As
filed with the Securities and Exchange Commission on April 7,
2006
Registration
No. 333-131650
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Pre-Effective
Amendment No. 1
to
FORM
SB-2
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
WPCS
INTERNATIONAL INCORPORATED
(Name
of small business issuer in its charter)
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Delaware
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4899
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98-0204758
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(State
o
r
other Jurisdiction of
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(Primary
Standard Industrial
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(I.R.S.
Employer
|
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Incorporation
or
Organization)
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Classification
Code Number)
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Identification
No.)
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One
East Uwchlan Avenue
Suite
301
Exton,
PA 19341
(610)
903-0400
(Address
and telephone number of principal executive offices and principal place of
business)
Andrew
Hidalgo, Chief Executive Officer
One
East Uwchlan Avenue
Suite
301
Exton,
PA 19341
(610)
903-0400
(Name,
address and telephone number of agent for service)
Copies
of all communications, including communications sent to agent for service,
should be sent to:
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Marc
J. Ross,
Esq.
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Thomas
A. Rose,
Esq.
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Sichenzia
Ross Friedman Ference
LLP
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1065
Avenue of the Americas, 21st
Flr.
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New
York, New York
10018
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(212)
930-9700
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(212)
930-9725
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Approximate
date of proposed sale to the public:
As
soon
as practicable after this Registration Statement becomes effective.
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
|_|
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
|_|
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
|_|
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box.
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CALCULATION
OF REGISTRATION FEE
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Proposed
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||||
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Title
of Each Class of
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Amount
to be
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Maximum
Aggregate
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Proposed Maximum
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Amount
of
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Securities
to be Registered
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Registered
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Price
Per Security(1)
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Aggregate
Offering Price
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Registration
Fee(1)
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Common
stock, $0.0001 par value
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876,931
shares
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$11.915
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$10,448,632.87
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$1,118.00
(2)
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(1)
Estimated
solely for the purpose of calculating the registration fee pursuant to Rule
457(c) under the Securities Act of 1933, as amended, based upon $11.915, the
average of the high and low sale prices of the registrant’s common stock as
reported on the NASDAQ Capital Market on February 2, 2006.
(2)
Fee
previously paid.
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and it is not soliciting an offer to buy these securities
in
any state where the offer or sale is not permitted.
Subject
to completion, dated ,
2006
876,931
Shares
Common
Stock
We
are
offering 876,931 shares of our common stock.
We
will
pay fees to
Punk,
Ziegel & Company, L.P.
,
as the
placement agent, in connection with this offering. See “Plan of Distribution”
beginning on page 45 of this prospectus for more information regarding this
arrangement.
Our
common stock is traded on the NASDAQ Capital Market under the symbol “WPCS.” On
April 4, 2006, the last reported sale price of our common stock on the NASDAQ
Capital Market was $7.52 per share.
Investing
in these securities involves significant risks. See “Risk Factors” beginning on
page 4.
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Per
Share
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Total
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||||||
| Public Offering Price | $ | $ | |||||
| Placement Agent Fee | $ | $ | |||||
| Proceeds to WPCS, before expenses | $ | $ | |||||
We
estimate the total expenses of this offering, excluding the placement agent’s
fee, will be approximately $ . The
placement agent is not required to sell any specific number or dollar amount
of
the shares of common stock offered, but will use its reasonable best efforts
to
sell the shares of common stock offered. The offering will end on or prior
to ,
2006. Because there is no minimum offering amount required as a condition
to
closing in this offering, the actual public offering amount, placement agent’s
fee and net proceeds to us, if any, in this offering are not presently
determinable and may be substantially less than the maximum offering amounts
set
forth above.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is ,
2006.
TABLE
OF CONTENTS
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Page
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Prospectus
Summary
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1
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Risk
Factors
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4
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Use
of Proceeds
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10
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Price
Range of Common Stock
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11
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Dividend
Policy
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11
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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12
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Business
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26
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Management
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33
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Executive
Compensation
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36
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Certain
Relationships and Related Transactions
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40
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Principal
Stockholders
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41
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Description
of Securities
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42
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Shares
Eligible for Future Sale
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44
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Plan
of Distribution
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45
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Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
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46
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Legal
Matters
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46
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Experts
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46
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Where
You Can Find Additional Information
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46
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| Index to Financial Statements | F-1 |
You
should rely only on the information contained in this prospectus. We have
not
authorized anyone to provide you with information that is different. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, these
securities in any jurisdiction where the offer or sale of these securities
is
not permitted. You should assume that the information contained in this
prospectus is accurate as of the date on the front of this prospectus only.
Our
business, financial condition, results of operations and prospects may have
changed since that date.
All
information contained herein relating to shares and per share data has been
adjusted to reflect a 1:12 stock split effected on January 10,
2005.
All
references herein to our fiscal year and our fiscal year end represent the
twelve months ended April 30 and April 30, respectively, and all references
herein to our fiscal quarters ended refer to July 31, October 31 and January
31,
as appropriate.
This
prospectus includes market and industry data that we obtained from internal
research, publicly available information and industry publications. Our internal
research is based on management’s understanding of industry conditions and has
not been verified by any independent sources. Industry publications generally
stated that the information they contain has been obtained from sources believed
to be reliable. We do not make any representation as to the accuracy of such
information.
PROSPECTUS
SUMMARY
This
summary highlights information contained elsewhere in this prospectus. This
summary does not contain all of the information that you should consider before
investing in our common stock. You should read the entire prospectus carefully,
including the section entitled “Risk Factors” and the consolidated financial
statements and accompanying notes included elsewhere in this prospectus, before
making an investment decision. Unless the context clearly indicates otherwise,
references in this prospectus to “we,” “us,” “our” and “WPCS” refer to WPCS
International Incorporated and its subsidiaries on a consolidated
basis.
Our
Company
WPCS
International Incorporated designs and deploys wireless networks. We provide
design-build engineering services for specialty communication systems and
wireless infrastructure. Specialty communication systems are wireless networks
designed to improve productivity for a specified application by communicating
data, voice or video information in situations where land line networks are
non-existent, more difficult to deploy or too expensive. Wireless infrastructure
services include the engineering, installation, integration and maintenance
of
wireless carrier equipment.
Wireless
technology has advanced substantially to the point where wireless networks
have
proven to be an effective alternative to land line networks, a key factor
in
wireless’ broad acceptance. We believe the use of dedicated wireless networks
for specified applications has improved productivity for individuals and
organizations alike. Demand for wireless data services is accelerating the
adoption of new technologies that enable wireless networks to deliver enhanced
features and capabilities. These new technologies have increased the complexity
of wireless systems, and created demand for the services of companies such
as
ours with specialized skills to address that complexity.
With
seven offices across the United States, we provide our services to our customers
nationwide. Because we are technology and vendor independent, we can integrate
multiple products and services across a variety of communication requirements,
creating the most appropriate solution for our customers. Wireless communication
is primarily achieved through radio frequency, or RF, signals. We have extensive
experience in RF engineering, a necessary skill in designing wireless networks
free from interference with other signals and amplified sufficiently to carry
data, voice or video with speed, accuracy and reliability. We believe the
strength of our experience in the design and deployment of specialty
communication systems gives us a competitive advantage, and has supported our
rapid growth, both organically and through acquisitions.
Our
goal
is to become a recognized leader in the design and deployment of wireless
networks for specialty communication systems and wireless infrastructure.
For
the fiscal year ended April 30, 2005, we generated revenues of $40.1 million,
an
increase of 81.9% from the fiscal year ended April 30, 2004. For the nine
months
ended January 31, 2006, we generated revenues of $38.2 million, an increase
of
31.8% over the comparable period in 2005. Our backlog at January 31, 2006
was
approximately $19.7 million.
Our
Strategy
Our
strategy focuses on both organic growth and the pursuit of acquisitions that
add
to our engineering capacity and geographic coverage. Specifically, we will
endeavor to:
•
Increase
customer awareness by marketing the full range of our services to our
customers;
•
Maintain
and expand our focus in existing vertical markets such as public safety and
gaming, and develop expertise in new vertical markets;
•
Strengthen
our relationships with technology providers whose products offer benefits to
our
customers; and
•
Seek
strategic acquisitions of compatible businesses that can be assimilated into
our
organization and that will add accretive earnings to our business.
Our
Customers
Our
customers include corporations, government entities and educational
institutions. In our specialty communication systems segment, we believe our
design and deployment of innovative wireless networks specific to the needs
of
customers in certain vertical markets has brought us recognition in these
markets. We have worked with public safety customers such as the California
Department of Transportation, or CALTRANS, gaming customers such as Bally’s, and
healthcare customers such as Wake Forest University Baptist Hospital. In our
wireless infrastructure services segment, our customers are major wireless
service providers such as Sprint Nextel.
Risks
Affecting Us
Our
business is subject to numerous risks, as discussed more fully in the section
entitled “Risk Factors” immediately following this prospectus summary,
including:
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•
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Our
success is dependent on growth in the deployment of wireless networks,
and
to the extent that such growth slows down, our revenues may decrease
and
our ability to continue operating profitably may be
harmed;
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•
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We
have a limited history of profitability which may not
continue;
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•
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If
we fail to accurately estimate costs associated with our fixed-price
contracts using percentage-of-completion, our actual results may
vary from
our assumptions, which may reduce our profitability or impair our
financial performance;
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•
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Failure
to properly manage projects may result in unanticipated costs or
claims;
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•
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The
industry in which we operate has relatively low barriers to entry
and
increased competition could result in margin erosion, which would
make
profitability even more difficult to
sustain;
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•
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Our
business depends upon our ability to keep pace with the latest
technological changes, and our failure to do so could make us less
competitive in our industry;
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•
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Our
failure to attract and retain engineering personnel or maintain
appropriate staffing levels could adversely affect our
business;
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•
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If
we are unable to identify and complete future acquisitions, we may
be
unable to continue our growth;
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•
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Future
acquired companies could be difficult to assimilate, disrupt our
business,
diminish stockholder value and adversely affect our operating
results;
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•
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We
derive a significant portion of our revenues from a limited number
of
customers, the loss of which would significantly reduce our revenues;
and
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•
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Amounts
included in our backlog may not result in actual revenue or translate
into
profits.
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Our
Corporate Information
We
have
five operating subsidiaries: Clayborn Contracting Group, Inc., a California
corporation; Heinz Corporation, a Missouri corporation; Invisinet, Inc., a
Delaware corporation; Quality Communications & Alarm Company, Inc., a New
Jersey corporation; and Walker Comm, Inc., a California corporation. References
in this prospectus to Clayborn, Heinz, Invisinet, Quality and Walker Comm refer
to these companies, respectively.
Our
principal executive offices are located at One East Uwchlan Avenue, Suite 301,
Exton, Pennsylvania 19341, and our telephone number is (610) 903-0400. We are
a
Delaware corporation. We maintain a website at www.wpcs.com and the information
contained on that website is not deemed to be a part of this
prospectus.
The
Offering
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Common
stock offered by us
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876,931 shares
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Shares
outstanding prior to the offering (1)
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4,386,853 shares
as of March 31, 2006
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Shares
to be outstanding after the offering (1)
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5,263,784 shares
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Use
of proceeds
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We
estimate that our net proceeds from this offering will be approximately
$
million. We intend to use these net proceeds for general corporate
purposes, which may include potential strategic acquisitions
and/or
investments or repayment of all or a portion of our existing bank
debt, and for working capital.
We
have not entered into any binding commitments or agreements
with respect
to any potential strategic acquisition or investment
and
no assurances can be given that we will be able to identify
a potential
acquisition on terms we deem favorable.
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NASDAQ
Capital Market symbol
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WPCS.
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(1)
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Excludes
770,453 shares issuable upon the exercise of outstanding stock
options at
prices ranging from $4.80 to $19.92 and 2,016,904 shares issuable
upon the
exercise of outstanding warrants at prices ranging from $8.40
to
$10.80.
|
|
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RISK
FACTORS
This
investment has a high degree of risk. Before you invest you should carefully
consider the risks and uncertainties described below and the other information
in this prospectus. If any of the following risks actually occur, our business,
operating results and financial condition could be harmed and the value of
our
stock could go down. As a result, you could lose all or a part of your
investment.
Our
success is dependent on growth in the deployment of wireless networks, and
to
the extent that such growth slows down, our revenues may decrease and our
ability to continue operating profitably may be harmed.
Customers
are constantly re-evaluating their network deployment plans in response to
trends in the capital markets, changing perceptions regarding industry growth,
the adoption of new wireless technologies, increasing pricing competition and
general economic conditions in the United States and internationally. If the
rate of network deployment growth slows and customers reduce their capital
investments in wireless technology or fail to expand their networks, our
revenues and profits, if any, could be reduced.
We
have a limited history of profitability which may not
continue.
While
we
had net income of approximately $1.3 million for the fiscal year ended April
30,
2005, we incurred a net loss of approximately $124,000 for the fiscal year
ended
April 30, 2004. In addition, for the nine months ended January 31, 2006,
we
incurred a net loss of approximately $9.6 million.
There
can
be no assurance that we will sustain profitability or generate 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 may need to reduce or cease all or part
of our
operations.
If
we fail to accurately estimate costs associated with our fixed-price contracts
using percentage-of-completion, our actual results may vary from our
assumptions, which may reduce our profitability or impair our financial
performance.
A
substantial portion of our revenue is derived from fixed price contracts. Under
these contracts, we set the price of our services on an aggregate basis and
assume the risk that the costs associated with our performance may be greater
than we anticipated. We recognize revenue and profit on these contracts as
the
work on these projects progresses on a percentage-of-completion basis. Under
the
percentage-of-completion method, contracts in process are valued at cost plus
accrued profits less earned revenues and progress payments on uncompleted
contracts.
The
percentage-of-completion method therefore relies on estimates of total expected
contract costs. These costs may be affected by a variety of factors, such as
lower than anticipated productivity, conditions at work sites differing
materially from what was anticipated at the time we bid on the contract and
higher costs of materials and labor. Contract revenue and total cost estimates
are reviewed and revised periodically as the work progresses, such that
adjustments to profit resulting from revisions are made cumulative to the date
of the revision. Adjustments are reflected in contract revenue for the fiscal
period affected by these revised estimates. If estimates of costs to complete
long-term contracts indicate a loss, we immediately recognize the full amount
of
the estimated loss. Such adjustments and accrued losses could result in reduced
profitability and liquidity.
Failure
to properly manage projects may result in unanticipated costs or
claims.
Our
wireless network engagements may involve large scale, highly complex projects.
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 customers’ expectations could result in claims for substantial damages
against us. Our contracts generally limit our liability for damages that arise
from negligent acts, errors, mistakes or omissions in rendering services to
our
customers. 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.
If the project or network experiences a performance problem, we may not be
able
to recover the additional costs we would incur, which could exceed revenues
realized from a project.
The
industry in which we operate has relatively low barriers to entry and increased
competition could result in margin erosion, which would make profitability
even
more difficult to sustain.
Other
than the technical skills required in our business, the barriers to entry in
our
business are relatively low. We do not have any intellectual property rights
to
protect our business methods and business start-up costs do not pose a
significant barrier to entry. The success of our business is dependent on our
employees, customer relations and the successful performance of our services.
If
we face increased competition as a result of new entrants in our markets, we
could experience reduced operating margins and loss of market share and brand
recognition.
Our
business depends upon our ability to keep pace with the latest technological
changes, and our failure to do so could make us less competitive in our
industry.
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 may 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 deploying 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 preferences.
Our
failure to attract and retain engineering personnel or maintain appropriate
staffing levels could adversely affect our business.
Our
success depends upon our attracting and retaining skilled engineering personnel.
Competition for such skilled personnel in our industry is high and at times
can
be extremely intense, especially for engineers and project managers, and we
cannot be certain that we will be able to hire sufficiently qualified personnel
in adequate numbers to meet the demand for our services. We also believe that
our success depends to a significant extent on the ability of our key personnel
to operate effectively, both individually and as a group. Additionally, we
cannot be certain that we will be able to hire the requisite number of
experienced and skilled personnel when necessary in order to service a major
contract, particularly if the market for related personnel is competitive.
Conversely, if we maintain or increase our staffing levels in anticipation
of
one or more projects and the projects are delayed, reduced or terminated, we
may
underutilize the additional personnel, which could reduce our operating margins,
reduce our earnings and possibly harm our results of operations. If we are
unable to obtain major contracts or effectively complete such contracts due
to
staffing deficiencies, our revenues may decline and we may experience a drop
in
net income.
If
we are unable to identify and complete future acquisitions, we may be unable
to
continue our growth.
Since
November 1, 2002, we have acquired five companies and we intend to further
expand our operations through targeted strategic acquisitions. However, we
may
not be able to identify suitable acquisition opportunities. Even if we identify
favorable acquisition targets, there is no guarantee that we can acquire them
on
reasonable terms or at all. If we are unable to complete attractive
acquisitions, the growth that we have experienced over the last three fiscal
years may decline.
Future
acquired companies could be difficult to assimilate, disrupt our business,
diminish stockholder value and adversely affect our operating
results.
Completing
acquisitions may require significant management time and financial resources
because we may need to assimilate widely dispersed operations with distinct
corporate cultures. Our failure to manage future acquisitions successfully
could
seriously harm our operating results. Also, acquisitions could cause our
quarterly operating results to vary significantly. Furthermore, our stockholders
would be diluted if we financed the acquisitions by issuing equity securities.
In addition, acquisitions expose us to risks such as undisclosed liabilities,
increased indebtedness associated with an acquisition and the potential for
cash
flow shortages that may occur if anticipated financial performance is not
realized or is delayed from such acquired companies.
We
derive a significant portion of our revenues from a limited number of customers,
the loss of which would significantly reduce our revenues.
We
have
derived, and believe that we will continue to derive, a significant portion
of
our revenues from a limited number of customers. To the extent that any
significant customer uses less of our services or terminates its relationship
with us, our revenues could decline significantly. As a result, the loss
of any
significant customer could seriously harm our business. For the nine months
ended January 31, 2006, we had two separate customers which accounted for
20.1%
and 14.0% of our revenues. For the fiscal year ended April 30, 2005, we had
one
customer which accounted for 15.5% of our revenues. Other than under existing
contractual obligations, none of our customers is obligated to purchase
additional services from us. As a result, the volume of work that we perform
for
a specific customer is likely to vary from period to period, and a significant
customer in one period may not use our services in a subsequent
period.
Amounts
included in our backlog may not result in actual revenue or translate into
profits.
As
of
January 31, 2006, we had a backlog of unfilled orders of approximately $19.7
million. This backlog amount is based on contract values and purchase orders
and
may not result in actual receipt of revenue in the originally anticipated
period
or at all. In addition, contracts included in our backlog may not be profitable.
We have experienced variances in the realization of our backlog because of
project delays or cancellations resulting from external market factors and
economic factors beyond our control and we may experience delays or
cancellations in the future. If our backlog fails to materialize, we could
experience a reduction in revenue, profitability and
liquidity.
Our
business could be affected by adverse weather conditions, resulting in variable
quarterly results.
Adverse
weather conditions, particularly during the winter season, could affect our
ability to perform outdoor services in certain regions of the United States.
As
a result, we might experience reduced revenue in the third and fourth quarters
of our fiscal year. Natural catastrophes such as the recent hurricanes in the
United States could also have a negative impact on the economy overall and
on
our ability to perform outdoor services in affected regions or utilize equipment
and crews stationed in those regions, which in turn could significantly impact
the results of any one or more of our reporting periods.
Our
management will have broad discretion in allocating the net proceeds from this
offering, and the failure of our management to apply the net proceeds from
this
offering effectively could harm our business.
We
currently intend to use the net proceeds from the sale of the common stock
offered hereby for general corporate purposes, which may include potential
strategic acquisitions and/or investments or repayment of all or a
portion of our existing bank debt, and for working capital. We have
not determined the amount of net proceeds from the sale of our common stock
in
this offering that we will use for any of these purposes. Accordingly, our
management will retain broad discretion as to the allocation of the net proceeds
of this offering. The failure of management to apply these funds effectively
could negatively impact our business.
If
we are unable to retain the services of Messrs. Hidalgo, Schubiger, Heinz or
Walker, our operations could be disrupted.
Our
success depends to a significant extent upon the continued services of Mr.
Andrew Hidalgo, our Chief Executive Officer and Messrs. Richard Schubiger,
James
Heinz and Donald Walker, our Executive Vice Presidents. Mr. Hidalgo has overseen
our company since inception and provides leadership for our growth and
operations strategy. Messrs. Schubiger, Heinz and Walker run the day-to-day
operations of Quality, Heinz and Walker Comm, respectively. Loss of the services
of Messrs. Hidalgo, Schubiger, Heinz or Walker could disrupt our operations
and
harm our growth, revenues, and prospective business. We do not maintain key-man
insurance on the lives of Messrs. Hidalgo, Schubiger, Heinz or
Walker.
Employee
strikes and other labor-related disruptions may adversely affect our
operations.
Our
business is labor intensive, with certain projects requiring large numbers
of
engineers. Over 40% of our workforce is unionized. Strikes or labor disputes
with our unionized employees may adversely affect our ability to conduct our
business. If we are unable to reach agreement with any of our unionized work
groups on future negotiations regarding the terms of their collective bargaining
agreements, or if additional segments of our workforce become unionized, we
may
be subject to work interruptions or stoppages. Any of these events could be
disruptive to our operations and could result in negative publicity, loss of
contracts and a decrease in revenues.
We
may incur goodwill impairment charges in our reporting entities which could
harm
our profitability.
In
accordance with Statement of Financial Accounting Standards, or SFAS, No.
142,
“Goodwill and Other Intangible Assets,” we periodically review the carrying
values of our goodwill to determine whether such carrying values exceed the
fair
market value. All five of our acquired companies, Clayborn, Invisinet, Heinz,
Quality and Walker Comm, each of which is a reporting unit, are subject to
annual review for goodwill impairment. If impairment testing indicates that
the
fair value of a reporting unit exceeds its carrying value, the goodwill of
the
reporting unit is deemed impaired. Accordingly, an impairment charge would
be
recognized for that reporting unit in the period identified, which could
reduce
our profitability.
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 beyond our control, are
likely to cause these fluctuations. Some of these factors include:
|
•
|
the
timing and size of network deployments and technology upgrades by
our
customers;
|
|
•
|
fluctuations
in demand for outsourced network
services;
|
|
•
|
the
ability of certain customers to sustain capital resources to pay
their
trade accounts receivable balances and required changes to our allowance
for doubtful accounts based on periodic assessments of the collectibility
of our accounts receivable
balances;
|
|
•
|
reductions
in the prices of services offered by our
competitors;
|
|
•
|
our
success in bidding on and winning new business;
|
|
•
|
our
sales, marketing and administrative cost structure; and
|
|
•
|
effects of variable accounting for warrant liability. |
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.
Our
stock price may be volatile, which may result in lawsuits against us and our
officers and directors.
The
stock
market in general, and the stock prices of technology and telecommunications
companies in particular, have experienced volatility that has often been
unrelated to or disproportionate to the operating performance of those
companies. The market price of our common stock has fluctuated in the past
and
is likely to fluctuate in the future. Between March 31, 2005 and March 31,
2006,
our common stock has traded as low as $4.32 and as high as $12.78 per share,
based upon information provided by NASDAQ Capital Market. Factors which could
have a significant impact on the market price of our common stock include,
but
are not limited to, the following:
|
•
|
quarterly
variations in operating results;
|
|
•
|
announcements
of new services by us or our
competitors;
|
|
•
|
the
gain or loss of significant
customers;
|
|
•
|
changes
in analysts’ earnings estimates;
|
|
•
|
rumors
or dissemination of false
information;
|
|
•
|
pricing
pressures;
|
|
•
|
short
selling of our common stock;
|
|
•
|
impact
of litigation;
|
|
•
|
general
conditions in the market;
|
|
•
|
changing
the exchange or quotation system on which we list our common stock
for
trading;
|
|
•
|
political
and/or military events associated with current worldwide conflicts;
and
|
|
•
|
events
affecting other companies that investors deem comparable to
us.
|
Companies
that have experienced volatility in the market price of their stock have
frequently been the object of securities class action litigation. Class action
and derivative lawsuits could result in substantial costs to us and a diversion
of our management’s attention and resources, which could materially harm our
financial condition and results of operations.
Future
changes in financial accounting standards may adversely affect our reported
results of operations.
A
change
in accounting standards could have a significant effect on our reported results
and may even affect our reporting of transactions completed before the change
is
effective. For example, in December 2004, the Financial Accounting Standards
Board issued SFAS No. 123(R), “Share-Based Payment,” a revision of SFAS No. 123,
“Accounting for Stock-Based Compensation,” which requires companies to expense
all employee stock options and other share-based payments over the service
period. Implementation of this standard as required during the first fiscal
quarter of our fiscal year 2007 may impair our ability to use equity
compensation to attract and retain skilled personnel. It is likely that we
will
have to recognize additional compensation expense in the periods after adoption
of this standard.
New
pronouncements and varying interpretations of pronouncements have occurred
and
may occur in the future. Changes to existing rules or the questioning of current
practices may adversely affect our reported financial results or the way we
conduct our business.
Compliance
with changing regulation of corporate governance and public disclosure may
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, newly enacted SEC
regulations and NASDAQ Stock Market rules, have created additional burdens
for
companies such as ours. We are committed to maintaining high standards of
corporate governance and public disclosure. As a result, we intend to invest
appropriate resources to comply with evolving standards. This investment will
result in increased general and administrative costs and a diversion of
management time and attention from revenue-generating activities to compliance
activities.
We
can issue shares of preferred stock without stockholder approval, which could
adversely affect the rights of common stockholders.
Our
certificate of incorporation permits us to establish the rights, privileges,
preferences and restrictions, including voting rights, of future series of
our
preferred stock and to issue such stock without approval from our stockholders.
The rights of holders of our common stock may suffer as a result of the rights
granted to holders of preferred stock that we may issue in the future. In
addition, we could issue preferred stock to prevent a change in control of
our
company, depriving common stockholders of an opportunity to sell their stock
at
a price in excess of the prevailing market price.
There
may be an adverse effect on the market price of our shares as a result of shares
being available for sale in the future.
As
of
March 31, 2006, holders of our outstanding options and warrants have the
right
to acquire 2,787,357 shares of common stock issuable upon the exercise of
stock
options and warrants, at exercise prices ranging from $4.80 to $19.92 per
share,
with a weighted average exercise price of $8.35. The sale or availability
for
sale in the market of the shares underlying these options and warrants could
depress our stock price. We have registered substantially all of the underlying
shares described above for resale. Holders of registered underlying shares
may
resell the shares immediately upon issuance upon exercise of an option or
warrant.
If
our
stockholders sell substantial amounts of our shares of common stock, including
shares issued upon the exercise of outstanding options and warrants, the market
price of our common stock may decline. These sales also might make it more
difficult for us to sell equity or equity-related securities in the future
at a
time and price that we deem appropriate.
USE
OF PROCEEDS
We
estimate that we will receive net proceeds of approximately
$ million from
the sale of 876,931 shares in this offering (based upon the last reported
sale
price of our common stock on , 2006), after deducting the placement agent
fees
and estimated offering expenses. We intend to use the net proceeds for general
corporate purposes, which may include potential strategic acquisitions and/or
investments or repayment of all or a portion of our existing bank debt, and
for working capital. We have not entered into any binding commitments or
agreements with respect to any potential strategic acquisition or investment
and
no assurances can be given that we will be able to identify a potential
acquisition on terms we deem favorable. Pending these uses, the net proceeds
will be invested in investment-grade, interest-bearing
securities.
On
June
3, 2005, we entered into a credit agreement with Bank Leumi USA under which
we
borrowed $3,000,000 under a $5,000,000 revolving line of credit. As of January
31, 2006, we had outstanding $3,000,000 in loans under the credit agreement,
which mature on August 31, 2008. 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. As of January 31, 2006, the interest rate was 7.1875%. We used the
initial funds provided by the loan to repay existing bank debt at Walker Comm
of
approximately $672,000, for the payment of approximately $758,000 to the former
stockholders of our Quality subsidiary for monies due to them under the terms
of
the purchase of their company, and for working capital.
PRICE
RANGE OF COMMON STOCK
Our
common stock is currently traded on the NASDAQ Capital Market under the symbol
“WPCS.” Between January 10, 2005 and March 24, 2005, our stock traded on the OTC
Bulletin Board under the symbol “WPCI.” Prior to January 10, 2005, our stock
traded on the OTC Bulletin Board under the symbol “WPCS.”
For
the
period from May 1, 2003 to March 24, 2005, the table sets forth prices based
upon information obtained from inter-dealer quotations on the OTC Bulletin
Board
without retail markup, markdown, or commission and may not necessarily represent
actual transactions. For the period from March 27, 2005 to date, the following
table sets forth the high and low closing sale prices of our common stock as
reported by the NASDAQ Capital Market.
|
Period
|
High
|
Low
|
|||||
| Fiscal Year Ended April 30, 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
|
|||||
|
Fiscal
Year Ended April 30, 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
|
|||||
|
Fiscal
Year Ending April 30, 2006:
|
|
|
|||||
|
First
Quarter
|
$
|
9.18
|
$
|
4.32
|
|||
|
Second
Quarter
|
9.03
|
5.58
|
|||||
|
Third
Quarter
|
12.78
|
6.12
|
|||||
|
Fourth
Quarter, through March 31,
2006
|
12.50
|
7.25
|
|||||
On
March
31, 2006, the closing sale price of our common stock, as reported by the
NASDAQ
Capital Market, was $7.75 per share. On March 31, 2006, there were 65 holders
of
record of our common stock.
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. Under our
credit agreement dated June 3, 2005, we are prohibited from declaring or paying
dividends, except stock dividends, or making any other distribution. 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.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Some
of
the information in this prospectus contains forward-looking statements that
involve substantial risks and uncertainties. You can identify these statements
by forward-looking words such as “may,” “will,” “expect,” “anticipate,”
“believe,” “estimate” and “continue,” or similar words. You should read
statements that contain these words carefully because they:
|
•
|
discuss
our future expectations;
|
|
•
|
contain
projections of our future results of operations or of our financial
condition; and
|
|
•
|
state
other “forward-looking”
information.
|
We
believe it is important to communicate our expectations. However, there may
be
events in the future that we are not able to accurately predict or over which
we
have no control. The risk factors contained within this prospectus, as well
as
any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. You should
be aware that the occurrence of the events described in these risk factors
could
have an adverse effect on our business, results of operations and financial
condition.
Business
Overview
We
respond to the growing demand in wireless communications by providing
engineering services for the design and deployment of wireless networks. We
operate in two segments that we define as specialty communication systems and
wireless infrastructure services.
We
generate our revenue by providing a range of services including the design,
deployment and maintenance of:
|
•
|
two-way
radio communication systems, which are used primarily for emergency
dispatching;
|
|
•
|
Wi-Fi
networks, which are wireless local area networks that operate on
a set of
product compatibility standards;
|
|
•
|
WiMAX
networks, which are networks that can operate at higher speeds and
over
greater distances than Wi-Fi;
|
|
•
|
mesh
networks, which are redundant systems to route information between
points;
|
|
•
|
millimeter
wave networks, which are high capacity networks for high speed wireless
access;
|
|
•
|
fixed
wireless networks, which are used in point-to-point outdoor
communications;
|
|
•
|
Radio
Frequency Identification, or RFID, networks, which allow customers
to
identify and track assets;
|
|
•
|
free-space
optics, which is a wireless communication technology that uses light
to
transmit voice, data and video; and
|
|
•
|
commercial
cellular systems, which are used primarily for mobile
communications.
|
Specialty
communication systems are wireless networks for a specified customer
application. In this segment, we can utilize any facet of wireless technology
or
a combination of various wireless technologies to engineer a cost effective
network for a customer’s wireless communication requirement. Customers include
corporations, government entities and educational institutions. For the nine
months ended January 31, 2006, specialty communication systems represented
approximately 84% of our total revenue.
Wireless
infrastructure services include the design, deployment and maintenance of
commercial cellular systems. The primary customers in this category include
major wireless service providers such as Sprint Nextel and Cingular. For
the
nine months ended January 31, 2006, wireless infrastructure services represented
approximately 16% of our total revenue.
Management
currently considers the following events, trends and uncertainties to be
important in understanding our results of operations and financial
condition:
|
•
|
For
the nine months ended January 31, 2006, the specialty communication
systems segment represented approximately 84% of total revenue,
and the
wireless infrastructure services segment represented approximately
16% of
total revenue, as compared to approximately 77% and 23%, respectively,
for
the nine months ended January 31, 2005. This shift in revenue composition
towards the specialty communication systems segment was primarily
a result
of our acquisition of Quality in the third fiscal quarter of
2005.
|
|
•
|
As
we continue to search for acquisitions, our primary goal is to identify
companies which are performing well financially and are compatible
with
the services that we perform in the specialty communication systems
segment. This trend could lead to a further shift in our revenue
composition towards the specialty communication systems segment.
We
believe that the strength of our experience in the design and deployment
of specialty communication systems gives us a competitive
advantage.
|
|
•
|
We
also seek to achieve organic growth in our existing business by maximizing
the value of our existing customer base, maintaining and expanding
our
focus in vertical markets and developing our relationships with technology
providers.
|
|
•
|
We
believe that the emergence of new and improved technologies such
as WiMAX
will create additional opportunities for us to design and deploy
solutions
through the use of the latest technologies and assisting existing
customers in enhancing the efficiency of their existing wireless
networks
using new technologies.
|
|
•
|
We
believe that the wireless carriers will continue to make expenditures
to
build and upgrade their networks, increase existing capacity, upgrade
their networks with new technologies and maintain their existing
infrastructure. In response to this trend, we will continue to provide
network deployment services that address wireless carrier
needs.
|
|
•
|
In
connection with sales of our common stock and warrants to certain
investors during the third fiscal quarter ended January 31, 2005,
we
granted certain registration rights that provide for liquidated
damages in
the event of failure to timely perform under the agreements.
The SEC
concluded that under EITF 00-19, common stock and warrants subject
to
registration rights where significant liquidated damages could
be required
to be paid to the holder of the instrument in the event the issuer
fails
to maintain the effectiveness of a registration statement for
a preset
time period, the common stock subject to such liquidated damages
does not
meet the tests required for shareholders' equity classification, and
accordingly must be reflected as temporary equity in the
balance sheet until the conditions are eliminated. Additionally,
the fair
value of warrants should be recorded as a liability, with an
offsetting
reduction to shareholders’ equity, adjusted to market value at the end of
each period. In analyzing instruments under EITF 00-19, the likelihood
or
probability related to the failure to maintain an effective registration
statement is not a
factor.
|
Based
on
the above interpretation, as of April 30, 2005, we classified $5,732,116
for the
value of common stock subject to registration rights as temporary equity
instead
of shareholders' equity. During fiscal 2006, certain of these common shares
were
sold by the investors; therefore we are no longer subject to performance
for
these shares under the registration rights agreement. Accordingly, we
reclassified $3,663,010 out of temporary equity and into shareholders'
equity resulting in $2,069,106 of temporary equity as of January 31, 2006.
In
addition, we measured the initial fair value of the warrants on the closing
date
and classified the fair value of the warrants as warrant liability instead
of
shareholders' equity. At April 30, 2005, the warrant liability was $1,994,570.
At January 31, 2006, the warrant liability increased to $11,296,669 due
principally to the increase in the market value of our common stock. As a
result, for the nine months ended January 31, 2006, we recorded a non-cash
loss
on fair value of warrants of $11,406,414.
The
increase in the loss on fair value of warrants is due principally to the
increase in the market value of our common stock. The non-cash loss on fair
value of warrants has no effect on our cash flows or liquidity.
Historical
Overview
On
May
17, 2002, under an agreement and plan of merger, Phoenix Star Ventures Inc.,
a
publicly held corporation, acquired WPCS Holdings, Inc., a Delaware corporation,
by issuing approximately 458,334 shares of its common stock to stockholders
of
WPCS Holdings in exchange of all the outstanding shares of WPCS Holdings. WPCS
Holdings was incorporated in the State of Delaware on November 15, 2001. The
stockholders of WPCS Holdings, after the acquisition, owned the majority of
the
combined company. The acquisition was accounted for as a reverse acquisition
in
which WPCS Holdings was the acquiror. Concurrent with the acquisition, Phoenix
Star Ventures, the parent company, changed its name to WPCS International
Incorporated.
On
November 12, 2002, we acquired all of the outstanding shares of Invisinet in
exchange for an aggregate of 83,334 newly issued shares of our common stock
with
a fair value of approximately $1,750,000.
On
December 30, 2002, we acquired all of the outstanding shares of Walker Comm
in
exchange for an aggregate of 207,167 newly issued shares of our common stock
with a fair value of approximately $4,574,000 and $500,000 cash
consideration.
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 stockholders 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 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.
On
November 16, 2004, we sold an aggregate of 2,083,887 shares of our common stock
and common stock purchase warrants to purchase 2,083,887 shares of our common
stock at $8.40 per share to eight investors for $10,000,000.
On
November 24, 2004, we acquired all of the outstanding common stock of Quality
for aggregate consideration of approximately $7,458,000 in cash, net of
acquisition transaction costs. $6,700,000 was paid at closing, and additional
purchase price adjustments of approximately $758,000 were subsequently paid
to
settle working capital adjustments and income tax reimbursements.
Effective
January 10, 2005, a majority of our stockholders 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.
On
March
28, 2005, our common stock began trading on the NASDAQ Capital Market. Our
common stock is traded under the symbol “WPCS.”
Corporate
Structure
We
operate through our subsidiaries, Clayborn, Heinz, Invisinet, Quality and Walker
Comm. WPCS’ operations consist of expenses for corporate salaries and external
professional fees, such as accounting, legal and investor relations costs,
which
are not allocated to the subsidiaries. Our corporate structure is as set forth
in the following diagram:
Results
of Operations
Comparison
of Fiscal Years Ended April 30, 2005 and 2004
Consolidated
results for the fiscal years ended April 30, 2005 and 2004 were as follows.
Certain reclassifications have been made to prior fiscal year consolidated
financial statements to conform to the current presentation.
|
|
|||||||||||||
|
Year
Ended
April 30,
|
|||||||||||||
| 2005 | 2004 | ||||||||||||
|
Revenue
|
$
|
40,148,233
|
100.0
|
%
|
$
|
22,076,246
|
100.0
|
%
|
|||||
|
|
|||||||||||||
|
Costs
and expenses:
|
|||||||||||||
|
Cost
of revenue
|
32,445,470
|
80.8
|
%
|
17,286,099
|
78.3
|
%
|
|||||||
|
Selling,
general and administrative expenses
|
7,028,850
|
17.5
|
%
|
4,441,776
|
20.1
|
%
|
|||||||
|
Depreciation
and amortization
|
682,397
|
1.7
|
%
|
382,510
|
1.7
|
%
|
|||||||
|
|
|||||||||||||
|
Total
costs and expenses
|
40,156,717
|
100.0
|
%
|
22,110,385
|
100.1
|
%
|
|||||||
|
|
|||||||||||||
|
Operating
loss
|
(8,484
|
)
|
0.0
|
%
|
(34,139
|
)
|
(0.1
|
%)
|
|||||
|
Other
(income) expense:
|
|||||||||||||
|
Interest
expense
|
24,702
|
0.1
|
%
|
14,048
|
0.1
|
%
|
|||||||
|
Gain
on fair value of warrants
|
1,414,263 | (3.5 | %) | - | 0.0 | % | |||||||
| Income (loss) before income tax provision | 1,381,077 | 3.4 | % | (48,187 | ) |
(0.2
|
%) | ||||||
|
Income
tax provision
|
52,096 |
(0.1
|
%)
|
76,000
|
0.4
|
% | |||||||
|
|
|||||||||||||
|
Net
Income (loss)
|
$
|
1,328,981
|
|
3.3
|
%
|
$
|
(124,187
|
)
|
(0.6
|
%)
|
|||
Revenue
Revenue
for the fiscal year ended April 30, 2005 was approximately $40,148,000, as
compared to $22,076,000 for the prior fiscal year, an increase of 81.9%. The
increase in revenue was attributable to organic growth expansion of our customer
base and new contract awards of approximately $7,600,000 and approximately
$10,400,000 from the acquisitions of Heinz and Quality. For the fiscal year
ended April 30, 2005, we had one customer which comprised 15.5% of our
revenues.
Total
revenue from the specialty communication systems segment for the fiscal years
ended April 30, 2005 and 2004 was approximately $31,497,000 or 78.5% of total
revenue and $17,508,000 or 79.3% of total revenue, respectively. Wireless
infrastructure services segment revenue for the fiscal years ended April 30,
2005 and 2004 was approximately $8,651,000 or 21.5% of total revenue 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, union benefits and other overhead
costs. Our cost of revenue was approximately $32,445,000 or 80.8% of revenue
for
the fiscal year ended April 30, 2005, compared to $17,286,000 or 78.3% of
revenue for the prior fiscal year. The dollar increase in our total cost of
revenue was due to the corresponding increase in revenue during the fiscal
year
ended April 30, 2005 as a result of organic growth in revenue and the
acquisitions of Heinz and Quality. In addition, the increase in total cost
of
revenue was due to an increase in costs incurred on certain contracts that
were
recognized during the fiscal year ended April 30, 2005 of approximately
$1,200,000. The increase in cost of revenue as a percentage of revenue was
due
primarily to an increase in costs incurred on certain contracts, offset by
the
revenue mix attributable to the acquisitions of Heinz and Quality.
The
specialty communication systems segment cost of revenue and cost of revenue
as a
percentage of revenue for the fiscal years ended April 30, 2005 and 2004 were
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 was due to
the
corresponding increase in revenue during the fiscal year ended April 30, 2005
as
a result of organic growth in revenue from Walker Comm and Clayborn, and the
acquisitions of Clayborn and Quality. In addition, the increase in total cost
of
revenue was due to an increase in costs incurred on certain Walker Comm
contracts that were recognized during the fiscal year of approximately
$1,200,000. The increase in cost of revenue as a percentage of revenue was
due
to an increase in the costs incurred on certain Walker Comm contracts recognized
during the period, partially offset by lower cost of revenue on revenues
attributable to the Quality acquisition.
Wireless
infrastructure services segment cost of revenue and cost of revenue as a
percentage of revenue for the fiscal years ended April 30, 2005 and 2004 were
approximately $6,526,000 and 75.4% and $3,455,000 and 75.6%, respectively.
The
dollar increase in our total cost of revenue was due to the corresponding
increase in revenue during the fiscal year ended April 30, 2005 as a result
of
the acquisition of Heinz. The decrease in cost of revenue as a percentage of
revenue was due to the revenue mix attributable to the acquisition of
Heinz.
Selling,
General and Administrative Expenses
For
the
fiscal 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 total revenue for the prior fiscal year. The percentage decrease
was
due to the increase in total revenue in fiscal 2005. Included in selling,
general and administrative expenses for the fiscal year ended April 30, 2005
were $3,656,000 for salaries, commissions, and payroll taxes. The increase
in
salaries and payroll taxes compared to the prior fiscal year was due to the
increase in headcount as a result of the acquisitions of Clayborn, Heinz
and
Quality. Professional fees were $537,000, which included 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 $422,000
and
telecommunication expenses were $196,000. Other selling, general and
administrative expenses totaled $696,000. For the fiscal year ended April
30,
2005, total selling, general and administrative expenses for the specialty
communication systems and wireless infrastructure services segments were
$4,658,000 and $1,180,000, respectively.
For
the
fiscal 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 were salaries, commissions and payroll taxes of
$2,100,000, professional fees of $566,000 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 fiscal
year ended April 30, 2004, total selling, general and administrative expenses
for the specialty communication systems and wireless infrastructure services
segments were $2,805,000 and $712,000, respectively.
Depreciation
and Amortization
For
the
fiscal years 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 fiscal year ended April
30,
2005 was $310,000 as compared to $154,000 for the same period of the prior
fiscal year. The increase in amortization was 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.
Gain
on Fair Value of Warrants
Gain
on
fair value of warrants for the fiscal year ended April 30, 2005 was
approximately $1,414,000. The gain is due principally to the decrease in
the market value of our common stock. The gain represents the unrealized
non-cash change in the fair value of certain warrants recorded as a liability
using the Black-Scholes option pricing model. The non-cash gain on fair value
of
warrants has no impact on our cash flows or liquidity.
Net
income (loss)
Net
income was approximately $1,329,000 for the fiscal year ended April 30, 2005.
Net income 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 fiscal year ended April
30, 2004.
Comparison
of Nine Months Ended January 31, 2006 and 2005
|
Nine
Months Ended January 31,
|
||||||||||||||
| 2006 | 2005 | ||||||||||||
|
Revenue
|
$
|
38,243,071
|
100.0
|
%
|
$
|
29,015,396
|
100.0
|
%
|
|||||
|
|
|||||||||||||
|
Costs
and expenses:
|
|||||||||||||
|
Cost
of revenue
|
27,726,737
|
72.5
|
%
|
23,437,998
|
80.8
|
%
|
|||||||
|
Selling,
general and administrative expenses
|
6,820,446
|
17.8
|
%
|
4,756,278
|
16.4
|
%
|
|||||||
|
Depreciation
and amortization
|
633,394
|
1.7
|
%
|
430,438
|
1.5
|
%
|
|||||||
|
|
|||||||||||||
|
Total
costs and expenses
|
35,180,577
|
92.0
|
%
|
28,624,714
|
98.7
|
%
|
|||||||
|
|
|||||||||||||
|
Operating
income
|
3,062,494
|
8.0
|
%
|
390,682
|
1.3
|
%
|
|||||||
|
Other
Expense:
|
|||||||||||||
|
Interest
expense
|
142,196
|
0.4
|
%
|
18,625
|
0.0
|
%
|
|||||||
|
Loss
on fair value of warrants
|
11,406,414 | 29.8 | % | 840,499 | 2.9 | % | |||||||
|
|
|||||||||||||
|
Loss
before income tax provision
|
(8,486,116
|
) |
(22.2
|
%)
|
(468,442
|
) |
(1.6
|
%)
|
|||||
|
Income
tax provision
|
1,153,773
|
3.0
|
%
|
161,736
|
0.6
|
%
|
|||||||
|
|
|||||||||||||
|
Net
Loss
|
$
|
(9,639,889
|
) |
(25.2
|
%)
|
$
|
(630,178
|
) |
(2.2
|
%)
|
Revenue
Revenue
for the nine months ended January 31, 2006 was approximately $38,243,000,
as
compared to $29,015,000 for the nine months ended January 31, 2005, an increase
of 31.8%. The increase in revenue for the nine months was primarily attributable
to the acquisition of Quality on November 24, 2004. For the nine months ended
January 31, 2006, we had two separate customers which comprised 20.1% and
14.0%
of total revenue.
Total
revenue from the specialty communication systems segment for the nine months
ended January 31, 2006 and 2005 was approximately $32,315,000 or 84.5% and
$22,249,000 or 76.7% of total revenue, respectively. Wireless infrastructure
services segment revenue for the nine months ended January 31, 2006 and 2005
was
approximately $5,928,000 or 15.5% of total revenue and $6,766,000 or 23.3%
of
total revenue, respectively.
Cost
of Revenue
Cost
of
revenue consists of direct costs on contracts, materials, direct labor, third
party subcontractor services, union benefits and other overhead costs. Our
cost
of revenue was approximately $27,727,000 or 72.5% of revenue for the nine
months
ended January 31, 2006, compared to $23,438,000 or 80.8% for the same period
of
the prior year. The dollar increase in our total cost of revenue was due
to the
increase in revenue as a result of the acquisition of Quality. The decrease
in
cost of revenue as a percent of revenue is due to the revenue mix attributable
to contract revenue from Walker, Clayborn and Heinz and to the acquisition
of
Quality. In addition, in the third quarter of fiscal 2005, we experienced
an
increase in actual costs or estimated costs on certain contracts that were
recognized in that quarter.
The
specialty communication systems segment cost of revenue and cost of revenue
as a
percentage of revenue for the nine months ended January 31, 2006 and 2005
were
approximately $23,275,000 and 72.0% and $18,376,000 and 82.6%, respectively.
The
decrease in cost of revenue as a percentage of revenue was due to the revenue
mix attributable to contract revenue from Walker and Clayborn and the
acquisition of Quality. In addition, in the third quarter of fiscal 2005,
we
experienced an increase in actual costs or estimated costs on certain contracts
that were recognized in that quarter.
Wireless
infrastructure services segment cost of revenue and cost of revenue as a
percentage of revenue for the nine months ended January 31, 2006 and 2005
were
approximately $4,452,000 and 75.1% and $5,062,000 and 74.8%, respectively.
The
increase in cost of revenue as a percentage of revenue is due to the revenue
mix
attributable to contract revenue from Heinz.
Selling,
General and Administrative Expenses
For
the
nine months ended January 31, 2006, total selling, general and administrative
expenses were $6,820,000 or 17.8% of total revenue compared to $4,756,000
or
16.4% of revenue for the same period in the prior year. Included in selling,
general and administrative expenses for the nine months ended January 31,
2006
were $3,778,000 for salaries, commissions, and payroll taxes. The increase
in
salaries and payroll taxes compared to the same period in the prior year
is due
to the increase in headcount as a result of the acquisition of Quality.
Professional fees were $394,000, which include accounting, legal and investor
relation fees. Insurance costs were $1,039,000 and rent for office facilities
was $291,000. Automobile and other travel expenses were $544,000. Other selling,
general and administrative expenses totaled $774,000. For the nine months
ended
January 31, 2006, total selling, general and administrative expenses for
the
specialty communication systems and wireless infrastructure services segments
were $5,004,000 and $794,000, respectively.
For
the
nine months ended January 31, 2005, selling, general and administrative expenses
were $4,756,000 or 16.4% of revenue. Included in the selling, general and
administrative expenses were $2,346,000 for salaries, commissions and payroll
taxes, $430,000 in professional fees, and insurance costs of $861,000. Rent
for
our office facilities amounted to $253,000. Automobile and other travel expenses
were $279,000. Other selling, general and administrative expenses totaled
$587,000. For the nine months ended January 31, 2005, total selling, general
and
administrative expenses for the specialty communication systems and wireless
infrastructure services segments were $3,099,000 and $759,000,
respectively.
Depreciation
and Amortization
For
the
nine months ended January 31, 2006 and 2005, depreciation was approximately
$410,000 and $256,000, respectively. The increase in depreciation is due
to the
purchase of property and equipment and the acquisition of fixed assets from
acquiring Quality. The amortization of customer lists for the nine months
ended
January 31, 2006 was $223,000 as compared to the amortization of customer
lists
and backlog of $174,000 for the same period of the prior year. The increase
in
amortization is due to the acquisition of Quality customer lists. All customer
lists are amortized over a period of five to six years from the date of their
acquisition.
Loss
on Fair Value of Warrants
Loss
on
fair value of warrants for nine months ended January 31, 2006 and 2005 was
approximately $11,406,000 and $840,000, respectively. The increase in the
loss is due principally to the increase in the market value of our common
stock.
The loss represents the unrealized non-cash change in the fair value of certain
warrants recorded as a liability for the period using the Black-Scholes
option pricing model. The non-cash loss on fair value of warrants has no
impact
on our cash flows or liquidity.
Net
Loss
As
a
result of the above, the net loss was approximately $9,640,000 for the nine
months ended January 31, 2006, including federal and state income tax expense
of
approximately $1,154,000. The variation in effective tax rates between periods
is primarily due to the Quality acquisition and the loss on fair value of
warrants described above.
We
recognized net loss of approximately $630,000 for the nine months ended January
31, 2005, net of federal and state income taxes of approximately
$162,000.
Liquidity
and Capital Resources
At
January 31, 2006, we had working capital of approximately $13,053,000, which
consisted of current assets of approximately $20,086,000 and current liabilities
of $7,033,000.
Operating
activities provided approximately $1,938,000 in cash for the nine months
ended
January 31, 2006. The sources of cash from operating activities total
approximately $3,767,000, comprised of $9,640,000 net loss, $12,073,000 in
net
non-cash charges, a $50,000 decrease in prepaid expenses and other assets,
an
$810,000 increase in billings in excess of costs and estimated earnings on
uncompleted contracts and a $474,000 increase in income taxes payable. The
uses
of cash from operating activities total approximately $1,829,000, comprised
of a
$122,000 increase in accounts receivable, a $297,000 increase in costs and
estimated earnings in excess of billings on uncompleted contracts, a $73,000
increase in inventory, and a $1,337,000 decrease in accounts payable and
accrued
expenses.
Our
investing activities utilized approximately $139,000 in cash during the nine
months ended January 31, 2006, which consisted of $135,000 paid for property
and
equipment and $4,000 paid for acquisition transaction costs.
Our
financing activities provided cash of approximately $4,549,000 during the
nine
months ended January 31, 2006. Financing activities include proceeds from
the
exercise of warrants of $3,387,000 less related issuance costs of $200,000,
borrowings under lines of credit of $2,618,000 less debt issuance costs of
$159,000, repayments of equipment loans and capital lease obligations of
approximately $154,000, and $943,000 paid to shareholders.
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 commercial bank. 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.
Under
the
terms of our 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 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) our total tangible net worth, (iii) working capital, (iv)
minimum earnings before interest, taxes, depreciation and amortization, and
(v)
dividend restrictions. As of January 31, 2006, we were in compliance with
the
credit agreement covenants. The loan commitment expires on August 31, 2008.
We
may prepay the loan at any time.
The
loan
under the credit agreement bears 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 (7.1875% as of January
31,
2006). We paid a facility fee to the bank of $50,000 on the closing date.
In
addition to the loan, 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.
We
used
the initial funds provided by the loan, in the gross amount of $3,000,000,
to
repay existing bank debt of Walker of approximately $672,000, for the payment
of
approximately $758,000 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.
On
November 24, 2004, we acquired Quality for the aggregate consideration
of
approximately $7,500,000 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 provides 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.
At
January 31, 2006, we had cash and cash equivalents of $7,337,000 and working
capital of approximately $13,053,000. With the funds available from the recently
obtained revolving credit line and internally available funds, we believe
that
we have sufficient capital to meet our needs through January 31, 2007. Our
future operating results may be affected by a number of factors including
our
success in bidding on future contracts and our continued ability to manage
controllable costs effectively. To the extent we grow by future acquisitions
that involve consideration other than stock, our cash requirements may increase.
Backlog
As
of
January 31, 2006, we had a backlog of unfilled orders of approximately $19.7
million compared to approximately $17.4 million at January 31, 2005. We
anticipate our backlog at January 31, 2006 to be recognized as revenue within
eight months from that date. We define backlog as the value of work-in-hand
to
be provided for customers as of a specific date where the following conditions
are met (with the exception of engineering change orders): (i) the price
of the
work to be done is fixed; (ii) the scope of the work to be done is fixed,
both
in definition and amount; and (iii) there is a written contract, purchase
order,
agreement or other documentary evidence which represents a firm commitment
by
the customer to pay us for the work to be performed. These backlog amounts
are
based on contract values and purchase orders and may not result in actual
receipt of revenue in the originally anticipated period or at all. We have
experienced variances in the realization of our backlog because of project
delays or cancellations resulting from external market factors and economic
factors beyond our control and we may experience such delays or cancellations
in
the future. Backlog does not include new firm commitments which may be awarded
to us by our customers from time to time in future periods. These new project
awards could be started and completed in this same future period. Accordingly,
our backlog does not necessarily represent the total revenue that could be
earned by us in future periods.
Off-Balance
Sheet Arrangements
We
have
no off-balance sheet arrangements.
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.
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:
Equity
Issued with Registration Rights
In
connection with sales of our common stock and warrants to certain investors
during the third fiscal quarter ended January 31, 2005, the Company granted
certain registration rights that provide for liquidated damages in the event
of
failure to timely perform under the agreements. Although the common stock
purchase agreement does not provide for net-cash settlement, the existence
of
liquidated damages provides for a defacto net-cash settlement option. Therefore,
common stock subject to such liquidated damages does not meet the tests required
for shareholders’ equity classification, and accordingly has been reflected
between liabilities and equity in the accompanying consolidated balance sheet
until such time as the conditions are eliminated.
Warrant
Liability
In
connection with the sale of certain equity instruments during the third fiscal
quarter ended January 31, 2005, as described above, the Company issued
freestanding warrants. Although the terms of the warrants do not provide
for
net-cash settlement, in certain circumstances, physical or net-share settlement
is deemed to not be within the Company’s control and, accordingly, the Company
is required to account for these freestanding warrants as a derivative financial
instrument liability, rather than as shareholders’ equity.
The
warrant liability is initially measured and recorded at its fair value, and
is
then re-valued at each reporting date, with changes in the fair value reported
as non-cash charges or credits to earnings. For warrant-based derivative
financial instruments, the Black-Scholes option pricing model is used to
value
the warrant liability.
The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end
of
each reporting period. Derivative instrument liabilities are classified in
the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months
of
the balance sheet date.
The
Company does not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks.
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. We determine
our allowance by considering a number of factors, including the length of time
trade accounts receivable are past due, our previous loss history, the
customer’s current ability to pay its obligation to us, and the condition of the
general economy and the industry as a whole. We write 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
as of April 30 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.
Our
annual review for goodwill impairment for the fiscal years 2005 and 2004
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 Comm, Clayborn
and
Quality within our specialty communication systems 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 consolidated financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, using 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
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 engineering 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, a provision is made in the current period for the total
loss
anticipated.
Recently
Issued Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R)
(revised 2004), “Share-Based Payment,” which revises FASB Statement No. 123 and
will be effective beginning with the first fiscal quarter for our fiscal
year
ending April 30, 2007. The revised standard will require us to expense employee
stock options and other share-based payments over the service period. 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, although
it
is likely that we will have to recognize additional compensation expense
in the
periods after adoption.
No
other
recently issued accounting pronouncement effective after the end of the most
recent quarter is expected to have a material impact on our consolidated
financial statements.
BUSINESS
Overview
We
design
and deploy wireless networks. We provide design-build engineering services
for
specialty communication systems, which are dedicated wireless networks for
specified applications, and for wireless infrastructure, which encompasses
commercial cellular systems for wireless carriers. Our range of services
includes site design, spectrum analysis, engineering, trenching, electrical
work, structured cabling, product integration, testing and project management.
Because we are technology and vendor independent, we can integrate multiple
products and services across a variety of communication requirements. This
ability gives our customers the flexibility to create and implement the most
appropriate solution for their communication needs, and the cost advantage
that
comes from dealing with competing vendors. Our customers include corporations,
government entities and educational institutions. Within this customer base,
we
also serve vertical sectors such as public safety, gaming and healthcare, and
wireless carriers.
The
increasing demand for wireless services has become a driving force behind
the
recent growth in the global communications industry. Wireless technology
has
advanced substantially to the point where wireless networks have proven to
be an
effective alternative to land line networks, a key factor in wireless’ broad
acceptance. The advantages of wireless over land line communication are apparent
in the aspects of mobility, capacity, cost, and deployment. We believe the
use
of dedicated wireless networks for specified applications has improved
productivity for individuals and organizations alike. We provide comprehensive
and cost effective engineering services to address the demand for these wireless
networks.
With
seven offices across the United States, we provide our services to our customers
nationwide. Our rapid revenue growth since we commenced operations in November
2001 is attributable to a combination of acquisitions and organic growth.
For
the fiscal year ended April 30, 2005, we generated revenues of $40.1 million,
an
increase of 81.9% from the fiscal year ended April 30, 2004. For the nine
months
ended January 31, 2006, we generated revenues of $38.2 million, an increase
of
31.8% over the comparable period in 2005. Our backlog at January 31, 2006
was
approximately $19.7 million.
Industry
Background
Worldwide
use of wireless communications has grown rapidly as cellular and other emerging
wireless technologies have become more widely available and affordable for
businesses and consumers. The Cellular Telecommunications & Internet
Association, or CTIA, in a summary prepared in October 2005, reported that
there
were approximately 194.5 million wireless subscribers in the United States,
an
increase of 15% over the prior year. The rapid growth in wireless communications
is driven by the dramatic increase in wireless device usage, as well as strong
demand for wireless data services and enterprise applications. According to
the
CTIA summary, wireless service revenue from data applications increased 85%
from
the prior year, to reach $3.7 billion for the first six months of
2005.
The
growing number of wireless subscribers and the increase in usage by those
subscribers have fueled the growth of the wireless services industry. According
to a study prepared by the Ovum Group for CTIA in September 2005, U.S. wireless
carriers spent $21.3 billion on capital investment in 2004. We believe
enterprise wireless network investment will increase substantially as the
industry continues to expand.
Advantages
of Wireless Technology
Various
improvements in wireless technologies have resulted in an environment where
wireless solutions provide a number of key advantages over traditional land
line
solutions, including:
|
•
|
Mobility.
Mobile
communications and computing are among the driving forces behind
the
demand for wireless connectivity. The increased functionality and
declining cost of mobile wireless devices has fueled further growth.
Mobile connectivity has led to greater productivity as organizations
transmit data and gather information from remote staff and locations
where
land line connectivity is unavailable. Such mobile connectivity has
created significant cost savings in data collection, increased
responsiveness, enabled greater access to enterprise resources, and
improved controls.
|
|
•
|
Capacity.
Current
technology allows wireless transmission with capacity, quality and
reliability superior to land line and comparable to fiber. For example,
current radio technology is capable of two-way data transfer at rates
up
to 1 gigabits per second, allowing wireless networks to transmit
content
as quickly as over fiber.
|
|
•
|
Cost.
Wireless
networks cost less than comparable land line networks both to deploy
and
to operate. Wireless deployment is less expensive because the installation
of a land line network is more labor-intensive, requires more time
and may
involve substantial right-of-way expenditures, while we expect the
main
cost component of wireless networks-equipment-to continue to decline
as
technology advances and production volumes increase. Operating costs
of
wireless networks are also lower because land lines require extensive
troubleshooting to execute repairs. In addition, wireless networks
bypass
local service providers, eliminating recurring monthly
charges.
|
|
•
|
Deployment.
Because
enterprise wireless networks do not require negotiating rights of
way,
substantial infrastructure engineering, time-consuming third party
coordination efforts or additional FCC licensing, they can be deployed
quickly and less expensively. Rapid deployment allows organizations
to
install networks more closely in line with immediate needs rather
than
having to commit to time-consuming engineering projects in anticipation
of
future growth.
|
Industry
Trends
The
demand for wireless data services can be tied to the following key
trends:
|
•
|
increased
security of wireless data
transmission;
|
|
•
|
introduction
of new technologies such as Wi-Fi, WiMAX and
RFID;
|
|
•
|
increasing
accessibility and affordability of Web-enabled devices;
and
|
|
•
|
increased
capacity of wireless networks, making them a legitimate substitute
for
land line communications.
|
The
advantages gained through wireless communication solutions have expanded the
scope of possible applications, creating demand for specialty communication
systems.
Demand
for wireless data services is accelerating the adoption of new technologies
to
enable wireless networks to deliver enhanced features and capabilities. Such
technologies include Internet protocol, or IP, communications, including Voice
over IP; fixed broadband wireless that permits the use of high capacity wireless
connections between locations that are within a line of sight across relatively
short distances; and mobile wireless technologies and new high capacity
applications, commonly referred to as “3G” broadband wireless networks.
According to the Telecommunications Industry Association’s
2005
Telecommunications Market Review and Forecast
,
Wi-Fi
and WiMAX infrastructure revenues were expected to reach $5.2 billion and $115
million, respectively, in 2005. The proliferation of network technologies,
enabled by the standardization around IP is increasing the challenge to
integrate these technologies, protocols and services. All these new technologies
have increased the complexity of wireless systems, and created demand for the
services of companies with specialized skills to address that
complexity.
Business
Strategy
Our
goal
is to become a recognized leader in the design and deployment of wireless
networks for specialty communication systems and wireless infrastructure. We
have designed and deployed many systems incorporating innovative uses of
wireless technology in various vertical markets. Our strategy focuses on both
organic growth and the pursuit of acquisitions that add to our engineering
capacity and geographic coverage. Specifically, we will endeavor
to:
|
•
|
Market
additional services to our customers.
Each
acquisition we make expands our customer base. We seek to expand
these new
customer relationships by making them aware of the diverse products
and
services we offer. We believe that providing these customers the
full
range of our services will lead to new projects or revenue opportunities
and increased profitability.
|
|
•
|
Maintain
and expand our focus in vertical markets.
We
have deployed successful, innovative wireless solutions for multiple
customers in a number of vertical markets, such as public safety
and the
gaming industry. We will continue to seek additional customers in
these
targeted vertical markets who can benefit from our expertise, and
look for
new ways in which we can design wireless solutions to enhance productivity
within these markets. We also look for new vertical markets where
we can
make a difference with compelling wireless solutions, and will continue
to
expand our vertical market coverage to include these new markets
as
appropriate.
|
|
•
|
Strengthen
our relationships with technology providers.
We
will continue to strengthen the relationships we have with technology
providers such as Avaya and Motorola. These companies rely on us
to deploy
their technology products within their customer base. We have worked
with
these providers in testing new equipment they develop, and our personnel
maintain certifications on our technology providers’ products. We also
look for innovative products which can be of benefit to our customers,
and
endeavor to establish similar relationships with new technology providers
as part of our commitment to offering the most complete solutions
to our
customers.
|
|
•
|
Seek
strategic acquisitions.
We
will continue to look for additional acquisitions of compatible businesses
that can be assimilated into our organization, expand our geographic
coverage and add accretive earnings to our business. Our preferred
acquisition candidates will have experience with specialty communication
systems, engineering capacity in a design-build format, an expansive
customer base, and a favorable financial
profile.
|
Services
We
operate in two segments, specialty communication systems and wireless
infrastructure services. Specialty communication systems are wireless networks
designed to improve productivity for a specified application by communicating
data, voice or video information in situations where land line networks are
non-existent, more difficult to deploy or too expensive. Wireless infrastructure
services include the engineering, installation, integration and maintenance
of
wireless carrier equipment. For the nine months ended January 31, 2006,
specialty communication systems represented approximately 84% of our total
revenue, and wireless infrastructure services represented approximately 16%
of
our total revenue. For the fiscal year ended April 30, 2005, specialty
communication systems represented approximately 78% of our total revenue,
and
wireless infrastructure services represented approximately 22% of our total
revenue.
Specialty
Communication Systems
The
types
of specialty communication systems that we implement are used for mobile
computing and general wireless connectivity purposes. In mobile computing,
the
most popular use is the transfer of data, voice or video from a server to a
mobile device, which can be achieved through the following
applications:
|
•
|
asset
tracking, which is a wireless network that monitors the location
of mobile
assets such as vehicles or stationary assets such as
equipment;
|
|
•
|
telematics,
which are instructions sent through a wireless network that controls
a
device such as a slot machine or traffic signal;
and
|
|
•
|
telemetry,
which is the acquisition of data from a measuring device such as
the
devices used at a water treatment plant to maintain the integrity
of
drinking water.
|
In
general wireless connectivity, we design and deploy wireless networks which
allow entities to reduce their dependence on high cost leased land lines or
provide them with a redundant back-up wireless network to their land line
network.
Wireless
communication is primarily achieved through radio frequency, or RF, signals.
There are various RF communication methods used for connectivity, including
Wi-Fi and WiMAX technology for local area and wide area networking, fixed
wireless networks for point-to-point connectivity, and cellular communication
for general voice and data transmission. We have the engineering expertise
to
utilize any facet of wireless technology or a combination of various wireless
technologies to engineer a cost effective network for a customer’s wireless
communication requirement. In addition, the design and deployment of a specialty
communication system is a comprehensive effort that requires experience in
RF
engineering so that the wireless network is free from interference with other
signals and amplified sufficiently to carry data, voice or video with speed
and
accuracy. Our extensive engineering expertise with RF communications makes
us
well suited to address these challenges for our customers.
We
are
technology and vendor independent. As wireless networks evolve, customers are
increasingly showing a tendency to select independent service providers,
allowing our independence to become an important differentiator. As open
standards and IP-based architecture continue to supplant vendor proprietary
protocols and products in the marketplace, we believe our independent position
will allow us to capture an increasing share of the specialty communication
systems market. We believe that the strength of our experience in the design
and
deployment of these specialty communication systems gives us a competitive
advantage and has supported our rapid growth, both organically and through
acquisitions.
Wireless
Infrastructure Services
We
provide wireless infrastructure services to major wireless carriers. Wireless
carriers are focused on building and expanding their networks, increasing
capacity, upgrading their networks with new technologies and maintaining their
existing infrastructure. Our engineers install, test and commission base station
equipment at the carrier cell site, including installations of new equipment,
technology upgrades, equipment modifications and reconfigurations. These
services may also include tower construction. The range of infrastructure
services includes the following:
|
•
|
Installation,
testing and commissioning of base station equipment, which is the
installation of radio frequency equipment inside the shelter at a
cell
site, and testing to ensure that the equipment is operating prior
to cell
site activation;
|
|
•
|
Equipment
modification and reconfiguration, which involves replacing old equipment
with new equipment, re-routing cables, and re-locating equipment
at the
cell site;
|
|
•
|
Network
modifications, which refers to work done on existing cell sites to
increase capacity or change the direction of sectors or
antennas;
|
|
•
|
Sectorization,
which is the installation of antennas to existing cell towers to
increase
the capacity of the cell site; and
|
|
•
|
Maintenance,
which includes antenna maintenance to replace damaged antennas, installing
tower lighting control panels or sensors, or repairing damaged
shelters.
|
Project
Characteristics
Our
contracts are service-based projects providing installation and engineering
services, which include providing labor, materials and equipment for a complete
installation. The projects are generally staffed with a project manager who
manages multiple projects and a field supervisor who is responsible for an
individual project. Depending on contract scope, project staff size could range
from two to four engineers to as high as 25 to 30 engineers. A project may
also
include subcontracted services along with our direct labor.
The
project manager coordinates the daily activities of direct labor and
subcontractors and works closely with our field supervisors. Project managers
are responsible for job costing, change order tracking, billing, and customer
relations. Executive management monitors the performance of all projects
regularly through work-in-progress reporting or percentage-of-completion, and
reviews this information with each project manager.
Our
projects are executed on a contract basis. These contracts can be awarded
through a competitive bidding process, an informal bidding process, or a simple
quote request. Upon award of a contract, there can often be a delay of several
months before work begins. The active work time on our projects can range in
duration from a few days up to as long as two years. Once services under the
contract commence, our average project length is approximately two
months.
Customers
We
serve
a variety of customers in different market segments. In our specialty
communication systems segment, we believe our design and deployment of
innovative wireless networks specific to the needs of customers in certain
vertical markets has brought us recognition in these markets.
In
public
safety, we have designed and deployed illuminated crosswalks activated by a
wireless signal, wireless traffic monitoring systems and wireless changeable
highway message signs for Amber Alert notification. In addition, we have
designed and deployed inclusive emergency management systems that coordinate
emergency services including 911 dispatching and records management. Our public
safety customers have included CALTRANS, Amtrak, the New Jersey State Police
and
the State of New York.
In
the
gaming industry, we have developed expertise in the design and deployment of
wireless networks to monitor slot machine activity for casino operators. The
slot machines, which represent the highest percentage of revenue for any casino,
are networked and constantly monitored from a central location. The network
is
designed to alert the casino operators if there is a malfunction, and provide
the ability to repair any technical issues immediately and remotely,
representing an economic benefit in both cost savings and elimination of lost
revenue. In addition, we have established wireless two-way radio, paging and
dispatch networks within casinos for improved communication. Our gaming
customers have included Bally’s, Caesar’s Entertainment, Mohegan Sun Hotel &
Casino and The Seminole Indian Nation.
In
the
healthcare industry, we have deployed systems such as the
following:
|
•
|
a
wireless network for the asset tracking of ambulances in order to
improve
medical dispatch services for
patients;
|
|
•
|
the
deployment of laptop computers in ambulances for the transmission
of
patient information to the hospital while in transit;
and
|
|
•
|
a
wireless network that allows medical staff to access consolidated
patient
medical records throughout the hospital via mobile wireless devices,
improving the accuracy of patient
care.
|
Our
healthcare customers have included Amcare Ambulance, Wake Forest University
Baptist Hospital, Somerset Hospital and Southeast Regional Medical
Center.
We
also
provide design and deployment of wireless networks for general wireless
connectivity. We have provided these services to customers within our vertical
markets, as well as corporations such as United Parcel Service and real estate
developers such as Silverstein Properties in the construction of the new 7
World
Trade Center in New York City. Improved communication can be established between
buildings by establishing Wi-Fi networks and fixed wireless networks that
eliminate costly leased land lines. We also designed and deployed a wireless
network for Alltel Stadium, the home of the Jacksonville Jaguars and site of
the
2005 Super Bowl, which is used for point-of-sale inventory management for
different vendors throughout the stadium.
In
our
wireless infrastructure segment, our customers are major wireless service
providers. We have provided services for Sprint Nextel, Cingular, T-Mobile,
U.S.
Cellular and Verizon. We are performing engineering services for a major
wireless carrier related to a project mandated by the FCC. The project involves
a multi-phase FCC-mandated re-banding initiative to include mitigation of public
safety radio interference at the 800MHz frequency by moving service to the
900
MHz frequency. The scope of our project requires the removal and replacement
of
certain equipment located at the cell site shelters to accommodate the frequency
changes. In addition, we are upgrading and integrating non-wide band equipment
within existing transmitter sites to allow for future frequency
migration.
For
the
fiscal year ended April 30, 2005, we had revenue from one customer totaling
$6.2
million, which comprised 15.5% of our total revenue. For the nine months
ended
January 31, 2006, we had revenue from two customers totaling $7.7 million
and
$5.4 million, which comprised 20.1% and 14.0% of our total revenue,
respectively.
Sales
and Marketing
We
have
dedicated sales and marketing resources that develop opportunities within
our
existing customer base, and identify new customers through our vertical market
focus and our relationships with technology providers. In addition, our project
managers devote a portion of their time to sales and marketing. When an
opportunity is identified, we assess the opportunity to determine our level
of
interest in participation. After qualifying an opportunity, our sales and
marketing resources work with the internal project management teams to prepare
a
cost estimate and contract proposal for a particular project. We keep track
of
bids submitted and bids that are awarded. Once a bid is awarded to us, it
is
assigned to a project management team and included in our backlog. We focus
almost all of our sales and marketing effort in the United States due to
the
robust market conditions.
Backlog
As
of
January 31, 2006, we had a backlog of unfilled orders of approximately $19.7
million compared to approximately $17.4 million at January 31, 2005. We
anticipate our backlog at January 31, 2006 to be recognized as revenue within
eight months from that date. We define backlog as the value of work-in-hand
to
be provided for customers as of a specific date where the following conditions
are met (with the exception of engineering change orders): (i) the price
of the
work to be done is fixed; (ii) the scope of the work to be done is fixed,
both
in definition and amount; and (iii) there is a written contract, purchase
order,
agreement or other documentary evidence which represents a firm commitment
by
the customer to pay us for the work to be performed. These backlog amounts
are
based on contract values and purchase orders and may not result in actual
receipt of revenue in the originally anticipated period or at all. We have
experienced variances in the realization of our backlog because of project
delays or cancellations resulting from external market factors and economic
factors beyond our control and we may experience such delays or cancellations
in
the future. Backlog does not include new firm commitments which may be awarded
to us by our customers from time to time in future periods. These new project
awards could be started and completed in this same future period. Accordingly,
our backlog does not necessarily represent the total revenue that could be
earned by us in future periods.
Competition
We
face
competition from numerous service providers, ranging from small independent
regional firms to larger firms servicing national markets. We also face
competition from existing or prospective customers that employ in-house
personnel to perform some of the same types of services that 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 a
competitor. At the present time, we believe that there are no dominant
competitors in the specialty communication systems segment. Some of the
competition we face comes from companies that provide similar services, but
are
not vendor independent, such as Terabeam, Inc. and ARC Wireless Solutions,
Inc.,
and from companies that offer general wireless connectivity services on a
subscription model basis, such as Earthlink, Inc. and T-Mobile USA, Inc. The
vendor-independent competitors in this market are relatively fragmented, and
there is no recognized competitor who offers services similar to ours on a
national scale. There are a number of engineering firms that could compete
with
us in the future, who have substantially greater resources. The competition
we
face in the wireless infrastructure services segment comes primarily from
Wireless Facilities, Inc. and LCC International, Inc. There are also numerous
regional competitors whom we encounter in our wireless infrastructure services
business.
The
principal competitive advantage in these markets is the ability to deliver
results on time and within budget. Other factors of importance include
reputation, accountability, staffing capability, 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 design, deploy and maintain all facets of wireless technology for
various vertical sectors gives us a competitive advantage. We maintain a trained
and certified staff of engineers that have developed proven methodologies for
the design and deployment of wireless networks, and can provide these services
on a national basis. In addition, we offer both a union and non-union workforce
that allows us to bid on either labor requirement, creating yet another
competitive advantage.
However,
our ability to compete effectively also depends on a number of additional
factors which are beyond our control. These factors include competitive pricing
for similar services, the ability and willingness of the competition to finance
projects on favorable terms, the ability of customers to perform the services
internally and the responsiveness of our competitors to customer
needs.
Employees
As
of
March 31, 2006, we employed 219 full time employees, of whom 151 are project
engineers, 23 are project managers, 39 are in general management and
administration and six are executives. We have approximately 95 project
engineers who are represented by the International Brotherhood of Electrical
Workers. A contract with these union employees expires November 30, 2008.
We
also have non-union employees. We believe relations with our employees are
good.
Properties
Our
principal executive offices are located in approximately 2,550 square feet
of
office space in Exton, Pennsylvania. We operate our business under office leases
in the following locations:
|
Location
|
Lease
Expiration
Date
|
Minimum
Annual
Rent
|
|||||
|
Auburn,
California (1)
|
month-to-month
|
$
|
64,440
|
||||
|
Exton,
Pennsylvania
|
February
1, 2008
|
$
|
48,725
|
||||
|
|
|||||||
|
Fairfield,
California (2)
|
February
28, 2011
|
$
|
94,125
|
||||
|
Lakewood,
New Jersey
|
August
31, 2007
|
$
|
90,370
|
||||
|
Rocklin,
California
|
January
31, 2008
|
$
|
27,000
|
||||
|
San
Leandro, California
|
July
31, 2006
|
$
|
13,756
|
||||
|
St.
Louis, Missouri
|
August
31, 2008
|
$
|
56,142
|
(1)
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.
(2)
We
lease
our Fairfield, California location from a trust, of which Gary Walker, one
of
our Directors, is the trustee.
We
believe that our existing facilities are suitable and adequate to meet our
current business requirements.
Legal
Proceedings
We
are
currently not a party to any material legal proceedings or
claims.
MANAGEMENT
Directors
and Executive Officers
Our
directors and executive officers and their ages as of March 31, 2006 are
as
follows.
|
Name
|
Age
|
Position
|
||
|
Andrew
Hidalgo
|
49
|
Chairman,
Chief Executive Officer and Director
|
||
|
Joseph
Heater
|
42
|
Chief
Financial Officer
|
||
|
Donald
Walker
|
43
|
Executive
Vice President
|
||
|
James
Heinz
|
46
|
Executive
Vice President
|
||
|
Richard
Schubiger
|
40
|
Executive
Vice President
|
||
|
Norm
Dumbroff
|
45
|
Director
|
||
|
Neil
Hebenton
|
50
|
Director
|
||
|
Gary
Walker
|
51
|
Director
|
||
|
William
Whitehead
|
50
|
Director
|
Set
forth
below is a biographical description of each director and executive
officer.
Andrew
Hidalgo, Chairman and Chief Executive Officer
Mr.
Hidalgo has been our Chairman of the Board and Chief Executive Officer since
our
inception in May 2002 and served in the same capacity with the predecessor
company WPCS Holdings, Inc. since September 2000. He is responsible for our
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.
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 its 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 engineering 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
Norm
Dumbroff , Director
Mr.
Dumbroff became a director of WPCS in November 2002. Since April 1990, he has
been the Chief Executive Officer of Wav Incorporated, 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, Director
Mr.
Hebenton became a director of WPCS in October 2002. Since February 2002, he
has
been Senior Director, Business Development, for Perceptive Informatics, Inc.
(a
subsidiary of PAREXEL International Corp.), a company offering clinical trial
data management software applications to pharmaceutical and biotechnology
companies. From January 1998 to January 2002, he was the Managing Director
for
the U.K. based FW Pharma Systems, a multi-million dollar application software
company serving the pharmaceutical and biotechnology sectors. Prior to that,
Mr.
Hebenton has held a variety of operational, scientific and marketing positions
in Europe with Bull Information Systems (BULP-Paris, Frankfurt, Zurich) and
Phillips Information Systems. He received his B.S. in Mathematics from the
University of Edinburgh, Scotland.
Gary
Walker, Director
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, Director
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.
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 and 2006 Incentive Stock
Plan
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 on which our directors
serve.
Audit
Committee
Our
Audit
Committee currently consists 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.
Our
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. Our Audit Committee also prepares the Audit Committee
report that is required pursuant to the rules of the SEC.
Executive
Committee
Our
Executive Committee currently consists of Norm Dumbroff, Neil Hebenton and
William Whitehead, with Mr. Dumbroff elected as Chairman of the Committee.
Our
Board of Directors has determined that all of the members are “independent”
under the current listing standards of the NASDAQ Stock Market. Our Board of
Directors has adopted a written charter setting forth the authority and
responsibilities of the Executive Committee.
Our
Executive Committee has responsibility for assisting the Board of Directors
in,
among other things, evaluating and making recommendations regarding the
compensation of our executive officers and directors, assuring that the
executive officers are compensated effectively in a manner consistent with
our
stated compensation strategy, producing an annual report on executive
compensation in accordance with the rules and regulations promulgated by the
SEC, periodically evaluating the terms and administration of our incentive
plans
and benefit programs and monitoring of compliance with the legal prohibition
on
loans to our directors and executive officers.
Nominating
Committee
Our
Nominating Committee currently consists 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.
Our
Nominating Committee has responsibility for assisting the Board in, among other
things, effecting the organization, membership and function of the Board and
its
committees. The Nominating Committee shall identify and evaluate the
qualifications of all candidates for nomination for election as
directors.
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 our Chief Executive Officer
and each of our four other most highly compensated executive officers based
on
salary and bonus earned during the 2005 fiscal year:
|
Summary
Compensation Table
|
|||||||||||||||||||||||||
|
Long-Term
Compensation
|
|||||||||||||||||||||||||
|
Annual
Compensation
|
Awards
|
Payouts
|
|||||||||||||||||||||||
|
Name
and Principal Position
|
Fiscal
Year
|
Annual
Salary
($)
|
Annual
Bonus
($)
|
Other
Annual
Compensation
($)
|
Restricted
Stock
Awards
($)
|
Securities
Underlying
Options/SARs
(#)
(5)
|
LTIP
Payouts
($)
|
All
Other
Compensation
($)
|
|||||||||||||||||
|
Andrew
Hidalgo,
|
2005
|
168,000
|
---
|
9,549
|
(6)
|
---
|
154,167
|
---
|
---
|
||||||||||||||||
|
Chairman,
CEO and
|
2004
|
154,500
|
17,000
|
7,958
|
(6)
|
---
|
---
|
---
|
---
|
||||||||||||||||
|
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
Comm
|
2004
|
140,000
|
26,962
|
---
|
---
|
16,667
|
---
|
---
|
|||||||||||||||||
|
and
Director (2)
|
2003
|
42,333
|
2,669
|
---
|
---
|
---
|
---
|
---
|
|||||||||||||||||
|
James
Heinz,
|
2005
|
140,000
|
---
|
---
|
---
|
10,000
|
---
|
---
|
|||||||||||||||||
|
Executive
Vice President (3)
|
2004
|
10,231
|
---
|
---
|
---
|
---
|
---
|
---
|
|||||||||||||||||
|
|
2003
|
---
|
---
|
---
|
---
|
---
|
---
|
---
|
|||||||||||||||||
|
Joseph
Heater,
|
2005
|
132,000
|
---
|
---
|
---
|
35,000
|
---
|
---
|
|||||||||||||||||
|
Chief
Financial Officer (4)
|
2004
|
95,500
|
8,000
|
---
|
---
|
33,334
|
---
|
---
|
|||||||||||||||||
|
2003
|
---
|
---
|
---
|
---
|
---
|
---
|
---
|
||||||||||||||||||
|
(1)
|
Mr.
Walker has served as Executive Vice President since December 30,
2002.
|
(2)
Mr.
Walker has served as President of Walker Comm 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. We do not have any
outstanding stock appreciation rights.
(6)
Represents
car allowance payments.
Employment
Agreements
Contract
with Andrew Hidalgo
On
February 1, 2004, we entered into a three-year employment contract with Andrew
Hidalgo, our Chairman and Chief Executive 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
$168,000 per annum. In addition, Mr. Hidalgo is entitled to participate in
any
and all benefit plans, from time to time, in effect for our employees, along
with vacation, sick and holiday pay in accordance with our policies established
and in effect from time to time.
Contract
with Joseph Heater
On
June
1, 2005, we entered into a three-year employment contract with Joseph Heater,
our 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.
In
addition, Mr. Heater is entitled to participate in any and all benefit plans,
from time to time, in effect for our employees, along with vacation, sick and
holiday pay in accordance with our policies established and in effect from
time
to time.
Contract
with Donald Walker
On
December 30, 2002, we entered into a four-year employment contract with an
option to renew for an additional year, with Donald Walker, the Vice-President
of Walker Comm, who is also an Executive Vice President. The base salary under
the agreement is $140,000 per annum. In addition, Mr. Walker is entitled to
participate in any and all benefit plans, from time to time, in effect for
our
employees, along with vacation, sick and holiday pay in accordance with our
policies established and in effect from time to time. Mr. Walker is also
entitled to the full-time use of an automobile owned or leased by us, for which
we reimburse Mr. Walker for all maintenance and gasoline expenses associated
with the use of the automobile. Mr. Walker is also entitled to receive an annual
bonus of 3% of the operating income of Walker Comm: (i) after the elimination
of
all expenses related to (y) services provided to Walker Comm by WPCS or any
affiliate thereof and (z) transactions between Walker Comm and WPCS or any
affiliate thereof; and (ii) prior to the deduction of interest, taxes,
depreciation and amortization.
Contract
with Gary Walker
On
December 30, 2002, we entered into a four-year employment contract with an
option to renew for an additional year, with Gary Walker, the President of
Walker Comm, who is also a Director. The base salary under the agreement is
$140,000 per annum. In addition, Mr. Walker is entitled to participate in any
and all benefit plans, from time to time, in effect for our employees, along
with vacation, sick and holiday pay in accordance with our policies established
and in effect from time to time. Mr. Walker is also entitled to the full-time
use of an automobile owned or leased by us, for which we reimburse Mr. Walker
for all maintenance and gasoline expenses associated with the use of the
automobile. Mr. Walker is also entitled to receive an annual bonus of 3% of
the
operating income of Walker Comm: (i) after the elimination of all expenses
related to (y) services provided to Walker Comm by WPCS or any affiliate thereof
and (z) transactions between Walker Comm and WPCS or any affiliate thereof;
and
(ii) prior to the deduction of interest, taxes, depreciation and
amortization.
Contract
with James Heinz
On
April
2, 2004, we entered into a three-year employment contract with James Heinz,
the
President of Heinz, who is also an Executive Vice President. The base salary
under the agreement is $140,000 per annum. In addition, Mr. Heinz is entitled
to
participate in any and all benefit plans, from time to time, in effect for
our
employees, along with vacation, sick and holiday pay in accordance with our
policies established and in effect from time to time. Mr. Heinz is also entitled
to the full-time use of an automobile owned or leased by us, for which we
reimburse Mr. Heinz for all maintenance and gasoline expenses associated with
the use of the automobile. Mr. Heinz is also entitled to receive an annual
bonus
of 2.5% of quarterly operating income, before the deduction of interest and
income taxes of Heinz, WPCS Incorporated and Invisinet, Inc.
Contract
with Richard Schubiger
On
August
1, 2005, we entered into a three-year employment contract with Richard
Schubiger, the President of Quality, who is also an Executive Vice President.
The base salary under the agreement is $140,000 per annum. In addition, Mr.
Schubiger is entitled to participate in any and all benefit plans, from time
to
time, in effect for our employees, along with vacation, sick and holiday pay
in
accordance with our policies established and in effect from time to time.
Pursuant to the agreement, Mr. Schubiger earned a bonus of $36,000 for the
calendar year ended December 31, 2005, resulting from Quality achieving at
least
$13 million in revenue and such revenue yielded a minimum of 12% in earnings
before interest and taxes. Effective January 1, 2006, Mr. Schubiger is entitled
to receive an annual bonus of 3.0% of earnings before the deduction of interest
and income taxes of Quality.
Stock
Option Plans
The
2002
Stock Option Plan was adopted by the Board of Directors in September 2002 and
increased from 41,667 to 416,667 options on March 3, 2003, and approved by
the
stockholders in April 2004. The 2002 Plan provides for the issuance of up to
416,667 options. The 2006 Incentive Stock Plan was adopted by the Board of
Directors and approved by the stockholders in September 2005. The 2006 Plan
provides for the issuance of up to 400,000 shares and/or options.
2002
Stock Option Plan
The
primary purpose of the 2002 Stock Option Plan is to attract and retain the
best
available personnel for us in order to promote the success of our business
and
to facilitate the ownership of our stock by employees. The 2002 Stock Option
Plan is administered by our Board of Directors. Under the 2002 Stock Option
Plan, key employees, officers, directors and consultants are entitled to receive
awards. The 2002 Stock Option Plan permits the granting of incentive stock
options and non-qualified stock options with the purchase price, vesting and
expiration terms set by the Board of Directors.
2006
Incentive Stock Plan
The
primary purpose of the 2006 Incentive Stock Plan is to attract and retain the
best available personnel for us in order to promote the success of our business
and to facilitate the ownership of our stock by employees. The 2006 Incentive
Stock Plan is administered by our Board of Directors. Under the 2006 Incentive
Stock Plan, key employees, officers, directors and consultants are entitled
to
receive awards. The 2006 Incentive Stock Plan permits the granting of incentive
stock options, non-qualified stock options and shares of common stock with
the
purchase price, vesting and expiration terms set by the Board of
Directors.
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. We do not have any outstanding
stock appreciation rights.
|
Name
|
No.
of Securities Underlying Options Granted (#)
|
|
%
of Total Options Granted to Employees in Fiscal
Year
|
Exercise
Price ($/Share)
|
|
Expiration
Date
|
|||||||
|
|
|||||||||||||
|
Andrew
Hidalgo
|
154,167
|
57.8
|
%
|
6.60
|
10/6/2009
|
||||||||
|
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 Underlying
|
Value
of Unexercised In-the-Money
|
|||||||||||
| Shares Acquired |
Unexercised
Options at Fiscal Year-End
(#)
|
Options
at Fiscal Year-End ($)
(1)
|
||||||||||
|
Name
|
on
Exercise (#)
|
Value
Realized
|
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
||||||
|
Andrew
Hidalgo
|
-
|
-
|
154,167
|
-
|
-
|
-
|
||||||
|
Gary
Walker
|
-
|
-
|
2,084
|
-
|
$
313
|
-
|
||||||
|
James
Heinz
|
-
|
-
|
10,000
|
-
|
-
|
-
|
||||||
|
Joseph
Heater
|
-
|
-
|
25,000
|
-
|
-
|
-
|
||||||
|
Joseph
Heater
|
-
|
-
|
10,000
|
-
|
-
|
-
|
||||||
(1)
Based
on
the closing price of $4.95 per share on April 29, 2005.
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 obligations resulting from these transactions were ongoing
after
the close, resulting in payoffs to the other parties who became
affiliates.
In
connection with the acquisition of Walker Comm, we assumed a lease with a
living
trust established by Gary Walker, one of our Directors, who is the trustee
and
whose heirs are the beneficiaries of the trust. The lease is 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 fiscal years
ended
April 30, 2005, and 2004, the rent paid for this lease was $88,000 and $56,000,
respectively. For each of the nine months ended January 31, 2006 and 2005,
the
rent paid for this lease was $66,000. We believe the terms of this lease
are no
less favorable than those which could have been obtained between unrelated
parties for similar transactions acting at arm’s length.
On
August
22, 2003, we acquired all of the outstanding shares of Clayborn, our wholly
owned subsidiary, in exchange for an aggregate $900,000 cash consideration
and
68,871 newly issued shares of our common stock. The Clayborn stockholders
consisted of David Gove, the former President of Clayborn, and his spouse.
An
additional $1,100,000 is due by September 30, 2007, payable in quarterly
distributions, by payment to the Clayborn stockholders of 50% of the quarterly
post tax profits, as defined, of Clayborn and a final payment of any remaining
balance on that date. Through January 31, 2006, payments of $185,000 have
been
made to the former Clayborn stockholders and the total remaining due is
$915,000.
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 from James Heinz,
our
Executive Vice President, 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 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 was issued. Of
the
$200,000, $75,000 was paid in April 2005, $75,000 was paid in April 2006
and
$50,000 is payable in April 2007.
On
November 24, 2004, we acquired all of the issued and outstanding common stock
of
Quality, of which Richard Schubiger, our Executive Vice President, owned 33.33%.
The aggregate consideration we paid to the Quality selling stockholders, net
of
acquisition transaction costs, was $7,457,913, of which $6,700,000 was paid
pro
rata to the Quality stockholders at closing. Additional purchase price
adjustments of $757,913 were paid in June 2005 to settle working capital
adjustments and income tax reimbursements related to our Internal Revenue Code
Section 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.
PRINCIPAL
STOCKHOLDERS
The
following table sets forth certain information regarding beneficial ownership
of
our common stock as of March 31, 2006, and as adjusted to reflect the issuance
of 876,931 shares of common stock in this offering:
|
•
|
by
each person who is known by us to beneficially own more than 5% of
our
common stock;
|
|
•
|
by
each of our officers and directors;
and
|
|
•
|
by
all of our officers and directors as a
group.
|
|
Percentage
of Class
|
Percentage
of Class
|
|||||
|
Name
and Address of Beneficial Owner (1)
|
Number
of Shares Owned (2)
|
Prior
to Offering (3)
|
After
Offering (4)
|
|||
|
Andrew
Hidalgo
|
485,074
(5)
|
10.39%
|
8.75%
|
|||
|
Joseph
Heater
|
131,679
(5)
|
2.91%
|
2.44%
|
|||
|
Donald
Walker
|
16,667
(5)
|
*
|
*
|
|||
|
James
Heinz
|
69,524
(5)
|
1.58%
|
1.32%
|
|||
|
Richard
Schubiger
|
10,000
(5)
|
*
|
*
|
|||
|
Norm
Dumbroff
|
92,738
(5)
|
2.10%
|
1.75%
|
|||
|
Neil
Hebenton
|
23,988
(5)
|
*
|
*
|
|||
|
Gary
Walker
|
114,051
(5)
|
2.58%
|
2.15%
|
|||
|
William
Whitehead
|
30,155
(5)
|
*
|
*
|
|||
|
All
Officers and Directors as a Group (9 persons)
|
973,876
(5)
|
19.69%
|
16.72%
|
|||
|
Special
Situations Private Equity Fund, L.P.
|
820,845
(6)
|
16.73%
|
14.19%
|
|||
|
153
E. 53
rd
Street, 55
th
Floor
|
||||||
|
New
York, NY 10022
|
||||||
|
Special
Situations Fund III QP, L.P.
|
1,065,586
(6)
|
21.07%
|
17.96%
|
|||
|
153
E. 53
rd
Street, 55
th
Floor
|
||||||
|
New
York, NY 10022
|
_____________
*
Less
than
1%.
(1)
The
address for each of our officers and directors is One East Uwchlan Avenue,
Exton, PA 19341.
(2)
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 March 31, 2006 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.
(3)
Percentage
based on 4,386,853 shares of common stock issued and outstanding on March
31,
2006.
(4)
Percentage
based on 5,263,784 shares of common stock outstanding.
(5)
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 March 31, 2006 or become exercisable within 60 days of
that
date: Andrew Hidalgo, 280,857 shares; Joseph Heater, 131,679 shares; Donald
Walker, 16,667 shares; James Heinz, 10,000 shares; Richard Schubiger, 10,000
shares; Norm Dumbroff, 21,904 shares; Neil Hebenton, 23,988; Gary Walker,
36,487
shares; William Whitehead, 28,155 shares; and all officers and directors
as a
group, 559,737 shares.
(6)
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 March
31, 2006 or become exercisable within 60 days of that date: Special Situations
Private Equity Fund, L.P., 520,831 shares and Special Situations Fund III
QP,
L.P., 670,402 shares. Information based upon a Form 13 D/A filed on February
13,
2006 by Austin W. Marxe and David M. Greenhouse who share voting and investment
control over all securities held by Special Situations Private Equity Fund,
L.P.
and Special Situations Fund III QP, L.P.
DESCRIPTION
OF SECURITIES
The
following description of our capital stock is a summary and is qualified in
its
entirety by the provisions of our certificate of incorporation, with amendments,
all of which have been filed as exhibits to our registration statement of which
this prospectus is a part.
Common
Shares
We
are
authorized to issue up to 75,000,000 shares of common stock, par value $0.0001.
As of March 31, 2006, there were 4,386,853 shares of common stock issued
and
outstanding, 816,667 shares reserved for issuance under our stock option
plans,
and 2,016,904 warrants to acquire shares of common stock. The holders of
common
stock are entitled to one vote for each share held of record on all matters
to
be voted on by the stockholders. The holders of common stock are entitled
to
receive dividends ratably, when, as and if declared by the Board of Directors,
out of funds legally available. In the event of our liquidation, dissolution
or
winding-up, the holders of common stock are entitled to share equally and
ratably in all assets remaining available for distribution after payment
of
liabilities and after provision is made for each class of stock, if any,
having
preference over the common stock. The holders of shares of common stock,
as
such, have no conversion, preemptive, or other subscription rights and there
are
no redemption provisions applicable to the common stock.
Preferred
Shares
We
are
authorized to issue up to 5,000,000 shares of preferred stock, par value
$0.0001. As of March 31, 2006, no shares of preferred stock are issued and
outstanding. The shares of preferred stock may be issued in series, and shall
have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, as shall
be
stated and expressed in the resolution or resolutions providing for the issuance
of such stock adopted from time to time by the Board of Directors. The Board
of
Directors is expressly vested with the authority to determine and fix in
the
resolution or resolutions providing for the issuances of preferred stock
the
voting powers, designations, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series to the full extent
now
or hereafter permitted by the laws of the State of Delaware.
Warrants
and Options
As
of
March 31, 2006, we had outstanding warrants and options to acquire approximately
2,787,357 shares of common stock, exercisable at prices ranging between $4.80
and $19.92.
In
connection with the sale of 100 units in a private placement during July to
September 2003, each unit had 3,703.67 warrants, with each warrant representing
the right to purchase one share of our common stock at an exercise price of
$10.80 per share expiring from July 18, 2006 to September 5, 2006. The exercise
price and the number of shares issuable upon exercise of the warrants will
be
adjusted upon the occurrence of certain events, including the issuance of common
stock as a dividend on shares of common stock, subdivisions, reclassifications
or combinations of the common shares or similar events. The warrants do not
contain provisions protecting against dilution resulting from the sale of
additional shares of common shares for less than the exercise price of the
warrants or the current market price of our securities and do not entitle
warrant holders to any voting or other rights as a stockholder until such
warrants are exercised and common shares are issued.
Warrants
may be redeemed in whole or in part at our option, upon 30 days’ notice, at a
redemption price equal to $0.12 per share of common stock issuable upon exercise
of the warrants, if the closing price of the common shares is at least $15.00
per share on average for 10 consecutive trading days, ending not earlier
than 30
days before the warrants are called for redemption. Additionally, in connection
with the sale of the 100 units, we issued the placement agent three-year
warrants expiring September 3, 2006 to purchase 55,417 shares of our common
stock at an exercise price of $9.00 per share. As of March 31, 2006, there
were
424,118 warrants issued in that offering that are
outstanding.
On
November 16, 2004, we sold 2,083,887 shares of common stock and 2,083,887
common
stock purchase warrants to eight investors in a private placement. 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 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
addition, Punk, Ziegel & Company, L.P., the placement agent in this
transaction, received warrants to purchase 62,500 shares of common stock,
exercisable for a period of five years at an exercise price of $4.80 per
share.
As of March 31, 2006, there were 1,592,786 warrants issued in that offering
that
are outstanding.
Transfer
Agent
Interwest
Transfer Co., Inc., 1981 E. Murray Holladay Road, Suite 100, Salt Lake City
Utah
84117, is the transfer agent and registrar for our common stock.
SHARES
ELIGIBLE FOR FUTURE SALE
Upon
completion of this offering, we will have outstanding 5,263,784 shares of
common
stock, assuming no exercise of outstanding options or warrants. All of the
shares of common stock sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless purchased
by our affiliates as that term is defined in Rule 144 under the Securities
Act.
Not including shares of common stock issuable upon exercise of outstanding
options or warrants, the 1,109,337 shares of common stock held by Special
Situations Private Equity Fund, L.P., Special Situations Fund III QP, L.P.
and
our directors and executive officers after the offering will be “restricted
securities” within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act, unless an
exemption from registration is available, including an exemption pursuant
to
Rule 144 under the Securities Act.
In
addition, holders of our outstanding options and warrants have the right
to
acquire 2,787,357 shares of common stock issuable upon the exercise of stock
options and warrants at exercise prices ranging from $4.80 to $19.92 per
share,
with a weighted average exercise price of $8.35. We have registered all but
21,250 of the underlying shares described above for resale.
Rule
144
In
general, under Rule 144 of the Securities Act as currently in effect, beginning
90 days after the date of this prospectus, a person (or persons whose shares
are
aggregated, such as an affiliate) who has beneficially owned restricted shares
for at least one year, is permitted to sell, within any three-month period,
the
number of such restricted shares that does not exceed the greater
of:
|
•
|
one
percent of the then-outstanding shares of our common stock;
or
|
|
•
|
the
average weekly trading volume of our common stock during the four
calendar
weeks preceding such sale.
|
Sales
under Rule 144 are subject to restrictions relating to manner of sale, notice
and the availability of current public information about us.
Rule
144(k)
In
addition, under Rule 144(k) of the Securities Act, a person who was not an
affiliate of our company at any time within the three months preceding a sale,
and who has beneficially owned shares for at least two years, may sell such
shares immediately following this offering without having to comply with volume
limitations, manner of sale provisions, notice or other requirements of Rule
144.
PLAN
OF DISTRIBUTION
We
are
offering the securities through a placement agent. Subject to the terms and
conditions contained in the placement agent agreement dated , 2006, Punk,
Ziegel
& Company, L.P. has agreed to act as the placement agent for the sale of up
to 876,931 shares of our common stock. The placement agent is not purchasing
or
selling any securities by this prospectus prospectus, nor is it required
to
arrange the purchase or sale of any specific number or dollar amount of
securities, but has agreed to use reasonable best efforts to arrange for
the
sale of all of the securities.
The
placement agent agreement provides that the obligations of the placement
agent
and the investors are subject to certain conditions precedent, including
the
absence of any material adverse change in our business and the receipt of
certain opinions, letters and certificates from our counsel, our independent
auditors and us.
Confirmations
and definitive prospectuses will be distributed to all investors who agree
to
purchase securities, informing investors of the closing date. We currently
anticipate that closing of the sale of the offered securities will take place
on
or about , 2006. Investors will also be informed of the date and manner in
which
they must transmit the purchase price.
On
the
scheduled closing date, the following will occur:
|
•
|
We
will receive funds in the amount of the aggregate purchase price;
and
|
|
|
•
|
Punk,
Ziegel & Company, L.P.
will receive the placement agent’s fee in accordance with the terms of the
placement agent agreement.
|
We
will
pay the placement agent an aggregate commission equal to 6.5% of the gross
proceeds received at closing from the sale of securities in the offering.
The
estimated offering expenses payable by us, in addition to the placement agent’s
fee, are approximately $ , which includes legal, accounting and printing
costs
and various other fees associated with listing the shares of common stock.
After
deducting certain fees due to the placement agent and our estimated offering
expenses, we expect the net proceeds from this offering to be up to
approximately $ million.
We
have
agreed to indemnify the placement agent against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, and liabilities
arising from breaches of representations and warranties contained in the
placement agent agreement. We have also agreed to contribute to payments
the
placement agent may be required to make in respect of such liabilities.
The
placement agent agreement with Punk, Ziegel & Company, L.P. is included as
an exhibit to our Current Report on Form 8-K that will be filed with the
Securities and Exchange Commission in connection with the consummation of
this
offering.
Our
common stock currently is traded on the NASDAQ Capital Market under the symbol
“WPCS.” Interwest Transfer Co., Inc., is the transfer agent for our common
stock.
DISCLOSURE
OF COMMISSION POSITION ON
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our
Certificate of Incorporation limits, to the maximum extent permitted by Delaware
law, the personal liability of directors for monetary damages for breach of
their fiduciary duties as a director. Our Bylaws provide that we shall indemnify
our officers and directors and may indemnify our employees and other agents
to
the fullest extent permitted by Delaware law.
Section
145 of the Delaware General Corporation Law provides that a corporation may
indemnify a director, officer, employee or agent made a party to an action
by
reason of the fact that he or she was a director, officer, employee or agent
of
the corporation or was serving at the request of the corporation against
expenses actually and reasonably incurred by him or her in connection with
such
action if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation
and
with respect to any criminal action, had no reasonable cause to believe his
or
her conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been advised that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
LEGAL
MATTERS
The
validity of the shares of common stock being offered hereby will be passed
upon
for us by Sichenzia Ross Friedman Ference LLP, New York, New York.
EXPERTS
The
consolidated financial statements of WPCS International Incorporated as of
and
for the fiscal years ended April 30, 2005 and 2004, included in this prospectus,
have been included herein in reliance on the report of J.H. Cohn LLP,
Independent Registered Public Accounting Firm, given on the authority of that
firm as experts in accounting and auditing.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have
filed a Registration Statement on Form SB-2 with the Securities and Exchange
Commission regarding this offering. This prospectus, which is part of the
registration statement, does not contain all of the information included in
the
registration statement, and you should refer to the registration statement
and
its exhibits to read that information. You may read and copy the registration
statement, related exhibits and the reports, proxy statements and other
information we file with the SEC at the SEC’s public reference facilities
maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can
also request copies of those documents, upon payment of a duplicating fee,
by
writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference rooms. The SEC also
maintains an Internet site that contains reports, proxy and information
statements and other information regarding issuers that file with the SEC.
The
site’s internet address is www.sec.gov.
You
may
also request a copy of these filings, at no cost, by writing or telephoning
us
at:
WPCS
International Incorporated
One
East
Uwchlan Avenue
Suite
301
Exton,
PA
19341
(610)
903-0400
WPCS
INTERNATIONAL INCORPORATED
The
Financial Statements required by
Item 310 of Regulation S-B are stated in U.S. dollars and are prepared in
accordance with U.S. Generally Accepted Accounting Principles.
|
|
|
Pages
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
Consolidated
Balance Sheets as of April 30, 2005 and 2004
|
|
F-3
|
|
Consolidated
Statements of Operations for the fiscal years ended April 30,
2005 and
2004
|
F-5
|
|
|
Consolidated
Statements of Shareholders’
Equity for the fiscal
years ended April 30, 2005 and 2004
|
F-6
|
|
|
Consolidated
Statements of Cash Flows for the fiscal years ended April 30,
2005 and
2004
|
F-8
|
|
|
Notes
to Consolidated Financial Statements
|
F-10
|
|
|
Condensed
Consolidated Balance Sheets at January 31, 2006 (unaudited)
and April 30,
2005
|
|
F-27
|
|
Condensed
Consolidated Statements of Operations for the nine months
ended January 31,2006, and 2005 (unaudited)
|
F-29
|
|
|
Condensed
Consolidated Statement of Shareholders’ Equity for the nine months
ended January 31, 2006 (unaudited)
|
F-30
|
|
|
Condensed
Consolidated Statements of Cash Flows for the nine months
ended January 31, 2006, and 2005 (unaudited)
|
F-31
|
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
F-33
|
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
J.H.
COHN LLP
|
|
Roseland,
New Jersey
|
|
July
15, 2005
|
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
B
AL
ANCE
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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (continued)
The
accompanying notes are an integral part of these
consolidated
financial statements.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF O
PE
RATIONS
|
|
|
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
|
|
|
Gain
on fair value of warrants
|
|
|
(1,414,263
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE INCOME TAX PROVISION
|
|
|
1,381,077
|
|
|
(48,187
|
)
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
52,096
|
|
|
76,000
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS)
|
|
$
|
1,328,981
|
|
|
($124,187
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per common share
|
|
$
|
0.50
|
|
|
($0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per common share
|
|
$
|
0.49
|
|
|
($0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average number of common shares outstanding
|
|
|
2,679,529
|
|
|
1,521,697
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average number of common shares outstanding
|
|
|
2,729,866
|
|
|
1,521,697
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF
SHAR
EHOLDERS’
EQUITY
|
Retained
|
|||||||||||||||||||||||||
|
Additional
|
Unearned
|
Earnings
|
Total
|
||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY - CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|||||||||||
|
Additional
|
Unearned
|
Earnings
|
Total
|
||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Paid-In
|
Consulting
|
(Accumulated
|
Shareholders’
|
||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Services
|
Deficit)
|
Equity
|
||||||||||||||||||
|
Common
Stock issuance costs
|
-
|
-
|
-
|
-
|
(26,888
|
) |
-
|
-
|
(26,888
|
) | |||||||||||||||
|
|
|||||||||||||||||||||||||
|
Amortization
of unearned consulting services
|
-
|
-
|
-
|
-
|
-
|
38,559
|
-
|
38,559
|
|||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
- |
-
|
1,328,981
|
|
1,328,981
|
|
|||||||||||||||
|
|
|||||||||||||||||||||||||
|
BALANCE,
APRIL 30, 2005
|
-
|
$
|
-
|
1,737,498
|
$
|
174
|
$
|
11,966,499
|
$
|
-
|
$
|
661,734
|
|
$
|
12,628,407
|
The
accompanying notes are an integral part of these consolidated financial
statements.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF C
ASH
FLOWS
|
|
|
Year
Ended
|
|
||||
|
|
|
April
30,
|
|
||||
|
|
|
2005
|
|
2004
|
|
||
|
OPERATING
ACTIVITIES :
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
1,328,981
|
|
|
($124,187
|
)
|
|
Adjustments
to reconcile net income (loss) to net cash (used in) provided by
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
682,397
|
|
|
382,510
|
|
|
Fair
value of warrant liability
|
|
|
(1,414,263
|
)
|
|
-
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayment
of advances from officers
|
|
|
-
|
|
|
(100,000
|
)
|
|
Net
proceeds from issuance of common stock with registration
rights
|
|
|
9,140,949
|
|
|
2,174,268
|
|
|
Common
stock issuance costs
|
|
|
(26,888
|
)
|
|
-
|
|
|
(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.
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 acquisition 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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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.
NOTE
2 - EQUITY ISSUED WITH REGISTRATION RIGHTS
On
November 16, 2004, the Company completed a private placement with certain
investors for an aggregate of 2,083,887 shares of its common stock and 2,083,887
common stock purchase warrants for $10,000,000. Under the terms of the sale,
the
investors were granted certain registration rights in which the Company agreed
to timely file a registration statement to register the common shares and
the
shares underlying the warrants, obtain effectiveness of the registration
statement by the SEC within ninety (90) days of November 16, 2004, and maintain
the effectiveness of this registration statement for a preset time thereafter.
In the event the Company fails to timely perform under the registration rights
agreement, the Company agrees to pay the investors liquidated damages in
an
amount equal to 1.5% of the aggregate amount invested by the investors for
each
30-day period or pro rata for any portion thereof following the date by which
the registration statement should have been effective. The initial registration
statement was filed and declared effective by the SEC within the allowed
time
and the Company has maintained the effectiveness of the registration statement
to date, and has not been required to pay any liquidated damages in connection
with the filing or on-going effectiveness of the registration
statement.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
The
Emerging Issues Task Force ("EITF") is currently reviewing the accounting
for
securities with liquidated damages clauses as stated in EITF 05-04, "The
Effect
of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject
to
EITF 00-19." There are currently several views as to how to account for this
type of transaction and the EITF has not yet reached a consensus. In accordance
with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed
To,
and Potentially Settled in the Company's Own Stock," and EITF 05-04, because
the
maximum potential liquidated damages for failure to maintain an effective
registration statement is greater than the difference between the fair value
of
registered and unregistered shares, the value of the common stock subject
to
such registration rights should be classified as temporary equity. Additionally,
in accordance with EITF 00-19 and the terms of the above warrants, the fair
value of the warrants should be recorded as a liability, with an offsetting
reduction to shareholders’ equity. The warrant liability is initially measured
at fair value using the Black-Scholes option pricing model, and is then
re-valued at each reporting date, with changes in the fair value reported
as
non-cash charges or credits to earnings.
The
SEC
concluded that under EITF 00-19, common stock and warrants subject to
registration rights where significant liquidated damages could be required
to be
paid to the holder of the instrument in the event the issuer fails to maintain
the effectiveness of a registration statement for a preset time period, the
common stock subject to such liquidated damages does not meet the tests required
for shareholders’ equity classification, and accordingly must be reflected
between liabilities and shareholders’ equity in the balance
sheet until the conditions are eliminated. In analyzing instruments
under EITF 00-19, the likelihood or probability related to the failure to
maintain an effective registration statement is not a factor.
Based
on
the above interpretation, as of April 30, 2005, the Company classified
$5,732,116 for the value of common stock subject to registration rights as
temporary equity instead of shareholders’ equity. In addition, the Company
measured the initial fair value of the warrants on the closing date at
$3,408,833 and classified the fair value of the warrants as warrant liability
instead of shareholders’ equity. At the end of each reporting period, the value
of the warrants is re-measured based on the fair value of the underlying
shares,
and changes to the warrant liability and related “gain or loss in fair value of
the warrants” is recorded as a non-cash charge or credit to earnings. The
warrant liability will be reclassified to shareholders’ equity when the Company
is no longer subject to performance under the registration rights agreement.
At
April
30, 2005, the warrant liability was $1,994,570, due to changes in the fair
value
of the warrants. The fair value of the warrants was estimated using the
Black-Scholes option-pricing model, with the following assumptions for the
year
ended April 30, 2005: risk-free interest rate of 3.91% to 3.96%, dividend
yield
of 0%, expected life of 6.54 to 7 years and volatility range of 28.4% to
42.1%
were used.
For
the
year ended April 30, 2005, the non-cash gain on fair value of warrants was
$1,414,263. The gain on fair value of warrants is due principally to the
decrease in the market value of the common stock of the Company. The non-cash
gain on fair value of warrants has no effect on the Company’s cash flows or
liquidity.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
3 - 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 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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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.
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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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.
Other
Concentrations
For
the
year ended April 30, 2005, the Company had revenue from one customer totaling
approximately $6,220,000, which comprised 15.5% 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, 188,340 stock options and
2,572,171 warrants were not included in the computation of fully diluted
earnings per share, because the stock option and warrant exercise prices
exceeded the market price of the common stock and, therefore, the effects
would
be antidilutive. The assumed conversion of the remaining 266,556 stock options
resulted in a 50,337 share increase in weighted average shares for fully
diluted
earnings per share. At April 30, 2004, the Company had 299,322 stock options
and
425,784 warrants outstanding which are potentially dilutive securities, however,
basic and fully diluted EPS is the same since the effect of the assumed exercise
of stock options and warrants would be antidilutive.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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
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.
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
income (loss), as reported
|
|
$
|
1,328,981
|
|
|
($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
income (loss), Pro forma
|
|
$
|
876,161
|
|
|
($425,025
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.50
|
|
|
($0.08
|
)
|
|
Pro
forma
|
|
$
|
0.33
|
|
|
($0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.49
|
|
|
($0.08
|
)
|
|
Pro
forma
|
|
$
|
0.32
|
|
|
($0.28
|
)
|
The
fair
value of each option grant was estimated on the date of grant using the
Black-Scholes Option pricing model with the following assumptions. For the
year
ended April 30, 2005, risk-free interest rate of 3.51% to 4.22%, dividend
yield
of 0%, expected life of 5 years and volatility range 28.4% to 44.9% were
used.
For the year ended April 30, 2004, risk-free interest rate 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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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.
NOTE
4 - ACQUISITIONS
In
accordance with SFAS No. 141, “Business Combinations,” acquisitions of
businesses are accounted for under the purchase accounting 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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
The
purchase price allocation has been determined as follows:
|
Assets
purchased:
|
|
|
|
|
|
Cash
|
|
$
|
134,218
|
|
|
Accounts
receivable
|
|
|
575,804
|
|
|
Costs
in excess of billings
|
|
|
231,562
|
|
|
Income
tax refunds receivable
|
|
|
104,765
|
|
|
Inventory
|
|
|
39,000
|
|
|
Fixed
assets
|
|
|
444,126
|
|
|
Backlog
|
|
|
13,500
|
|
|
Customer
list
|
|
|
245,000
|
|
|
Other
assets
|
|
|
97,669
|
|
|
Goodwill
|
|
|
1,775,447
|
|
|
|
|
|
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
|
|
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 cost 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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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
|
|
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 12.
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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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
|
|
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
|
|
$
|
1,474,004
|
|
$
|
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
|
|
|
3,871,722
|
|
|
4,069,476
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income per common share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
$
|
0.04
|
|
|
Diluted
|
|
$
|
0.38
|
|
$
|
0.04
|
|
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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 are not deductible for income tax
purposes.
NOTE
5 - 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
|
)
|
NOTE
6 - 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
|
|
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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
7 - 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 bears 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.
Under
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 expires 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.
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
8 - 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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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
9 - 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 plan.
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
10 - INCOME TAXES
The
provision or 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
|
|
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 provision (benefit) at statutory rate (34%)
|
|
$
|
470,000
|
|
|
($16,000
|
)
|
|
State
and local taxes, net of federal tax benefit
|
|
|
19,000
|
|
|
76,000
|
|
|
Increase
in valuation allowance
|
|
|
12,000
|
|
|
16,000
|
|
|
Gain
on fair value of warrants
|
|
|
(482,000
|
)
|
|
-
|
|
|
Other
|
|
|
33,096
|
|
|
-
|
|
|
|
|
$
|
52,096
|
|
$
|
76,000
|
|
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
The
tax
effects of temporary differences which give rise to deferred tax assets and
liabilities 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
11 - 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.
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.
|
|
|
Number
of Shares
|
|
Weighted-average
Exercise Price
|
|
||
|
Outstanding,
May 1, 2003
|
|
|
6,418
|
|
$
|
17.41
|
|
|
Granted
|
|
|
334,864
|
|
$
|
12.31
|
|
|
Cancelled
|
|
|
(41,960
|
)
|
$
|
12.97
|
|
|
Outstanding,
May 1, 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 activity with respect to stock options granted
under
the 2002 Plan at April 30, 2005:
|
|
|
Options
outstanding
|
|
Options
exercisable
|
||||
|
Exercise
prices
|
|
Shares
under option
|
|
Weighted-average
remaining life in 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
12 - 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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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 $4.80 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.
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 stock purchase warrants for
the
year ended April 30, 2005.
|
|
|
Number
of Shares
|
|
Weighted
Average Exercise Price
|
|
||
|
Outstanding,
May 1, 2003
|
|
|
0
|
|
|
|
|
|
Granted
|
|
|
425,784
|
|
$
|
10.57
|
|
|
Outstanding,
May 1, 2004
|
|
|
425,784
|
|
$
|
10.57
|
|
|
Granted
|
|
|
2,146,387
|
|
$
|
8.40
|
|
|
Outstanding,
April 30, 2005
|
|
|
2,572,171
|
|
$
|
8.76
|
|
NOTE
13 - 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
|
|
||||||||||||||||||||
|
|
|
Corporate
|
|
Wireless
Infrastructure
|
|
Specialty
Communication
|
|
Total
|
|
Corporate
|
|
Wireless
Infrastructure
|
|
Specialty
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
$
|
207,777
|
|
$
|
783,014
|
|
$
|
390,286
|
|
$
|
1,381,077
|
|
|
($924,882
|
)
|
$
|
361,160
|
|
$
|
515,535
|
|
|
($48,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
14 - 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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
|
January
31,
|
|
April
30,
|
|
||
|
ASSETS
|
|
2006
|
|
2005
|
|
||
|
|
|
(Unaudited)
|
|
|
|
||
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,336,885
|
|
$
|
989,252
|
|
|
Accounts
receivable, net of allowance of $93,786 and $75,786 at January
31, 2006
and April 30, 2005, respectively
|
|
|
10,002,658
|
|
|
9,907,316
|
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
1,205,748
|
|
|
908,955
|
|
|
Inventory
|
|
|
958,402
|
|
|
885,624
|
|
|
Prepaid
expenses and other current assets
|
|
|
491,624
|
|
|
536,331
|
|
|
Deferred
income taxes
|
|
|
91,000
|
|
|
112,000
|
|
|
Total
current assets
|
|
|
20,086,317
|
|
|
13,339,478
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net
|
|
|
1,402,413
|
|
|
1,560,271
|
|
|
|
|
|
|
|
|
|
|
|
CUSTOMER
LISTS, net
|
|
|
935,138
|
|
|
1,158,388
|
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
14,239,918
|
|
|
13,961,642
|
|
|
|
|
|
|
|
|
|
|
|
DEBT
ISSUANCE COSTS, net
|
|
|
124,178
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
102,640
|
|
|
156,932
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
36,890,604
|
|
$
|
30,176,711
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (continued)
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
||
|
|
|
Nine
Months Ended
|
|
||||
|
|
|
January
31,
|
|
||||
|
|
|
2006
|
|
2005
|
|
||
|
|
|
|
|
(Note
1)
|
|
||
|
|
|
|
|
|
|
||
|
REVENUE
|
|
$
|
38,243,071
|
|
$
|
29,015,396
|
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES:
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
27,726,737
|
|
|
23,437,998
|
|
|
Selling,
general and administrative expenses
|
|
|
6,820,446
|
|
|
4,756,278
|
|
|
Depreciation
and amortization
|
|
|
633,394
|
|
|
430,438
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
35,180,577
|
|
|
28,624,714
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
|
|
3,062,494
|
|
|
390,682
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
EXPENSE:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
142,196
|
|
|
18,625
|
|
|
Loss
on fair value of warrants
|
|
|
11,406,414
|
|
|
840,499
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAX PROVISION
|
|
|
(8,486,116
|
)
|
|
(468,442
|
)
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
1,153,773
|
|
|
161,736
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
($9,639,889
|
)
|
|
($630,178
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per common share
|
|
|
($2.48
|
)
|
|
($0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average number of common shares
outstanding
|
|
|
3,890,382
|
|
|
2,311,171
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR
THE NINE MONTHS ENDED JANUARY 31, 2006
(Unaudited)
|
Retained
|
||||||||||||||||||||||
|
Additional
|
Earnings
|
Total
|
||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
Paid-in
|
(Accumulated
|
Shareholders’
|
||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit)
|
Equity
|
||||||||||||||||
|
BALANCE,
APRIL 30, 2005
|
-
|
$
|
-
|
1,737,498
|
$
|
174
|
$
|
11,966,499
|
$ |
661,734
|
|
$
|
12,628,407
|
|||||||||
|
|
||||||||||||||||||||||
|
Proceeds
from exercise of warrants
|
-
|
-
|
429,851
|
43
|
3,186,577
|
-
|
3,186,620
|
|||||||||||||||
| Reclassification of fair value of | ||||||||||||||||||||||
|
warrant
liability from exercise of
|
||||||||||||||||||||||
| warrants to additional paid-in capital | - | - | - | - | 2,104,315 | - | 2,104,315 | |||||||||||||||
| Reclassification of proceeds from | ||||||||||||||||||||||
| sales of common stock with | ||||||||||||||||||||||
| registration rights to additional paid-in capital | - | - | 1,331,319 | 133 | 3,662,877 | - | 3,663,010 | |||||||||||||||
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
(9,639,889
|
) |
(9,639,889
|
) | |||||||||||||
|
|
||||||||||||||||||||||
|
BALANCE,
JANUARY 31, 2006
|
-
|
$
|
-
|
3,498,668
|
$
|
350
|
$
|
20,920,268
|
$
|
(8,978,155
|
) |
$
|
11,942,463
|
|||||||||
The
accompanying notes are an integ
ral
part of these condensed consolidated financial
statements.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
||||||
|
|
|
Nine
Months Ended
|
|
||||
|
|
|
January
31,
|
|
||||
|
|
|
2006
|
|
2005
|
|
||
|
OPERATING
ACTIVITIES :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
($9,639,889
|
)
|
|
($630,178
|
)
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
633,394
|
|
|
430,438
|
|
|
Fair
value of warrant liability
|
|
|
11,406,414
|
|
|
840,499
|
|
|
Provision
for doubtful accounts
|
|
|
24,877
|
|
|
-
|
|
|
Amortization
of debt issuance costs
|
|
|
34,609
|
|
|
-
|
|
|
Amortization
of unearned consulting services
|
|
|
-
|
|
|
38,559
|
|
|
Deferred
income taxes
|
|
|
(27,000
|
)
|
|
(65,948
|
)
|
|
Changes
in operating assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(122,369
|
)
|
|
(945,873
|
)
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
(296,793
|
)
|
|
(42,331
|
)
|
|
Inventory
|
|
|
(72,778
|
)
|
|
(446,957
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
44,707
|
|
|
15,437
|
|
|
Other
assets
|
|
|
5,489
|
|
|
(30,211
|
)
|
|
Accounts
payable and accrued expenses
|
|
|
(1,337,527
|
)
|
|
132,907
|
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
810,273
|
|
|
(646,845
|
)
|
|
Income
taxes payable
|
|
|
474,256
|
|
|
(103,643
|
)
|
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
1,937,663
|
|
|
(1,454,146
|
)
|
|
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(134,586
|
)
|
|
(151,114
|
)
|
|
Acquisition
of Quality, net of cash received
|
|
|
-
|
|
|
(6,709,678
|
)
|
|
Acquisition
transaction costs
|
|
|
(4,303
|
)
|
|
(113,518
|
)
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(138,889
|
)
|
|
(6,974,310
|
)
|
|
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock with registration
rights
|
|
|
-
|
|
|
9,164,793
|
|
|
Common
stock issuance costs
|
|
|
-
|
|
|
(26,888
|
)
|
|
Net
proceeds from exercise of warrants
|
|
|
3,186,620
|
|
|
-
|
|
|
Borrowings
(repayments) under lines of credit
|
|
|
2,617,719
|
|
|
(332,998
|
)
|
|
Debt
issuance costs
|
|
|
(158,787
|
)
|
|
-
|
|
|
Repayments
of loans payable
|
|
|
(151,707
|
)
|
|
(64,667
|
)
|
|
Repayments
of amounts due to shareholders
|
|
|
(942,913
|
)
|
|
-
|
|
|
Payments
of capital lease obligations
|
|
|
(2,073
|
)
|
|
(1,876
|
)
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
4,548,859
|
|
|
8,738,364
|
|
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
6,347,633
|
|
|
309,908
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
989,252
|
|
|
1,984,636
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
|
7,336,885
|
|
$
|
2,294,544
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
|
|
|
Nine
Months Ended
|
|
||||
|
|
|
January
31,
|
|
||||
|
|
|
2006
|
|
2005
|
|
||
|
|
|
|
|
|
|
||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
130,053
|
|
$
|
20,439
|
|
|
Income
taxes
|
|
$
|
714,727
|
|
$
|
424,708
|
|
|
SCHEDULE
OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Reversal
of accruals established in purchase accounting
|
|
$
|
2,150
|
|
$
|
49,790
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of notes for property and equipment
|
|
$
|
283,593
|
|
$
|
139,033
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of proceeds from sales of common stock with registration
rights
|
|
|
|
|
|
|
|
|
to
additional paid - in capital
|
|
$
|
3,663,010
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
of fair value of warrant liability to additional paid - in capital
from exercise of warrants
|
|
$
|
2,104,315
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
NOTE
1 - BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission (“SEC”) for quarterly reports on Form 10-QSB and do not include all
of the information and note disclosures required by accounting principles
generally accepted in the United States of America. Accordingly, the unaudited
condensed consolidated financial statements should be read in conjunction
with
the Company’s audited consolidated financial statements and notes thereto for
the fiscal year ended April 30, 2005 included elsewhere in this prospectus.
The
accompanying unaudited condensed consolidated financial statements reflect
all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of the management, considered necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods. Operating results for the nine month period ended January 31, 2006
are
not necessarily indicative of the results that may be expected for the fiscal
year ending April 30, 2006. Certain reclassifications have been made to prior
period financial statements to conform to the current
presentation.
The
accompanying unaudited condensed 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”), Heinz
Corporation (“Heinz”), and Quality Communications & Alarm Company
(“Quality”) from November 24, 2004 (date of acquisition), collectively the
“Company”.
The
Company provides design-build engineering services for specialty communication
systems, which are dedicated wireless networks for specified applications,
and
for wireless infrastructure, which encompasses commercial cellular systems
for
wireless carriers. The Company provides a range of services including site
design, spectrum analysis, engineering, trenching, electrical work, structured
cabling, product integration, testing and project
management.
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.
NOTE
2 - EQUITY ISSUED WITH REGISTRATION RIGHTS
On
November 16, 2004, the Company completed a private placement with certain
investors for an aggregate of 2,083,887 shares of its common stock and 2,083,887
common stock purchase warrants for $10,000,000. Under the terms of the sale,
the
investors were granted certain registration rights in which the Company agreed
to timely file a registration statement to register the common shares and
the
shares underlying the warrants, obtain effectiveness of the registration
statement by the SEC within ninety (90) days of November 16, 2004, and maintain
the effectiveness of this registration statement for a preset time thereafter.
In the event the Company fails to timely perform under the registration rights
agreement, the Company agrees to pay the investors liquidated damages in
an
amount equal to 1.5% of the aggregate amount invested by the investors for
each
30-day period or pro rata for any portion thereof following the date by which
the registration statement should have been effective. The initial registration
statement was filed and declared effective by the SEC within the allowed
time
and the Company has maintained the effectiveness of the registration statement
to date, and has not been required to pay any liquidated damages in connection
with the filing or on-going effectiveness of the registration
statement.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
The
Emerging Issues Task Force ("EITF") is currently reviewing the accounting
for
securities with liquidated damages clauses as stated in EITF 05-04, "The
Effect
of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject
to
EITF 00-19." There are currently several views as to how to account for this
type of transaction and the EITF has not yet reached a consensus. In accordance
with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed
To,
and Potentially Settled in the Company's Own Stock," and EITF 05-04, because
the
maximum potential liquidated damages for failure to maintain an effective
registration statement is greater than the difference between the fair value
of
registered and unregistered shares, the value of the common stock subject
to such registration rights should be classified as temporary equity.
Additionally, in accordance with EITF 00-19 and the terms of the above warrants,
the fair value of the warrants should be recorded as a liability, with an
offsetting reduction to shareholders' equity. The warrant liability is
initially measured at fair value using the Black-Scholes option pricing model,
and is then re-valued at each reporting date, with changes in the fair value
reported as non-cash charges or credits to earnings.
The
SEC
concluded that under EITF 00-19, common stock and warrants subject to
registration rights where significant liquidated damages could be required
to be
paid to the holder of the instrument in the event the issuer fails to maintain
the effectiveness of a registration statement for a preset time period, the
common stock subject to such liquidated damages does not meet the tests required
for shareholders' equity classification, and accordingly must be reflected
between liabilities and shareholders' equity in the balance sheet
until the conditions are eliminated. In analyzing instruments under EITF
00-19,
the likelihood or probability related to the failure to maintain an effective
registration statement is not a factor.
Based
on
the above interpretation, as of April 30, 2005, the Company classified
$5,732,116 for the value of common stock subject to registration rights as
temporary equity instead of shareholders' equity. During fiscal 2006,
certain of these common shares were sold by the investors; therefore the
Company
is no longer subject to performance for these shares under the registration
rights agreement. Accordingly, the Company reclassified $3,663,010 from
temporary equity and into shareholders' equity, resulting in $2,069,106 of
temporary equity as of January 31, 2006.
In
addition, the Company measured the initial fair value of the warrants on
the
closing date to be $3,408,833, and classified the fair value of the
warrants as warrant liability instead of shareholders' equity. At the end
of
each reporting period, the value of the warrants is re-measured based on
the
fair value of the underlying shares, and changes to the warrant liability
and
related “gain or loss in fair value of the warrants” is recorded as
a non-cash charge or credit to earnings. The warrant liability will be
reclassified to shareholders' equity when the Company is no longer
subject to performance under the registration rights agreement.
At
April
30, 2005, the warrant liability was $1,994,570 due to changes in the fair
value
of the warrant liability. At January 31, 2006, the warrant liability increased
to $11,296,669 due principally to the increase in the market value of the
Company’s common stock. The fair value of the warrants was estimated using the
Black-Scholes option-pricing model, with the following assumptions: for the
nine
months ended January 31, 2006, risk-free interest rate of 4.16% to 4.47%,
dividend yield of 0%, expected life of 5.79 to 6.29 years and volatility
range
of 29.1% to 35.5% were used. For the nine months ended January 31, 2005,
risk-free interest rate of 3.92%, dividend yield of 0%, expected life of
6.79 years and volatility of 42.1% were used.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
As
a
result, for the nine months ended January 31, 2006 and 2005, the Company
recorded a non-cash loss on fair value of warrants of $11,406,414 and $840,499
respectively. The increase in the loss on fair value of warrants is due
principally to the increase in the market value of the common stock of the
Company. The non-cash loss on fair value of warrants has no effect on the
Company’s cash flows or liquidity.
NOTE
3 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING
POLICIES
A
summary
of selected significant accounting policies consistently applied in the
preparation of the accompanying condensed consolidated financial statements
follows (additional policies are set forth in the Company’s Annual Report on
Form 10-KSB):
Goodwill
In
accordance with 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 finite
useful lives be amortized over their respective estimated useful lives to
their
estimated residual values, and reviewed for impairment.
SFAS
No. 142 requires that goodwill be tested for impairment at least annually,
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 based on the excess, if any,
of
the reporting unit’s carrying value of goodwill over its implied fair
value.
The
Company determines the fair value of the businesses acquired (reporting units)
for purposes of the initial 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 estimates of costs of capital for purposes of arriving at a discount
factor. The Company performs its annual impairment test during the fourth
quarter absent any interim impairment indicators.
Changes
in goodwill during the nine months ended January 31, 2006 are as follows:
|
|
|
|
|
|
|
Beginning
balance, May 1, 2005
|
|
$
|
13,961,642
|
|
|
|
|
|
|
|
|
Additional
transaction costs for prior acquisitions
|
|
|
2,675
|
|
|
Clayborn
acquisition purchase price adjustment
|
|
|
48,803
|
|
|
Quality
acquisition purchase price adjustments
|
|
|
226,798
|
|
|
|
|
|
|
|
|
Ending
balance, January 31, 2006
|
|
$
|
14,239,918
|
|
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
Revenue
recognition
The
Company records revenue and profit on its 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.
Earnings
(Loss) Per Share
Earnings
(loss) per common share is computed pursuant to SFAS No. 128, "Earnings Per
Share" (“EPS”). Basic income per common share is computed as net income 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 January 31, 2006, the Company had 781,204 stock
options and 2,142,320 warrants outstanding which are potentially dilutive
securities. At January 31, 2005, the Company had 369,926 stock options and
2,509,121 warrants outstanding which were potentially dilutive securities.
For
the nine months ended January 31, 2006 and 2005, basic and diluted EPS is
the
same since the effect of the assumed exercise of stock options and warrants
would be antidilutive.
Equity
Issued with Registration Rights
In
connection with sales of our common stock and warrants to certain investors
during the third fiscal quarter ended January 31, 2005, the Company granted
certain registration rights that provide for liquidated damages in the event
of
failure to timely perform under the agreements. Although the common stock
purchase agreement does not provide for net-cash settlement, the existence
of
liquidated damages provides for a defacto net-cash settlement option. Therefore,
common stock subject to such liquidated damages does not meet the tests required
for shareholders' equity classification, and accordingly has been reflected
between liabilities and equity in the accompanying consolidated balance sheet
as
of January 31, 2006 until the conditions are eliminated.
Warrant
Liability
In
connection with the sale of certain equity instruments in the third fiscal
quarter ended January 31, 2005, as described above, the Company issued
freestanding warrants. Although the terms of the warrants do not provide
for
net-cash settlement, in certain circumstances, physical or net-share settlement
is deemed to not be within the Company’s control and, accordingly, the Company
is required to account for these freestanding warrants as a derivative financial
instrument liability, rather than as shareholders' equity.
The
warrant liability is initially measured and recorded at its fair value, and
is
then re-valued at each reporting date, with changes in the fair value reported
as non-cash charges or credits to earnings. For warrant-based derivative
financial instruments, the Black-Scholes option pricing model is used to
value
the warrant liability.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
The
classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is re-assessed at the end
of
each reporting period. Derivative instrument liabilities are classified in
the
balance sheet as current or non-current based on whether or not net-cash
settlement of the derivative instrument could be required within 12 months
of
the balance sheet date.
The
Company does not use derivative instruments to hedge exposures to cash flow,
market, or foreign currency risks.
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, useful life of customer lists, deferred
tax
valuation allowance, the fair values of the assets and liabilities of purchased
businesses and the factors related to determining if goodwill is impaired.
Actual results could differ from those estimates.
NOTE
4- ACQUISITIONS
In
accordance with SFAS No. 141, “Business Combinations”, acquisitions 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.
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 $176,356, was
$7,457,913, of which $6,700,000 was paid at closing. Additional purchase
price
adjustments of $757,913 were paid in June 2005 to settle working capital
adjustments and income tax reimbursements related to the Company’s Internal
Revenue Code Section 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 provides 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.
A
valuation of certain assets, including property and equipment, and list of
major
customers was completed 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.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
The
purchase price allocation, as adjusted, has been determined as
follows:
|
Assets
purchased:
|
|
|
|
|
|
Cash
|
|
$
|
163,674
|
|
|
Accounts
receivable
|
|
|
2,124,587
|
|
|
Inventory
|
|
|
244,053
|
|
|
Fixed
assets
|
|
|
329,252
|
|
|
Prepaid
expenses
|
|
|
70,447
|
|
|
Customer
lists
|
|
|
580,000
|
|
|
Other
assets
|
|
|
6,000
|
|
|
Goodwill
|
|
|
5,722,862
|
|
|
|
|
|
9,240,875
|
|
|
Liabilities
assumed:
|
|
|
|
|
|
Accounts
payable
|
|
|
(940,727
|
)
|
|
Accrued
expenses
|
|
|
(271,991
|
)
|
|
Income
taxes payable
|
|
|
(98,181
|
)
|
|
Line
of credit borrowings
|
|
|
(135,129
|
)
|
|
Notes
payable
|
|
|
(160,578
|
)
|
|
|
|
|
(1,606,606
|
)
|
|
Purchase
price
|
|
$
|
7,634,269
|
|
The
following unaudited pro forma financial information presents the combined
results of operations of the Company and Quality for the nine months ended
January 31, 2005 as if the acquisition had occurred on May 1, 2004, after
giving
effect to certain adjustments, including the issuance of the Company’s common
stock 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 and Quality been a single entity during the 2005 period.
|
Nine months
ended
|
||||
|
January
31, 2005
|
||||
|
(Unaudited)
|
||||
|
Revenue
|
$
|
36,394,749
|
||
|
Net
loss
|
($547,047
|
)
|
||
|
Weighted
average number of shares used in calculation:
|
||||
|
Basic
and diluted net loss per share
|
3,820,835
|
|||
|
Pro
forma net loss per common share:
|
||||
|
Basic
and diluted
|
(0.14
|
)
|
||
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
Customer
lists are amortized over a period of five to six years from the date of
acquisition. The Company recorded amortization expense related to customer
lists
of $223,000 and $174,000 for the nine months ended January 31, 2006 and 2005,
respectively. With the exception of goodwill related to the Quality acquisition,
any future goodwill impairments are not deductible for income tax
purposes.
NOTE
5 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS
Costs
and
estimated earnings on uncompleted contracts consist of the following at January
31, 2006:
|
Costs
incurred on uncompleted contracts
|
|
$26,785,374
|
|
|
|
Estimated
contract profit
|
|
|
5,583,898
|
|
|
|
|
|
32,369,272
|
|
|
Less:
billings to date
|
|
|
33,178,288
|
|
|
|
|
|
|
|
|
Net
billings in excess
|
|
|
($809,016
|
)
|
|
|
|
|
|
|
|
Costs
and estimated earnings in excess of billings
|
|
$
|
1,205,748
|
|
|
|
|
|
|
|
|
Billings
in excess of costs and estimated earnings
|
|
|
|
|
|
on
uncompleted contracts
|
|
|
(2,014,764
|
)
|
|
Net
billings in excess
|
|
|
($809,016
|
)
|
NOTE
6 - RELATED PARTY TRANSACTIONS
In
connection with the acquisition of Walker, the Company leases the Fairfield,
California location from a trust, of which Gary Walker, one of the Company’s
directors, is the trustee. For each of the nine months ended January 31,
2006
and 2005, the rent paid for this lease was $66,000.
In
connection with the acquisition of Clayborn, an additional $1,100,000 is
due by
September 30, 2007, payable in quarterly distributions to the former 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. Through January
31,
2006, payments of $185,000 have been made to the former Clayborn shareholders
and the total remaining due is $915,000.
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 in April 2006 and $50,000 in April 2007.
In
connection with the acquisition of Quality, approximately $758,000 of additional
purchase price consideration was paid to the selling shareholders in June
2005
for working capital adjustments and income tax reimbursements.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
NOTE
7 - LINE OF CREDIT
On
June
3, 2005, the Company entered into a credit agreement with a 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 its assets.
Under
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.
As of January 31, 2006, the Company was in compliance with the Credit Agreement
covenants. The loan commitment expires on August 31, 2008. The Company may
prepay the loan at any time.
The
loan
under the revolving credit line bears 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 (7.1875% as of
January 31, 2006). The Company paid a facility fee to the bank of $50,000
on the
closing date. In addition to the loan, 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.
The
Company used the initial funds provided by the loan, in the gross amount
of
$3,000,000, to repay existing bank debt of Walker of approximately $672,000,
for
the payment of approximately $758,000 to the former shareholders of its Quality
subsidiary for monies due to them pursuant to the terms of the purchase of
their
company, and for working capital.
NOTE
8 - STOCK OPTION PLANS
In
September 2005, the Company adopted the 2006 Incentive Stock Plan, under
which
officers, directors, key employees or consultants may be granted options.
Under
the 2006 Incentive Stock Plan, 400,000 shares of common stock were reserved
for
issuance upon the exercise of stock options, stock awards or restricted stock.
Under the terms of the 2006 Incentive Stock Plan, stock options are granted
at
exercise prices equal to the fair market value of the common stock at the
date
of grant, and become exercisable and expire in accordance with the terms
of the
stock option agreement between the optionee and the Company at the date of
grant. Through January 31, 2006, options to purchase 380,000 shares were
granted
at exercise prices ranging from $6.14 to $6.61. At January 31, 2006, there
were
20,000 options to purchase shares available for issuance under the 2006
Incentive Stock 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 one to 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
January 31, 2006, there were 15,463 shares available for grant under the
2002
Plan.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
As
currently permitted by SFAS 123, “Accounting for Stock-Based Compensation,” 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 plans. By making that election,
the
Company is required under SFAS 123 and related pronouncements to provide
pro
forma disclosures of net income and net income per common share as if the
fair
value based method of accounting had been applied.
The
Company applies the intrinsic value method in accounting for its stock-based
compensation plans. Had the Company measured compensation under the fair
value
based method for all stock options granted and amortized the cost over the
related vesting period under the provisions of SFAS 123, the Company’s pro forma
net income (loss) and net income (loss) per share would have been as
follows:
|
Nine
months ended January 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Net
loss, as reported
|
($9,639,889
|
)
|
($630,178
|
)
|
|||
|
Deduct
total stock-based employee compensation expense determined under
fair
value based method for all awards, net of tax
|
375,297 | 422,573 | |||||
|
Net
loss, pro forma
|
($10,015,186
|
)
|
($1,052,751
|
)
|
|||
|
Basic
and diluted net loss per share
|
|||||||
|
As
reported
|
($2.48
|
)
|
($0.27
|
)
|
|||
|
Pro
forma
|
($2.57
|
)
|
($0.46
|
)
|
|||
The
fair
value of each option granted was estimated on the date of grant using the
Black-Scholes Option pricing model with the following assumptions. For the
nine
months ended January 31, 2006, risk-free interest rate of 3.81%, dividend
yield of 0%, expected life of 5 years and volatility range of 29.1% to 35.5%
were used. For the nine months ended January 31, 2005, risk-free interest
rate
of 3.51% to 3.64%, dividend yield of 0%, expected life of 5 years and volatility
of 44.9% were used.
SFAS
123(R) (revised December 2004), “Share-Based Payment,” a revision of SFAS
123,
established,
among other things, accounting and disclosure requirements for the use of
a
fair-value-based method of accounting for stock-based employee compensation
plans. As a result of the revisions to SFAS 123, the Company will be required
to
expense the fair value of employee stock options beginning with its first
fiscal
quarter ending July 31, 2006. The revised standard will require the Company
to
expense the fair value of employee stock options and other share-based payments
over the service period. 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.
The Company is 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, although it is likely that we
will
have to recognize additional compensation expense in periods after
adoption.
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED
FINANCIAL
STATEMENTS
(Unaudited)
NOTE
9 - 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 income
(loss)
before income taxes. Corporate loss includes corporate salaries and external
professional fees, such as accounting, legal and investor relations costs
which
are not allocated to the reportable segments. Corporate assets include cash,
prepaid expenses and deferred tax assets. Segment results for the nine months
ended January 31, 2006 and 2005 are as follows.
|
|
|
As
of/ For Nine Months Ended January 31, 2006
|
|
As
of/ For Nine Months Ended January 31, 2005
|
|
||||||||||||||||||||
|
|
|
Corporate
|
|
Wireless
Infrastructure
|
|
Specialty
Communication
|
|
Total
|
|
Corporate
|
|
Wireless
Infrastructure
|
|
Specialty
Communication
|
|
Total
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Revenue
|
|
$
|
-
|
|
$
|
5,928,485
|
|
$
|
32,314,586
|
|
$
|
38,243,071
|
|
$
|
-
|
|
$
|
6,766,465
|
|
$
|
22,248,931
|
|
$
|
29,015,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
($12,607,828
|
)
|
$
|
602,706
|
|
$
|
3,519,006
|
|
|
($8,486,116
|
)
|
|
($1,753,156
|
)
|
$
|
856,804
|
|
$
|
427,910
|
|
|
($468,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
-
|
|
$
|
2,482,085
|
|
$
|
11,757,833
|
|
$
|
14,239,918
|
|
$
|
-
|
|
$
|
2,435,752
|
|
$
|
11,214,042
|
|
$
|
13,649,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
4,702,296
|
|
$
|
5,507,233
|
|
$
|
26,681,075
|
|
$
|
36,890,604
|
|
$
|
2,687,
680
|
|
$
|
5,490,960
|
|
$
|
22,619,228
|
|
$
|
30,797,868
|
|
NOTE
10 - PROPOSED OFFERING
On
February 8, 2006, the Company filed a registration statement on Form SB-2
with
the SEC in connection with a proposed public offering of 2,000,000 shares
of
common stock, subject to an over-allotment option for an additional 300,000
shares of common stock. There can be no assurance as to the timing or final
terms of the offering, or whether or not the offering will be consummated.
In
connection with the public offering, the Company anticipates incurring
substantial costs, which, if the offering is not consummated, will be charged
to
expense. As of January 31, 2006, such costs were not
material.
876,931
Shares
Common
Stock
________________
PROSPECTUS
,
2006
________________
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
24.
Indemnification
of Directors and Officers.
Our
Certificate of Incorporation limits, to the maximum extent permitted by Delaware
law, the personal liability of directors for monetary damages for breach of
their fiduciary duties as a director. Our Bylaws provide that we shall indemnify
our officers and directors and may indemnify our employees and other agents
to
the fullest extent permitted by Delaware law.
Section
145 of the Delaware General Corporation Law provides that a corporation may
indemnify a director, officer, employee or agent made a party to an action
by
reason of the fact that he or she was a director, officer, employee or agent
of
the corporation or was serving at the request of the corporation against
expenses actually and reasonably incurred by him or her in connection with
such
action if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation
and
with respect to any criminal action, had no reasonable cause to believe his
or
her conduct was unlawful.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been advised that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Item
25.
Other
Expenses of Issuance and Distribution.
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by WPCS International
Incorporated
in
connection with the offer and sale of the securities being registered. All
amounts are estimates except the SEC registration fee and the NASD filing
fee.
|
$
|
2,932
|
||
|
NASD
filing fee
|
$
|
3,240
|
|
|
NASDAQ
listing fee
|
* | ||
|
Transfer
Agent’s Fee
|
* | ||
|
Printing
and engraving costs
|
* | ||
|
Legal
fees and expenses
|
* | ||
|
Accounting
fees and expenses
|
* | ||
|
Miscellaneous
|
* | ||
|
Total
|
$
|
*
|
*
To be
provided by amendment.
Item
26.
Recent
Sales of Unregistered Securities.
Except
as
set forth below, there were no sales of unregistered securities by WPCS during
the past three (3) years:
During
July, August and September 2003, we sold an aggregate of 100 units to 40
accredited investors in a private placement for aggregate proceeds of
$2,500,000. Each Unit consists of (i) 3,704 shares of our common stock, and
(ii)
warrants to purchase 3,704 shares of common stock, exercisable for a period
of
three years at an exercise price of $10.80 per share. The shares were issued
in
a transaction exempt under Rule 506 of Regulation D promulgated under Section
4(2) of the Securities Act of 1933, as amended.
On
August
22, 2003, we issued 68,871 shares of our common stock in exchange for all of
the
issued and outstanding shares of Clayborn Contracting Group, Inc. The shares
were issued to one accredited investor in a transaction exempt under Rule 506
of
Regulation D promulgated under Section 4(2) of the Securities Act of 1933,
as
amended.
On
April
2, 2004, we issued 59,524 shares of our common stock in exchange for all of
the
issued and outstanding shares of Heinz Corporation. The shares were issued
to
one accredited investor in a transaction exempt under Rule 506 of Regulation
D
promulgated under Section 4(2) of the Securities Act of 1933, as
amended.
On
November 16, 2004, we sold an aggregate of $10,000,000 of our common stock
and
common stock purchase warrants to eight investors. We sold an aggregate of
2,083,337 shares of common stock and 2,083,337 warrants to the investors. 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 by us, as well as customary
adjustment provisions for stock splits, combinations, dividends and the like.
At
any time after the registration statement is effective, 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.
In
September 2005, we issued 62,500 shares of common stock upon exercise of
warrants in exchange for $300,000. The shares were issued to one accredited
investor in a transaction exempt under Rule 506 of Regulation D promulgated
under Section 4(2) of the Securities Act of 1933, as amended.
In
December 2005, we issued 211,500 shares of common stock upon exercise of
warrants in exchange for $1,776,600. The shares were issued to one accredited
investor in a transaction exempt under Rule 506 of Regulation D promulgated
under Section 4(2) of the Securities Act of 1933, as amended.
In
January 2006, we issued 155,851 shares of common stock upon exercise of warrants
in exchange for $1,310,148. The shares were issued to two accredited investors
in transactions exempt under Rule 506 of Regulation D promulgated under Section
4(2) of the Securities Act of 1933, as amended.
In
February 2006, we issued 124,866 shares of common stock upon exercise of
warrants in exchange for $1,048,874. The shares were issued to two accredited
investors in transactions exempt under Rule 506 of Regulation D promulgated
under Section 4(2) of the Securities Act of 1933, as amended.
In
February 2006, we issued 5,334 shares of common stock upon exercise of stock
options in exchange for $27,853. The shares were issued to two accredited
investors in transactions exempt under Rule 506 of Regulation D promulgated
under Section 4(2) of the Securities Act of 1933, as amended.
In
March
2006, we issued 5,417 shares of common stock upon exercise of stock options
in
exchange for $28,252. The shares were issued to two accredited investors
in
transactions exempt under Rule 506 of Regulation D promulgated under Section
4(2) of the Securities Act of 1933, as amended.
Item
27. Exhibits
The
Following exhibits are included as part of this Form
SB-2. References to "us" in this Exhibit List means WPCS International
Incorporated, a Delaware Corporation.
|
4.1
|
Certificate
of Designation of Series A Convertible Preferred Stock, incorporated
by
reference to Exhibit 4.1 of wowtown.com, Inc.’s Form SB-2, filed June 8,
2000.
|
|
4.2
|
Certificate
of Designation of Series B Convertible Preferred Stock, incorporated
by
reference to Exhibit 4.2 of WPCS International Incorporated’s Annual
Report on Form 10-KSB, filed July 29,
2002.
|
|
4.3
|
Certificate
of Designation of Series C Convertible Preferred Stock, incorporated
by
reference to Exhibit 4.3 of WPCS International Incorporated’s Annual
Report on Form 10-KSB, filed August 14,
2003.
|
|
4.4
|
2002
Employee Stock Option Plan, incorporated by reference to Exhibit
4.4 of
WPCS International Incorporated’s Annual Report on Form 10-KSB, filed
August 14, 2003.
|
|
4.5
|
Form
of 2003 Common Stock Purchase Warrant, incorporated by reference
to
Exhibit 4.5 of WPCS International Incorporated’s Annual Report on Form
10-KSB, filed August 14, 2003.
|
|
4.6
|
2006
Incentive Stock Plan, incorporated by reference to Exhibit 4.2
of WPCS
International Incorporated’s registration statement on Form S-8, filed
September 21, 2005.
|
|
10.1
|
Employment
Agreement by and between WPCS International Incorporated and Andrew
Hidalgo, dated as of February 1, 2004, incorporated by reference
to
Exhibit 10.1 of WPCS International Incorporated’s registration statement
on Form SB-2/A, filed April 30,
2004.
|
|
10.2
|
Employment
Agreement by and among WPCS International Incorporated, Walker
Comm, Inc,
and Donald Walker, incorporated by reference to Exhibit 10.3 of
WPCS
International Incorporated’s Annual Report on Form 10-KSB, filed August
14, 2003.
|
|
10.3
|
Employment
Agreement by and among WPCS International Incorporated, Walker
Comm, Inc,
and Gary Walker, incorporated by reference to Exhibit 10.4 of WPCS
International Incorporated’s Annual Report on Form 10-KSB, filed August
14, 2003.
|
|
10.4
|
Employment
Agreement by and between WPCS International Incorporated and Joseph
Heater, dated as of June 1, 2005, incorporated by reference to
Exhibit
10.4 of WPCS International Incorporated’s Annual Report on Form 10-KSB,
filed July 29, 2005.
|
|
10.5
|
Employment
Agreement by and between Heinz Corporation and James Heinz, dated
as of
April 1, 2004, incorporated by reference to Exhibit 10.12 of WPCS
International Incorporated’s registration statement on Form SB-2/A, filed
April 30, 2004.
|
|
10.6
|
Employment
Agreement by and between Quality Communications & Alarm Company, Inc.
and Richard Schubiger, dated as of August 1, 2005, incorporated
by
reference to Exhibit 10.6 of WPCS International Incorporated’s
registration statement on Form SB-2, filed February 8,
2006.
|
|
10.7
|
Agreement
and Plan of Merger by and among Phoenix Star Ventures, Inc., WPCS
Acquisition Corp., a Delaware corporation, WPCS Holdings, Inc.,
a Delaware
corporation, and Andy Hidalgo, dated as of May 17, 2002, incorporated
by
reference to Exhibit 1 of WPCS International Incorporated’s Current Report
on Form 8-K/A, filed June 12, 2002.
|
|
10.8
|
Agreement
and Plan of Merger by and among WPCS International Incorporated,
Invisinet
Acquisitions Inc., Invisinet, Inc., J. Johnson LLC and E. J. von
Schaumburg made as of the 13th day of November, 2002, incorporated
by
reference to Exhibit 3 of WPCS International Incorporated’s Current Report
on Form 8-K, filed November 27,
2002.
|
|
10.9
|
Amendment
to Invisinet Bonus Agreement, dated as of May 27, 2003, incorporated
by
reference to Exhibit 10.8 of WPCS International Incorporated’s Annual
Report on Form 10-KSB, filed August 14,
2003.
|
|
10.10
|
Agreement
and Plan of Merger by and among WPCS International Incorporated,
Walker
Comm Merger Corp., Walker Comm, Inc., Donald C. Walker, Gary
R. Walker,
and Tanya D. Sanchez made as of the 30th day of December, 2002,
incorporated by reference to Exhibit 10.10 of WPCS International
Incorporated’s registration statement on Form SB-2, filed February 8,
2006.
|
|
10.11
|
Agreement
and Plan of Merger by and among WPCS International Incorporated,
Clayborn
Contracting Acquisition Corp., Clayborn Contracting Group, Inc.,
David G.
Gove and Sharon Gove made as of the 22nd day of August, 2003, incorporated
by reference to Exhibit 3 of WPCS International Incorporated’s Current
Report on Form 8-K, filed August 29,
2003.
|
|
10.12
|
Agreement
and Plan of Merger by and among WPCS International Incorporated,
Heinz
Acquisition Corp., Heinz Corporation and James Heinz made as of
the 2nd
day of April, 2004, incorporated by reference to Exhibit 3 of WPCS
International Incorporated’s Current Report on Form 8-K, filed April 9,
2004.
|
|
10.13
|
Stock
Purchase Agreement by and among WPCS International Incorporated
and
Richard Schubiger, Matthew Haber and Brian Fortier, dated as of
November
24, 2004, incorporated by reference to Exhibit 10.1 of WPCS International
Incorporated’s current report on Form 8-K, filed November 30,
2004.
|
|
10.14
|
Form
of Securities Purchase Agreement, dated as of November 16, 2004,
incorporated by reference to Exhibit 10.1 of WPCS International
Incorporated’s current report on Form 8-K, filed November 19,
2004.
|
|
10.15
|
Form
of Common Stock Purchase Warrant, dated as of November 16, 2004,
incorporated by reference to Exhibit 10.2 of WPCS International
Incorporated’s current report on Form 8-K, filed November 19,
2004.
|
|
10.16
|
Form
of Registration Rights Agreement, dated as of November 16, 2004,
incorporated by reference to Exhibit 10.3 of WPCS International
Incorporated’s current report on Form 8-K, filed November 19,
2004.
|
|
10.17
|
Credit
Agreement by and among WPCS International Incorporated, Clayborn
Contracting Group, Inc., Heinz Corporation, Invisinet, Inc., Quality
Communications & Alarm Company, Inc., Walker Comm, Inc. and Bank Leumi
USA, dated as of June 3, 2005, incorporated by reference to Exhibit
10.1
of WPCS International Incorporated’s current report on Form 8-K, filed
June 8, 2005.
|
|
10.18
|
Form
of Security Agreement with Bank Leumi, dated as of June 3, 2005,
incorporated by reference to Exhibit 10.2 of WPCS International
Incorporated’s current report on Form 8-K, filed June 8,
2005.
|
|
14
|
Code
of Ethics and Business Conduct, incorporated by reference to Exhibit
14 of
WPCS International Incorporated’s annual report on Form 10-KSB, filed
August 14, 2003.
|
|
21.1
|
Subsidiaries
of the registrant, incorporated by reference to Exhibit 21.1
of WPCS
International Incorporated’s registration statement on Form SB-2, filed
February 8, 2006.
|
|
23.2
|
Consent
of legal counsel (see Exhibit
5).
|
Item
28.
Undertakings.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of
such issue.
The
undersigned Registrant hereby undertakes that:
(1)
For
purposes of determining any liability under the Securities Act of 1933, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2)
For
the purpose of determining any liability under the Securities Act of 1933,
each
post-effective amendment that contains a form of prospectus shall be deemed
to
be a new registration statement relating to the securities offered therein,
and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of
the
requirements of filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in the City of Exton, State
of
Pennsylvania, on April 7, 2006.
| WPCS INTERNATIONAL INCORPORATED | ||
|
|
|
|
| By: | /s/ Andrew Hidalgo, | |
|
Andrew Hidalgo, |
||
| Chairman, Chief Executive Officer | ||
| (Principal Executive Officer) and Director | ||
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed below by the following persons in the capacities
and
on the dates indicated below.
|
Signature
|
Title
|
Date
|
||
|
*
Andrew
Hidalgo
|
|
Chairman,
Chief Executive Officer (Principal Executive Officer) and
Director
|
|
April
7, 2006
|
|
*
Joseph Heater |
|
Chief
Financial Officer (Principal Financial Officer and Principal Accounting
Officer)
|
|
April
7, 2006
|
|
*
Norm Dumbroff |
|
Director
|
|
April
7, 2006
|
|
*
Neil Hebenton |
|
Director
|
|
April
7, 2006
|
|
*
Gary Walker |
|
Director
|
|
April
7, 2006
|
|
*
William Whitehead |
|
Director
|
|
April
7, 2006
|
|
|
|
|
| *By: | /s/ Joseph Heater | |
|
Joseph Heater |
||
| Attorney-in-fact | ||
II-5