendations
submitted by the independent auditors, and (v) reviewing our financial reporting
and accounting policies, including any significant changes, with management and
the independent auditors. The Audit Committee also prepares the Audit Committee
report that is required pursuant to the rules of the SEC.
Executive Committee
- -------------------
We have an Executive Committee currently consisting of Norm Dumbroff, Neil
Hebenton and William Whitehead, with Mr. Dumbroff elected as Chairman of the
Committee. The Board of Directors has determined that all of the members are
"independent" under the current listing standards of the Nasdaq Stock Market.
The Executive Committee was formed in December 2004 and has not met to date. The
Board of Directors has adopted a written charter setting forth the authority and
responsibilities of the Executive Committee.
The Executive Committee has responsibility for assisting the Board of Directors
in, among other things, evaluating and making recommendations regarding the
compensation of the executive officers and directors of the Company; assuring
that the executive officers are compensated effectively in a manner consistent
with the stated compensation strategy of the Company; producing an annual report
on executive compensation in accordance with the rules and regulations
20
promulgated by the SEC; periodically evaluating the terms and administration of
the Company's incentive plans and benefit programs and monitoring of compliance
with the legal prohibition on loans to directors and executive officers of the
Company.
Nominating Committee
- --------------------
We have a Nominating Committee currently consisting of Neil Hebenton, Norm
Dumbroff and William Whitehead, with Mr. Hebenton elected as Chairman of the
Committee. The Board of Directors has determined that all of the members are
"independent" under the current listing standards of the Nasdaq Stock Market.
The Nominating Committee was designated by the Board of Directors in February
2005 and has not met to date.
The Nominating Committee has responsibility for assisting the Board in, among
other things, effecting Board organization, membership and function including
identifying qualified Board nominees; effecting the organization, membership and
function of Board committees including composition and recommendation of
qualified candidates; establishment of and subsequent periodic evaluation of
successor planning for the chief executive officer and other executive officers;
development and evaluation of criteria for Board membership such as overall
qualifications, term limits, age limits and independence; and oversight of
compliance with the Corporate Governance Guidelines. The Nominating Committee
shall identify and evaluate the qualifications of all candidates for nomination
for election as directors.
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 2005 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 2005.
21
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation received during
the fiscal years ended April 30, 2005, 2004, and 2003 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 2005 fiscal year.
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------------------ -------------------------------------------------------
Other Annual Restricted Securities
Salary Bonus Compensation Stock Underlying LTIP All Other
Name and Principal Position Year ($) ($) ($) Awards Options (5) Payouts Compensation ($)
- ----------------------------------- ------ --------- --------- ------------- ----------- ------------ ------------ -----------------
Andrew Hidalgo 2005 168,000 - - - 154,167 - -
Chairman, Chief Executive Officer 2004 154,500 17,000 - - - - -
and Director 2003 141,000 - - - - - -
Donald Walker 2005 140,000 10,269 - - - - -
Executive Vice President (1) 2004 140,000 26,962 - - 16,667 - -
2003 41,160 2,669
Gary Walker 2005 140,000 10,269 - 2,084 - -
President-Walker and Director (2) 2004 140,000 26,962 - - 16,667 - -
2003 42,333 2,669 - - - -
James Heinz 2005 140,000 - 10,000 - -
Executive Vice President (3) 2004 10,231 - - - - - -
Joseph Heater 2005 132,000 - - - 35,000 - -
Chief Financial Officer (4) 2004 95,500 8,000 - - 33,334 - -
(1) Mr. Walker has served as Executive Vice President since December 30,
2002.
(2) Mr. Walker has served as President of Walker and as a Director since
December 30, 2002.
(3) Mr. Heinz has served as Executive Vice President since April 2, 2004.
(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.
22
Option Grants During 2005 Fiscal Year
The following table provides information related to options granted to the named
executive officers during the 2005 fiscal year. The Company does not have any
outstanding stock appreciation rights.
No. of % of Total
Securities Options
Underlying Granted to Exercise
Options Granted Employees in Price (
Name (#) Fiscal Year $/Sh) Expiration Date
- --------------------------------------------------------------------------------
Andrew Hidalgo 57.8% 10/6/2009
154,167 6.60
Gary Walker 2,084 0.8% 4.80 12/20/2009
James Heinz 10,000 3.8% 5.25 2/1/2010
Joseph Heater 25,000 9.4% 6.60 10/6/2009
Joseph Heater 10,000 3.8% 5.25 2/1/2010
Aggregated Option Exercises During 2005 Fiscal Year and Fiscal Year-End Option
Values
The following table provides information related to employee options exercised
by the named executive officers during the 2005 fiscal year and number and value
of such options held at fiscal year-end.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Value Options at Fiscal Year- End (#) Fiscal Year- End ($) (1)
Acquired --------------------------------- --------------------------
Name on Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------- ---------------- ---------------- -------------- ----------------
Andrew Hidalgo - - 154,167 - - -
Gary Walker - - 2,084 - - -
James Heinz - - 10,000 - - -
Joseph Heater - - 25,000 - - -
Joseph Heater - - 10,000 - - -
(1). Value based on the closing price of $4.95 per share on April 29, 2005,
less the option exercise price.
23
EMPLOYMENT AGREEMENTS
Contract with Andrew Hidalgo
On February 1, 2005, the Company entered into a three-year employment contract
with 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 Joseph Heater
On June 1, 2005, the Company entered into a three-year employment contract with
the Chief Financial Officer. 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 $140,000 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 President 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 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.
Contract with Richard Schubiger
On November 24, 2004, the Company entered into a two-year employment contract
with Richard Schubiger, the President of Quality, who is also an Executive Vice
President of the Company. The base salary under the agreement is $120,000 per
annum, plus benefits.
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.
24
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following tables sets forth, as of July 15, 2005, the number of and percent
of the Company's common stock beneficially owned by: (1) all directors and
nominees, naming them, (2) our executive officers, (3) our directors and
executive officers as a group, without naming them, and (4) persons or groups
known by us to own beneficially 5% or more of our common stock. The Company
believes that all persons named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned by them.
A person is deemed to be the beneficial owner of securities that can be acquired
by him within 60 days from July 15, 2005 upon the exercise of options, warrants
or convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options, warrants or convertible securities that are
held by him, but not those held by any other person, and which are exercisable
within 60 days of July 15, 2005 have been exercised and converted.
NUMBER OF
SHARES
NAME AND ADDRESS BENEFICIALLY PERCENTAGE OF
OF OWNER TITLE OF CLASS OWNED CLASS (2)
- ----------------------------------------------------------------------------
Andrew Hidalgo Common Stock 583,384 (3) 14.67%
One East Uwchlan Avenue
Exton, PA 19341
Donald Walker Common Stock 37,721 (3) *
One East Uwchlan Avenue
Exton, PA 19341
James Heinz Common Stock 69,524 (3) 1.81%
One East Uwchlan Avenue
Exton, PA 19341
Richard Schubiger Common Stock 10,000 (3) *
One East Uwchlan Avenue
Exton, PA 19341
Joseph Heater Common Stock 68,334 (3) 1.76%
One East Uwchlan Avenue
Exton, PA 19341
Norm Dumbroff Common Stock 75,002 (3) 1.96%
One East Uwchlan Avenue
Exton, PA 19341
Neil Hebenton Common Stock 6,252 (3) *
One East Uwchlan Avenue
Exton, PA 19341
Gary Walker Common Stock 96,315 (3) 2.51%
One East Uwchlan Avenue
Exton, PA 19341
William Whitehead Common Stock 17,419 (3) *
One East Uwchlan Avenue
Exton, PA 19341
All Officers and Directors Common Stock 963,951 (3) 23.39%
As a Group (9 persons)
Barron Partners LP Common Stock 535,340 (4) 12.29%
730 Fifth Avenue, 9th Floor
New York, NY 10019
Special Situations Private Common Stock 1,016,668 (4) 23.41%
Equity Fund, L.P.
153 E. 53rd Street, 55th Floor
New York, NY 10022
25
Special Situations Fund Common Stock 1,423,534 (4) 31.28%
III, L.P.
153 E. 53rd Street, 55th Floor
New York, NY 10022
SF Capital Partners Ltd. Common Stock 310,466 (4) 7.70%
3600 South Lake Drive
St. Francis, WI 53235
Carrhae & Co. Common Stock 208,334 (4) 5.31%
150 E. Social Hall Avenue
4th Floor
Salt Lake City, UT 84111
* Less than 1%.
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of July 15, 2005 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Based on 3,821,385 shares of common stock issued and outstanding.
(3) Includes the following number of shares of common stock which may be
acquired by certain officers and directors through the exercise of stock options
which were exercisable as of July 15, 2005 or become exercisable within 60 days
of that date: Andrew Hidalgo, 154,167 shares; Donald Walker, 16,667 shares;
James Heinz, 10,000 shares; Richard Schubiger, 10,000 shares; Joseph Heater,
68,334 shares, Norm Dumbroff, 4,168 shares; Neil Hebenton, 6,252 shares; Gary
Walker, 18,751 shares; William Whitehead, 10,419 shares; and all officers and
directors as a group, 298,758 shares.
(4) Includes the following number of shares of common stock which may be
acquired through the exercise of common stock purchase warrants which were
exercisable as of July 15, 2005 or become exercisable within 60 days of that
date: Barron Partners LP, 535,340 shares; Special Situations Fund Private Equity
Fund, L.P., 520,834 shares; Special Situations Fund III, L.P., 729,167 shares;
SF Capital Partners Ltd., 208,334 shares; and Carrhae & Co., 104,167 shares.
26
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, 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 410,896 $9.25 5,771
Equity compensation plans
not approved by security 44,000 $5.25 -
holders (2)
------------------------ --------------------- ---------------------------
Total 454,896 $8.77 5,771
======================== ===================== ===========================
(1) The Company established a nonqualified stock option plan pursuant to which
options to acquire a maximum of 416,667 shares of the Company's common
stock were reserved for grant. As of April 30, 2005, included above are
348,227 shares issuable upon exercise of options granted to employees and
directors, and 62,669 shares granted to outside consultants.
(2) Includes 44,000 shares issuable to employees outside the plan.
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.
In connection with the acquisition of Walker, we assumed a lease with a trust,
of which, a certain officer is the trustee, 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 years ended April 30, 2005, and
2004, the rent paid for this lease was $88,000 and $56,000, respectively.
On August 22, 2003, we acquired all of the outstanding shares of Clayborn in
exchange for an aggregate $900,000 cash consideration and 68,871 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, as defined, of Clayborn
and a final payment of any remaining balance on that date.
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 $11.76 per share, for an
aggregate of 59,524 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 was paid
in April 2005, $75,000 is payable on the second anniversary of the closing date
and $50,000 is payable on the third anniversary of the closing date.
27
On November 24, 2004, we acquired all of the issued and outstanding common stock
of Quality. The aggregate consideration paid by the Company to the Quality
selling shareholders, net of acquisition transaction costs, was $7,442,295, of
which $6,700,000 was paid at closing. Additional purchase price adjustments of
$742,295 were paid in June 2005 to settle working capital adjustments and income
tax reimbursements related to the Company electing to make an Internal Revenue
Code 338 (h) (10) election. For income tax purposes, this election results in a
stepped up basis of assets and liabilities and will result in future income tax
deductions.
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)
4.6 Form of Common Stock Purchase Warrant (4)
10.1 Andrew Hidalgo Employment Agreement (5)
10.2 Donald Walker Employment Agreement (3)
10.3 Gary Walker Employment Agreement (3)
10.4 Joseph Heater Employment Agreement
10.5 James Heinz Employment Agreement (5)
10.6 Richard Schubiger Employment Agreement (8)
10.8 Agreement and Plan of Merger by and among WPCS International
Incorporated and Clayborn Contracting Group made as of the 22nd
day of August, 2003 (6)
10.9 Agreement and Plan of Merger by and among WPCS International
Incorporated and Heinz Corporation made as of the 2nd day of
April, 2004 (7)
10.10 Stock Purchase Agreement among WPCS International Incorporated
and Richard Schubiger, Matthew Haber and Brian Fortier, dated as
of November 24, 2004 (8)
10.11 Securities Purchase Agreement, dated as of November 16, 2004 (4)
10.12 Form of Registration Rights Agreement, dated as of November 16,
2004 (4)
10.13 Credit Agreement with Bank Leumi USA, dated as of June 3, 2005
(9)
10.14 Form of Security Agreement with Bank Leumi, dated as of June 3,
2005 (9)
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 to the Company's registration statement on Form
S-2 (Commission File # 333-121757)
5. Incorporated by reference from the Company's registration statement on Form
SB-2 (Commission File # 333-109522).
6. Incorporated by reference to the Company Current Report on Form 8-K, dated
as of August 29, 2003.
7. Incorporated by reference to the Company Current Report on Form 8-K, dated
as of April 9, 2004.
8. Incorporated by reference to the Company Current Report on Form 8-K, dated
as of November 30, 2004.
9. Incorporated by reference to the Company Current Report on Form 8-K, dated
June 3, 2005.
28
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, 2005 and 2004, and for the reviews of the financial statements
included in our Quarterly Reports on Form 10-QSB during that fiscal year were
$133,000 and $115,500, respectively.
Audit Related Fees. We incurred fees to our auditors of $39,473 and $21,511,
respectively, for audit related fees during the fiscal years ended April 30,
2005 and 2004.
Tax Fees. We incurred fees to auditors of $3,900 and $2,115, respectively, for
tax compliance services during the fiscal years ended April 30, 2005 and 2004.
The Audit Committee has considered whether the provision of non-audit services
is compatible with maintaining the principal accountant's independence.
29
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, 2005
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, 2005.
/s/ ANDREW HIDALGO
-----------------
Andrew Hidalgo,
Chairman of the Board
/s/NORM DUMBROFF
----------------
Norm Dumbroff,
Director
/s/NEIL HEBENTON
----------------
Neil Hebenton,
Director
/s/ GARY WALKER
---------------
Gary Walker,
Director
/s/ WILLIAM WHITEHEAD
---------------------
William Whitehead,
Director
30