AYRO, Inc. - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT
OF 1934
For
the Fiscal Year Ended April 30, 2007
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
For
the transition period from _________ to __________
Commission
file number: 0-26277
WPCS
INTERNATIONAL INCORPORATED
(Exact
name of registrant as specified in its charter)
|
Delaware
|
98-0204758
|
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
One
East Uwchlan Avenue
Suite
301
Exton,
Pennsylvania 19341
(Address
of principal executive offices)
(610)
903-0400
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which
registered
|
|
Common
Stock, $0.0001 par value
|
The
NASDAQ Stock Market LLC
(NASDAQ
Global Market)
|
Securities
registered pursuant to Section 12(g) of the Act:
Title
of
class: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
by
Rule 405 of the Securities Act. Yeso
Nox
Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yeso
Nox
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filero
Accelerated filero
Non-accelerated filerx
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Act.) Yeso
Nox
The
aggregate market value of the voting common equity held by non-affiliates
as of
October 31, 2006, based on the closing sales price of the Common Stock as
quoted
on the Nasdaq Capital Market was $35,455,837.90. For purposes of this
computation, all officers, directors, and 5 percent beneficial owners of
the
registrant are deemed to be affiliates. Such determination should not be
deemed an admission that such directors, officers, or 5 percent beneficial
owners are, in fact, affiliates of the registrant.
As
of
July 26, 2007, there were 6,979,256 shares of issuer’s common stock outstanding.
TABLE
OF CONTENTS
|
|
|
|
|
PAGE
|
|
|
PART
I
|
|
||||
|
|
|
|
|
||
|
Item
1.
|
|
Business
|
|
4
|
|
|
Item
1A.
|
|
Risk
Factors
|
|
9
|
|
|
Item
2.
|
|
Properties
|
|
14
|
|
|
Item
3.
|
|
Legal
Proceedings
|
|
14
|
|
|
Item
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
|
14
|
|
|
|
|
|
|
|
|
|
PART
II
|
|
||||
|
|
|
|
|
||
|
Item
5.
|
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of
Equity Securities
|
|
15
|
|
|
Item
6.
|
|
Selected
Financial Data
|
|
17
|
|
|
Item
7.
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
18
|
|
|
Item
7A.
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
29
|
|
|
Item
8.
|
|
Financial
Statements and Supplementary Data
|
|
F-1-F-31
|
|
|
Item
9.
|
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
|
|
30
|
|
|
Item
9A.
|
|
Controls
and Procedures
|
|
30
|
|
|
Item
9B.
|
|
Other
Information
|
|
30
|
|
|
|
|
|
|
|
|
|
PART
III
|
|
||||
|
|
|
|
|
||
|
Item
10.
|
|
Directors,
Executive Officers and Corporate Governance
|
|
31
|
|
|
Item
11.
|
|
Executive
Compensation
|
|
34
|
|
|
Item
12.
|
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
|
39
|
|
|
Item
13.
|
|
Certain
Relationships and Related Transactions, and Director
Independence
|
|
41
|
|
|
Item
14.
|
|
Principal
Accountant Fees and Services
|
|
41
|
|
|
|
|
|
|
|
|
|
PART
IV
|
|
||||
|
|
|
|
|
||
|
Item
15.
|
|
Exhibits
and Financial Statement Schedules
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
Signatures
|
|
47
|
|
3
PART
I
ITEM
1. - DESCRIPTION OF BUSINESS
This
Annual Report on Form 10-K includes the accounts of WPCS International
Incorporated (WPCS) and its wholly owned subsidiaries, WPCS Incorporated ,
Invisinet Inc. (Invisinet), Walker Comm, Inc. (Walker Comm), Clayborn
Contracting Group, Inc. (Clayborn), Heinz Corporation (Heinz), Quality
Communications & Alarm Company, Inc. (Quality), New England Communications
Systems, Inc. (NECS) from June 1, 2006 (date of acquisition), Southeastern
Communication Services, Inc. (SECS) from July 19, 2006 ( date of acquisition),
Voacolo Electric Incorporated (Voacolo) from March 30, 2007 ( date of
acquisition), and its 60% interest in Taian AGS Pipeline Construction Co.
Ltd (TAGS) from April 5, 2007 ( date of acquisition), collectively “we”, us” or
the "Company".
This
Annual Report on Form 10-K (including the section regarding Management's
Discussion and Analysis of Financial Condition and Results of Operations)
contains forward-looking statements regarding our business, financial condition,
results of operations and prospects. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions
or
variations of such words are intended to identify forward-looking statements,
but are not deemed to represent an all-inclusive means of identifying
forward-looking statements as denoted in this Annual Report on Form 10-K.
Additionally, statements concerning future matters are forward-looking
statements.
Although
forward-looking statements in this Annual Report on Form 10-K reflect the good
faith judgment of our Management, such statements can only be based on facts
and
factors currently known by us. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
specifically addressed under the heading "Risks Related to Our Business" below,
as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers
are urged not to place undue reliance on these forward-looking statements,
which
speak only as of the date of this Annual Report on Form 10-K. We file reports
with the Securities and Exchange Commission (SEC). We make available on our
website under "Investor Relations/SEC Filings," free of charge, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports as soon as reasonably practicable after
we
electronically file such materials with or furnish them to the SEC. Our website
address is www.wpcs.com. You can also read and copy any materials we file with
the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington,
DC
20549. You can obtain additional information about the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including us.
We
undertake no obligation to revise or update any forward-looking statements
in
order to reflect any event or circumstance that may arise after the date of
this
Annual Report on Form 10-K. Readers are urged to carefully review and consider
the various disclosures made throughout the entirety of this annual Report,
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operations and
prospects.
Overview
The
increasing demand for wireless services has become the 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 its broad
acceptance. The advantages of wireless over land line communication are apparent
in the aspects of mobility, capacity, cost, and deployment. The use of dedicated
wireless networks for specified applications has improved productivity for
individuals and organizations alike. We provide design-build engineering
services for specialty communication systems, which are dedicated wireless
networks for specified applications and for wireless infrastructure, which
encompasses cellular networks for wireless carriers. Our range of services
includes site design, spectrum analysis, product integration, structured
cabling, electrical work, trenching, construction, testing, project management
and maintenance. 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 obtain the
most appropriate solution for their communication needs on a cost effective
basis. Our customers include corporations, government entities and educational
institutions.
With
twelve offices across the United States and one office in China, we provide
our
services to our customers nationwide and internationally. 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, 2007, we generated revenues of approximately $70 million, an increase of
34.2% from the fiscal year ended April 30, 2006. Our backlog at April 30, 2007
was approximately $34.9 million.
4
Industry
Background
Worldwide
use of wireless communications has grown rapidly. According to a
Telecommunications Industry Association report, in 2006, the domestic corporate,
government and education sectors spent an estimated $8.8 billion on the
deployment of wireless networks and expenditures are growing at 25% per year.
In
2006, the international corporate, government and education sectors spent an
estimated $28.1 billion on the deployment of wireless networks and expenditures
are growing at 33% per year. According to a report issued by The Cellular
Telecommunications & Internet Association (CTIA), wireless carriers spent
$33 billion on capital investments and expenditures are growing at 14% per
year.
The growing numbers of wireless users has fueled the growth of the wireless
services industry.
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 in most
instances.
|
|
•
|
Cost.
Wireless
networks cost less than comparable landline networks both to deploy
and to
operate. Wireless deployment is less expensive because the installation
of
a landline network is more labor-intensive, requires more time and
may
involve substantial right-of-way expenditures. 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 landlines 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 networks can be tied to the following key
trends:
|
•
|
Increased
security of wireless data
transmission;
|
|
•
|
Introduction
of new technologies;
|
|
•
|
Increasing
accessibility and affordability of wireless mobile devices;
and
|
|
•
|
Increased
capacity of wireless networks, making them a legitimate substitute
for
land line communications.
|
The
advantages gained through wireless communications have expanded the scope of
possible applications, creating demand for specialty communication
systems.
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:
5
| • | Provide additional services for 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,
healthcare, security and gaming. 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 deploy wireless networks
to enhance productivity within these markets. We also look to expand
our
vertical market coverage and include these new markets as
appropriate.
|
|
•
|
Strengthen
our relationships with technology providers. We
will continue to strengthen the relationships we have with technology
providers. 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
that 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 advanced
solutions.
|
|
•
|
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. Since April 30, 2007, we have signed letters
of
intent to acquire Major Electric, Inc. and Max Engineering LLC. We
expect
these acquisitions to close by August 1, 2007, subject to completion
of
due diligence and the execution of definitive agreements.
|
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 fiscal year ended April 30, 2007, specialty
communication systems represented approximately 81% of our total revenue, and
wireless infrastructure services represented approximately 19% of our total
revenue. For the fiscal year ended April 30, 2006, specialty communication
systems represented approximately 82% of our total revenue, and wireless
infrastructure services represented approximately 18% 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
devices
used at a water treatment plant to maintain the integrity of drinking
water.
|
In
general wireless connectivity, we design and deploy networks that allow entities
to reduce their dependence on high cost leased land lines. 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 an in-depth knowledge of radio frequency 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.
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 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.
6
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 corporate, government and education customers in various 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 our
wireless infrastructure segment, our customers are major wireless carriers.
For
the
fiscal years ended April 30, 2007 and 2006, we had revenue from a customer,
Genentech, of approximately $12.7 million or 18.1% and $7.6 million or 14.5%,
respectively. In addition, for the fiscal years ended April 30, 2007 and 2006,
we had revenue from a customer, Sprint Nextel, of approximately $8.2 million
or
11.7% and $10.8 million or 20.8%, 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.
7
Backlog
As
of
April 30, 2007, we had a backlog of unfilled orders of approximately $34.9
million compared to approximately $15.9 million at April 30, 2006. 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 that 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 organizations, 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 or wireless infrastructure
segment but we would classify Tetra Tech Incorporated (NASDAQ-TTEK) and Black
Box Corporation (NASDAQ-BBOX) as specialty communication systems competitors
and
LCC International Incorporated (NASDAQ-LCCI) as a wireless infrastructure
services competitor.
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 an international 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 that 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
April 30, 2007, we employed 361 full time employees, of whom 239 are project
engineers, 27 are project managers, 89 are in administration and sales and
six
are executives. A majority of the project engineers are represented by the
International Brotherhood of Electrical Workers. We also have non-union
employees. We believe our relations with all of our employees are good. We
have
approximately 106 union employees. A contract with 15 union employees expired
on
May 31, 2007. A new contract with this union has been negotiated and is in
the
process of completion. A contract with six union employees expires on September
30, 2007. A contract with 85 union employees expires on November 30, 2008.
8
ITEM
1A - RISK FACTORS
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 could be reduced.
We
have a limited history of profitability which may not
continue.
While
we
had net income of approximately $4.6 million for the fiscal year ended April
30,
2007, we incurred a net loss of approximately $1.6 million for the fiscal year
ended April 30, 2006. 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 monthly 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.
9
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, 2001, we have acquired nine 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 five 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 fiscal year
ended April 30, 2007, we had two separate customers which accounted for 18.1%
and 11.7% of our revenues. For the fiscal year ended April 30, 2006, we had
two
separate customers which accounted for 20.8% and 14.5% 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
April 30, 2007, we had a backlog of unfilled orders of approximately $34.9
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.
10
If
we are unable to retain the services of Messrs. Hidalgo, Schubiger, Heinz,
Walker, or Madenford 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, Donald Walker, and Charles Madenford, our Executive Vice Presidents.
Mr.
Hidalgo has overseen our company since inception and provides leadership for
our
growth and operations strategy. Messrs. Schubiger, Heinz, Walker and Madenford
run the day-to-day operations of Quality, Heinz, Walker Comm, and Clayborn
respectively. Loss of the services of Messrs. Hidalgo, Schubiger, Heinz, Walker
or Madenford 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, Walker or Madenford.
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 29% 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. Eight of our acquired companies, Clayborn, Heinz, Invisinet,
Quality, Walker Comm, NECS, SECS and Voacolo, each of which is a reporting
unit,
are subject to annual review for goodwill impairment. If impairment testing
indicates that the carrying value of a reporting unit exceeds its fair 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;
and
|
|
•
|
our
sales, marketing and administrative cost
structure.
|
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 April 30, 2006 and April 30,
2007,
our common stock has traded as low as $6.53 and as high as $13.74 per share,
based upon information provided by NASDAQ
Capital Market and NASDAQ Global Market. Factors which could have a significant
impact on the market price of our common stock include, but are not limited
to,
the following:
11
|
•
|
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 shareholder approval, which could
adversely affect the rights of common shareholders.
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 shareholders of an opportunity to sell their stock at a price in excess
of the prevailing market price.
12
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
July 15, 2007, holders of our outstanding options and warrants have the right
to
acquire 2,454,216 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 $7.02. 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.
We
are subject to the risks associated with doing business in the People’s Republic
of China (PRC).
We
conduct certain business in China through our TAGS joint venture, which is
organized under the laws of the PRC. Our China operations are directly related
to and dependent on the social, economic and political conditions in this
country, many of which we have no control over, and are influenced by many
factors, including:
|
|
·
|
changes
in the region’s economic, social and political conditions or government
policies;
|
|
|
·
|
changes
in trade laws, tariffs and other trade restrictions or
licenses;
|
|
|
·
|
changes
in foreign exchange regulation in China may limit our ability to
freely
convert currency to make dividends or other payments in U.S.
dollars;
|
|
|
·
|
fluctuation
in the value of the RMB ( Chinese Yuan) could adversely affect the
value
of our investment in China;
|
|
|
·
|
limitations
on the repatriation of earnings or assets, including
cash;
|
|
|
·
|
adverse
changes in tax laws and
regulations;
|
|
|
·
|
difficulties
in managing or overseeing our China operations, including the need
to
implement appropriate systems, policies, benefits and compliance
programs;
and
|
|
|
·
|
different
liability standards and less developed legal systems that may be
less
predictable than those in the United
States.
|
The
occurrence or consequences of any of these conditions may restrict our ability
to operate and/or decrease the profitability our operations in
China.
13
ITEM
2 - PROPERTIES
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:
|
|
Minimum
|
||
|
|
Lease
|
Annual
|
|
|
Location
|
Subsidiary
|
Expiration
Date
|
Rent
|
|
Exton,
Pennsylvania
|
WPCS
Corporate headquarters
|
February
1, 2008
|
$51,000
|
|
Auburn,
California (1)
|
Clayborn
|
Month-to-month
|
$64,440
|
|
St.
Louis, Missouri
|
Heinz
|
August
31, 2010
|
$56,142
|
|
Exton,
Pennsylvania
|
Heinz
|
July
31, 2008
|
$8,640
|
|
Windsor,
Connecticut
|
NECS
|
April
30, 2014
|
$80,821
|
|
Chicopee,
Massachusetts
|
NECS
|
August
31, 2007
|
$3,000
|
|
Lakewood,
New Jersey
|
Quality
|
August
31, 2007
|
$118,370
|
|
Sarasota,
Florida (2)
|
SECS
|
July
31, 2011
|
$51,360
|
|
Trenton,
New Jersey (3)
|
Voacolo
|
April
1, 2008
|
$54,000
|
|
Fairfield,
California (4)
|
Walker
Comm
|
February
28, 2011
|
$96,950
|
|
Rocklin,
California
|
Walker
Comm
|
January
31, 2008
|
$27,300
|
|
San
Leandro, California
|
Walker
Comm
|
July
31, 2008
|
$13,824
|
(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 Sarasota, Florida location from a trust, of which one of the former
shareholders of Southeastern Communications Services, Inc., is the
trustee.
(3)
We
lease our Trenton, New Jersey location from Voacolo Properties LLC, of which
the
former shareholders of Voacolo Electric, Inc., are the members.
(4)
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.
ITEM
3 - LEGAL PROCEEDINGS
We
are
currently not a party to any material legal proceedings or claims.
ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
PART
II
ITEM
5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
PRICE
RANGE OF COMMON STOCK
Our
common stock is currently traded on the NASDAQ Global Market under the symbol
“WPCS.” Prior to December 21, 2006, our common stock traded on the NASDAQ
Capital Market.
For
the
period from May 1, 2005 to date, the following table sets forth the high and
low
sale prices of our common stock as reported by the NASDAQ Capital Market and
NASDAQ Global Market.
|
Period
|
High
|
Low
|
|||||
|
Fiscal
Year Ended April 30, 2007:
|
|||||||
|
First
Quarter
|
$
|
9.80
|
$
|
6.53
|
|||
|
Second
Quarter
|
10.75
|
6.60
|
|||||
|
Third
Quarter
|
10.58
|
8.64
|
|||||
|
Fourth
Quarter
|
13.74
|
9.30
|
|||||
|
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
|
12.45
|
7.20
|
|||||
On
July
26, 2007, the closing sale price of our common stock, as reported by the NASDAQ
Global Market, was $13.23 per share. On July 26, 2007, there were 76 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. 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.
15
STOCK
PRICE PERFORMANCE GRAPH
Prior
to
May 24, 2002, we were not publicly traded and there was no public market for
our
securities. On May 24, 2002, we completed a reverse merger and began trading
on
the Over the Counter Bulletin Board. Our shares did not begin actively trading
until May 29, 2002. The graph below compares the cumulative total return of
our
common shares with that of the NASDAQ Composite Index and the NASDAQ
Telecommunications Index from May 29, 2002 (the date our shares first began
actively trading) through April 30, 2007. The graph assumes that you invested
$100 at the close of market on May 29, 2002 in our common shares and $100
invested at that same time in each of the indexes. The comparisons in this
graph
are provided in accordance with SEC disclosure requirements and are not intended
to forecast or be indicative of the future performance of our common
shares.
|
Reverse
Merger
|
4/30/03
|
4/30/04
|
4/30/05
|
4/30/06
|
4/30/07
|
|
|
WPCS
International
|
$
100.00
|
$
46.00
|
$
45.60
|
$
16.50
|
$
28.10
|
$
44.83
|
|
NASDAQ
Composite Index
|
$
100.00
|
$
86.74
|
$
113.74
|
$
113.83
|
$
137.57
|
$
149.57
|
|
NASDAQ
Telecommunications Index
|
$
100.00
|
$
91.94
|
$
124.49
|
$
124.29
|
$
157.46
|
$
175.28
|
16
ITEM
6 - SELECTED FINANCIAL DATA
The
following selected consolidated financial data should be read in conjunction
with our consolidated financial statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this Annual Report. The statements of operations data
for
the fiscal years ended April 30, 2007, 2006 and 2005 and the balance sheet
data
at April 30, 2007 and 2006 are derived from our audited financial statements
which are included elsewhere in this Annual Report. The statement of operations
data for the years ended April 30, 2004 and 2003 and the balance sheet data
at
April 30, 2005, 2004 and 2003 are derived from our audited financial statements
which are not included in this Annual Report. The historical results are not
necessarily indicative of results to be expected for future periods.
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
REVENUE
|
$
|
70,000,070
|
$
|
52,144,575
|
$
|
40,148,233
|
$
|
22,076,246
|
$
|
5,422,858
|
||||||
|
COSTS
AND EXPENSES:
|
||||||||||||||||
|
Cost
of revenue
|
47,781,351
|
38,010,945
|
32,445,470
|
17,286,099
|
3,768,495
|
|||||||||||
|
Selling,
general and administrative expenses
|
13,244,909
|
9,191,392
|
7,032,504
|
4,441,776
|
1,892,609
|
|||||||||||
|
Depreciation
and amortization
|
1,239,486
|
837,789
|
682,397
|
382,510
|
116,501
|
|||||||||||
|
Total
costs and expenses
|
62,265,746
|
48,040,126
|
40,160,371
|
22,110,385
|
5,777,605
|
|||||||||||
|
OPERATING
INCOME (LOSS)
|
7,734,324
|
4,104,449
|
(12,138
|
) |
(34,139
|
) |
(354,747
|
) | ||||||||
|
OTHER
EXPENSE (INCOME):
|
||||||||||||||||
|
Interest
expense
|
496,330
|
256,022
|
31,865
|
14,048
|
6,997
|
|||||||||||
|
Interest
income
|
(525,524
|
) |
(121,720
|
) |
(10,817
|
) | - | - | ||||||||
|
Minority
interest
|
23,099
|
-
|
- | - | - | |||||||||||
|
Loss
(gain) on change in fair value of warrants
|
-
|
4,078,494
|
(1,414,263
|
) | - | - | ||||||||||
|
INCOME
(LOSS) BEFORE INCOME TAX PROVISION
|
7,740,419
|
(108,347
|
) |
1,381,077
|
(48,187
|
) |
(361,744
|
) | ||||||||
|
Income
tax provision
|
3,146,818
|
1,515,773
|
52,096
|
76,000
|
19,550
|
|||||||||||
|
NET
INCOME (LOSS)
|
$
|
4,593,601
|
($1,624,120
|
)
|
$
|
1,328,981
|
($124,187
|
)
|
($381,294
|
)
|
||||||
|
Basic
net income (loss) per common share
|
$
|
0.80
|
($0.40
|
)
|
$
|
0.50
|
($0.01
|
)
|
($0.05
|
)
|
||||||
|
Diluted
net income (loss) per common share
|
$
|
0.72
|
($0.40
|
)
|
$
|
0.49
|
($0.01
|
)
|
($0.05
|
)
|
||||||
|
BALANCE
SHEET DATA:
|
||||||||||||||||
|
CASH
AND CASH EQUIVALENTS
|
$ |
21,558,739
|
$ |
12,279,646
|
$ |
989,252
|
$ |
1,984,636
|
$ |
167,547
|
||||||
|
TOTAL
ASSETS
|
71,691,670
|
44,122,318
|
30,176,711
|
20,882,097
|
9,821,226
|
|||||||||||
|
LONG-TERM
DEBT
|
7,337,105
|
3,487,757
|
831,156
|
815,418
|
-
|
|||||||||||
|
WORKING
CAPITAL ( Current Assets less
|
30,319,951
|
20,175,844
|
5,095,320
|
2,396,169
|
1,435,134
|
|||||||||||
|
Current
Liabilities)
|
||||||||||||||||
|
SHAREHOLDERS'
EQUITY
|
$ |
51,531,983
|
$ |
32,563,270
|
12,628,407
|
$ |
11,287,755
|
$ |
7,460,887
|
|||||||
17
ITEM
7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
This
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect
Management's current views with respect to future events and financial
performance. You can identify these statements by forward-looking words such
as
“may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or
similar words. Those statements include statements regarding the intent, belief
or current expectations of us and members of its management team as well as
the
assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking
statements.
Readers
are urged to carefully review and consider the various disclosures made by
us in
this report and in our other reports filed with the Securities and Exchange
Commission. Important factors currently known to Management could cause actual
results to differ materially from those in forward-looking statements. We
undertake no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
in the future operating results over time. We believe that its assumptions
are
based upon reasonable data derived from and known about our business and
operations and the business and operations of the Company. No assurances are
made that actual results of operations or the results of our future activities
will not differ materially from its assumptions. Factors that could cause
differences include, but are not limited to, expected market demand for the
Company’s services, fluctuations in pricing for materials, and
competition.
Business
Overview
The
increasing demand for wireless services has become the 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 its broad
acceptance. The advantages of wireless over land line communication are apparent
in the aspects of mobility, capacity, cost, and deployment. The use of dedicated
wireless networks for specified applications has improved productivity for
individuals and organizations alike. We provide design-build engineering
services for specialty communication systems, which are dedicated wireless
networks for specified applications and for wireless infrastructure, which
encompasses cellular networks for wireless carriers. Our range of services
includes site design, spectrum analysis, product integration, structured
cabling, electrical work, trenching, construction, testing, project management
and maintenance. 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 obtain the
most appropriate solution for their communication needs on a cost effective
basis. Our customers include corporations, government entities and educational
institutions.
We
operate in two segments that we define as specialty communication systems and
wireless infrastructure services.
Specialty
Communication Systems
We
provide specialty communication systems which 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. The types of specialty communication
systems that we implement are used for mobile communication and general wireless
connectivity purposes. In mobile communication, the most popular applications
include asset tracking, telematics and telemetry.
In
general wireless connectivity, we design and deploy networks that allow entities
to reduce their dependence on high cost leased land lines. 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 an in-depth knowledge of radio frequency 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.
For the year ended April 30, 2007, specialty communication systems represented
approximately 81% of our total revenue.
Wireless
Infrastructure Services
We
provide wireless infrastructure services to major wireless carriers, which
are
services that include the engineering, installation, integration and maintenance
of wireless carrier equipment. Wireless carriers continue to be 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 installation of new equipment, technology upgrades,
equipment modifications and reconfigurations. These services may also include
tower construction.
18
Major
wireless carriers have come to depend on our experience in providing engineering
and support services that keep their networks technologically advanced and
consistently operational. We have extensive experience in the installation,
testing and commissioning of base station equipment. We provide complete
services including testing, equipment modification, reconfiguration, structured
cabling and relocating equipment at the cell site. In addition, WPCS also
performs network modifications, antenna sectorization, electrical work and
maintenance. For the year ended April 30, 2007, wireless infrastructure services
represented approximately 19% 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 year ended April 30, 2007, the specialty communication systems
segment
represented approximately 81% of total revenue, and the wireless
infrastructure services segment represented approximately 19% of
total
revenue, which remains consistent with our historical services revenue
mix.
|
|
|
·
|
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 the sale of our common stock and warrants to certain
investors during the third quarter ended January 31, 2005, we granted
certain registration rights that provided for liquidated damages
in the
event of failure to timely perform under the agreements. During the
third
quarter of fiscal 2006, we became aware that the SEC had recently
announced its preferred interpretation of the accounting for common
stock
and warrants with registration rights under Emerging Issues Task
Force
(EITF) 00-19, “Accounting for Derivative Financial Instruments Indexed To,
and Potentially Settled in the Company’s Own Stock,” and EITF 05-04, “The
Effect of a Liquidated Damages Clause on a Freestanding Financial
Instrument Subject to EITF 00-19.” Although the EITF was still reviewing
the guidance in EITF 05-04, the SEC concluded that under EITF 00-19,
the
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 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 SEC concluded that the likelihood
or
probability related to the failure to maintain an effective registration
statement was not a factor at that time. During fiscal 2006, the
warrant
liability increased by $4,078,494, due to the increase in the market
value
of our common stock, resulting in a net non-cash loss on fair value
of
warrants for the fiscal year ended April 30, 2006. The non-cash loss
on
warrants had no effect on our cash flows or liquidity. On April 11,
2006,
we entered into a waiver agreement with the institutional investors
related to this private placement. Under the waiver, the parties
agreed to
modify the registration rights agreement associated with the common
stock
and warrants issued in November 2004 affected by EITF 00-19, thereby
eliminating the penalty provisions that could have resulted from
not
maintaining an effective registration statement related to these
common
shares and shares underlying the warrants, and eliminating any similar
non-cash charges in subsequent fiscal
years.
|
19
Results
of Operations for the Fiscal Year ended April 30, 2007 Compared to Fiscal Year
Ended April 30, 2006
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), Heinz Corporation (Heinz), Quality
Communications & Alarm Company, Inc. (Quality), New England Communications
Systems, Inc. (NECS) from June 1, 2006 (date of acquisition), Southeastern
Communication Services, Inc. (SECS) from July 19, 2006 ( date of acquisition),
Voacolo Electric Incorporated (Voacolo) from March 30, 2007 ( date of
acquisition), and its 60% interest in Taian AGS Pipeline Construction Co.
Ltd (TAGS) from April 5, 2007 ( date of acquisition), collectively the
"Company". Consolidated results for the year ended April 30, 2007 and 2006
are
as follows.
|
Year
Ended
|
|||||||||||||
|
April
30,
|
|||||||||||||
|
2007
|
2006
|
||||||||||||
|
REVENUE
|
$
|
70,000,070
|
100.0
|
%
|
$
|
52,144,575
|
100.0
|
%
|
|||||
|
COSTS
AND EXPENSES:
|
|||||||||||||
|
Cost
of revenue
|
47,781,351
|
68.3
|
%
|
38,010,945
|
72.9
|
%
|
|||||||
|
Selling,
general and administrative expenses
|
13,244,909
|
18.9
|
%
|
9,191,392
|
17.6
|
%
|
|||||||
|
Depreciation
and amortization
|
1,239,486
|
1.8
|
%
|
837,789
|
1.6
|
%
|
|||||||
|
Total
costs and expenses
|
62,265,746
|
89.0
|
%
|
48,040,126
|
92.1
|
%
|
|||||||
|
OPERATING
INCOME
|
7,734,324
|
11.0
|
%
|
4,104,449
|
7.9
|
%
|
|||||||
|
OTHER
EXPENSE (INCOME):
|
|||||||||||||
|
Interest
expense
|
496,330
|
0.7
|
%
|
256,022
|
0.5
|
%
|
|||||||
|
Interest
income
|
(525,524
|
)
|
(0.8
|
%)
|
(121,720
|
)
|
(0.2
|
%)
|
|||||
|
Minority
interest
|
23,099
|
0.0
|
%
|
-
|
0.0
|
%
|
|||||||
|
Loss
on change in fair value of warrants
|
-
|
0.0
|
%
|
4,078,494
|
7.8
|
%
|
|||||||
|
INCOME
(LOSS) BEFORE INCOME TAX PROVISION
|
7,740,419
|
11.1
|
%
|
(108,347
|
)
|
(0.2
|
%)
|
||||||
|
Income
tax provision
|
3,146,818
|
4.5
|
%
|
1,515,773
|
2.9
|
%
|
|||||||
|
NET
INCOME (LOSS)
|
$
|
4,593,601
|
6.6
|
%
|
($1,624,120
|
)
|
(3.1
|
%)
|
|||||
Revenue
Revenue
for the year ended April 30, 2007 was approximately $70,000,000, as compared
to
$52,145,000 for the year ended April 30, 2006. The increase in revenue for
the
year was primarily attributable to the acquisition of NECS on June 1, 2006,
SECS
on July 19, 2006, Voacolo on March 30, 2007, TAGS on April 5, 2007 and from
organic growth. For the year ended April 30, 2007, we had two separate customers
which comprised 18.1% and 11.7% of total revenue. For the year ended April
30,
2006, we had two separate customers which comprised 20.8% and 14.5% of total
revenue.
Total
revenue from the specialty communication segment for the years ended April
30,
2007 and 2006 was approximately $56,750,000 or 81.1% and $42,844,000 or 82.2%
of
total revenue, respectively. The increase in revenue was attributable to organic
growth and the acquisition of NECS, Voacolo and TAGS. Wireless infrastructure
segment revenue for the years ended April 30, 2007 and 2006 was approximately
$13,250,000 or 18.9% and $9,300,000 or 17.8% of total revenue, respectively.
The
increase in revenue was attributable to the acquisition of
SECS.
20
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 $47,781,000 or 68.3% of revenue for the year ended
April 30, 2007, compared to $38,011,000 or 72.9% for the prior year. The dollar
increase in our total cost of revenue is due to the corresponding increase
in
revenue during the year ended April 30, 2007 as a result of the acquisition
of
NECS, SECS, Voacolo, TAGS and from organic growth. The decrease in cost of
revenue as a percentage of revenue is due primarily to the revenue mix
attributable to revenue from Walker, Clayborn, Heinz, Quality and the
acquisitions of NECS, SECS, Voacolo and TAGS.
The
specialty communication segment cost of revenue and cost of revenue as a
percentage of revenue for the years ended April 30, 2007 and 2006 was
approximately $38,144,000 and 67.2% and $31,194,000 and 72.8%, respectively.
As
discussed above, the dollar increase in our total cost of revenue is due to
the
corresponding increase in revenue during the year ended April 30, 2006 as a
result of the acquisitions of NECS, Voacolo and TAGS and from organic growth.
The decrease in cost of revenue as a percentage of revenue is due primarily
to
the revenue mix attributable to revenue from Walker, Clayborn, Quality and
the
acquisitions of NECS, Voacolo and TAGS.
Wireless
infrastructure segment cost of revenue and cost of revenue as a percentage
of
revenue for the years ended April 30, 2007 and 2006 was approximately $9,637,000
and 72.7% and $6,817,000 and 73.3%, respectively. The dollar increase in our
total cost of revenue is due to the corresponding increase in revenue during
the
year ended April 30, 2007 as a result of the acquisition of SECS. The decrease
in cost of revenue as a percentage of revenue is due to the revenue mix
attributable to Heinz and SECS.
Selling,
General and Administrative Expenses
For
the
year ended April 30, 2007, total selling, general and administrative expenses
were approximately $13,245,000, or 18.9% of total revenue compared to
$9,191,000, or 17.6% of revenue for the prior year. Included in selling, general
and administrative expenses for the year ended April 30, 2007 are $7,687,000
for
salaries, commissions, payroll taxes and other employee benefits. The increase
in salaries and payroll taxes compared to the prior year is due to the increase
in headcount as a result of the acquisition of NECS, SECS, Voacolo and TAGS.
Professional fees were $653,000, which include accounting, legal and investor
relation fees. Insurance costs were $1,872,000 and rent for office facilities
was $559,000. Automobile and other travel expenses were $959,000 and
telecommunication expenses were $311,000. Other selling, general and
administrative expenses totaled $1,204, 000. For the year ended April 30, 2007,
total selling, general and administrative expenses for the specialty
communication and wireless infrastructure segments were $9,247,000 and
$2,400,000, respectively.
For
the
year ended April 30, 2006, total selling, general and administrative expenses
were approximately $9,191,000, or 17.6% of total revenue. Included in selling,
general and administrative expenses for the year ended April 30, 2006 are
$5,251,000 for salaries, commissions, payroll taxes and other employee benefits.
The increase in salaries and payroll taxes compared to the prior year is due
to
the increase in headcount as a result of the acquisition of Quality.
Professional fees were $514,000, which include accounting, legal and investor
relation fees. Insurance costs were $1,411,000 and rent for office facilities
was $396,000. Automobile and other travel expenses were $713,000 and
telecommunication expenses were $231,000. Other selling, general and
administrative expenses totaled $675,000. For the year ended April 30, 2006,
total selling, general and administrative expenses for the specialty
communication and wireless infrastructure segments were $6,725,000 and
$1,139,000, respectively.
Depreciation
and Amortization
For
the
years ended April 30, 2007 and 2006, depreciation was approximately $776,000
and
$544,000, respectively. The increase in depreciation is due to the purchase
of
property and equipment and the acquisition of fixed assets from acquiring NECS,
SECS, Voacolo and TAGS. The amortization of customer lists and backlog for
the
year ended April 30, 2007 was $463,000 as compared to $294,000 for the same
period of the prior year. The increase in amortization was due to the
acquisition of customer lists from NECS, SECS and Voacolo and backlog from
SECS
and Voacolo. All customer lists are amortized over a period of five to eight
years from the date of their acquisitions. Backlog is amortized over a period
of
one to three years from the date of acquisition based on the expected completion
period of the related contracts.
Interest
Expense and Interest Income
For
the
years ended April 30, 2007 and 2006, interest expense was approximately $496,000
and $256,000, respectively. The increase in interest expense is due principally
from increased borrowings on the revolving line of credit and the amortization
of debt issuance costs under the credit agreement entered into on June 3,
2005.
21
For
the
years ended April 30, 2007 and 2006, interest income was approximately $526,000
and $122,000, respectively. The increase in interest earned is due principally
to the increase in our cash and cash equivalent balance in fiscal 2007 from
cash
provided by operations and the proceeds received from the issuance of
common stock.
Net
Income (Loss)
The
net
income was approximately $4,594,000 for the year ended April 30, 2007. Net
income was net of federal and state income tax expense of approximately
$3,147,000. The variation in effective tax rates between periods was primarily
due to the nondeductible loss on fair value of warrants in fiscal 2006.
The
net
loss was approximately $1,624,000 for the year ended April 30, 2006. Net loss
is
net of federal and state income tax expense of approximately $1,516,000. 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.
Results
of Operations for the Fiscal Year ended April 30, 2006 Compared to Fiscal Year
Ended April 30, 2005
Consolidated
results for the year ended April 30, 2006 and 2005 are as follows. Certain
reclassifications have been made to prior year financial statements to conform
to the current presentation.
|
Year
Ended
|
|||||||||||||
|
April
30,
|
|||||||||||||
|
2006
|
2005
|
||||||||||||
|
REVENUE
|
$
|
52,144,575
|
100.0
|
%
|
$
|
40,148,233
|
100.0
|
%
|
|||||
|
COSTS
AND EXPENSES:
|
|||||||||||||
|
Cost
of revenue
|
38,010,945
|
72.9
|
%
|
32,445,470
|
80.8
|
%
|
|||||||
|
Selling,
general and administrative expenses
|
9,191,392
|
17.6
|
%
|
7,032,504
|
17.5
|
%
|
|||||||
|
Depreciation
and amortization
|
837,789
|
1.6
|
%
|
682,397
|
1.7
|
%
|
|||||||
|
Total
costs and expenses
|
48,040,126
|
92.1
|
%
|
40,160,371
|
100.0
|
%
|
|||||||
|
OPERATING
INCOME (LOSS)
|
4,104,449
|
7.9
|
%
|
(12,138
|
)
|
0.0
|
%
|
||||||
|
OTHER
EXPENSE (INCOME):
|
|||||||||||||
|
Interest
expense
|
256,022
|
0.5
|
%
|
31,865
|
0.1
|
%
|
|||||||
|
Interest
income
|
(121,720
|
)
|
(0.2
|
%)
|
(10,817
|
)
|
0.0
|
%
|
|||||
|
Loss
(gain) on change in fair value of warrants
|
4,078,494
|
7.8
|
%
|
(1,414,263
|
)
|
(3.5
|
%)
|
||||||
|
INCOME
(LOSS) BEFORE INCOME TAX PROVISION
|
(108,347
|
)
|
(0.2
|
%)
|
1,381,077
|
3.4
|
%
|
||||||
|
Income
tax provision
|
1,515,773
|
2.9
|
%
|
52,096
|
0.1
|
%
|
|||||||
|
NET
INCOME (LOSS)
|
($1,624,120
|
)
|
(3.1
|
%)
|
$
|
1,328,981
|
3.3
|
%
|
|||||
Revenue
Revenue
for the year ended April 30, 2006 was approximately $52,145,000, as compared
to
$40,148,000 for the year ended April 30, 2005. The increase in revenue for
the
year was primarily attributable to the acquisition of Quality on November 24,
2004 and from organic growth. For the year ended April 30, 2006, we had two
separate customers which comprised 20.8% and 14.5% of total revenue. For the
year ended April 30, 2005, we had one customer which comprised 15.5% of total
revenue.
Total
revenue from the specialty communication segment for the years ended April
30,
2006 and 2005 was approximately $42,844,000 or 82.2% and $31,497,000 or 78.5%
of
total revenue, respectively. Wireless infrastructure segment revenue for the
years ended April 30, 2006 and 2005 was approximately $9,300,000 or 17.8% and
$8,651,000 or 21.5% of total revenue, respectively.
22
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 $38,011,000 or 72.9% of revenue for the year ended
April 30, 2006, compared to $32,445,000 or 80.8% for the prior year. The dollar
increase in our total cost of revenue is due to the corresponding increase
in
revenue during the year ended April 30, 2006 as a result of the acquisition
of
Quality and from organic growth. The decrease in cost of revenue as a percentage
of revenue is due primarily to the revenue mix attributable to revenue from
Walker, Clayborn and Heinz and the acquisition Quality.
The
specialty communication segment cost of revenue and cost of revenue as a
percentage of revenue for the years ended April 30, 2006 and 2005 was
approximately $31,194,000 and 72.8% and $25,919,000 and 82.3%, respectively.
As
discussed above, the dollar increase in our total cost of revenue is due to
the
corresponding increase in revenue during the year ended April 30, 2006 as a
result of the acquisition of Quality. The decrease in cost of revenue as a
percentage of revenue is due to the revenue mix attributable to revenue from
Walker and Clayborn and the Quality acquisition.
Wireless
infrastructure segment cost of revenue and cost of revenue as a percentage
of
revenue for the years ended April 30, 2006 and 2005 was approximately $6,817,000
and 73.3% and $6,526,000 and 75.4%, respectively. The dollar increase in our
total cost of revenue is due to the corresponding increase in revenue during
the
year ended April 30, 2006 as a result of organic growth in revenue from Heinz.
The decrease in cost of revenue as a percentage of revenue is due to the revenue
mix attributable to Heinz.
Selling,
General and Administrative Expenses
For
the
year ended April 30, 2006, total selling, general and administrative expenses
were $9,191,000, or 17.6% of total revenue compared to $7,033,000 or 17.5%
of
revenue for the prior year. Included in selling, general and administrative
expenses for the year ended April 30, 2006 are $5,062,000 for salaries,
commissions, and payroll taxes. The increase in salaries and payroll taxes
compared to the prior year is due to the increase in headcount as a result
of
the acquisition of Quality. Professional fees were $514,000, which include
accounting, legal and investor relation fees. Insurance costs were $1,411,000
and rent for office facilities was $396,000. Automobile and other travel
expenses were $713,000 and telecommunication expenses were $231,000. Other
selling, general and administrative expenses totaled $864,000. For the year
ended April 30, 2006, total selling, general and administrative expenses for
the
specialty communication and wireless infrastructure segments were $6,725,000
and
$1,139,000, respectively.
For
the
year ended April 30, 2005, selling, general and administrative expenses were
$7,033,000 or 17.5% of revenue. Included in the selling, general and
administrative expenses was $3,656,000 for salaries, commissions and payroll
taxes, $537,000 in professional fees and insurance costs of $1,164,000. Rent
for
our office facilities amounted to $358,000. Automobile and other travel expenses
were $422,000 and telecommunication expenses were $196,000. Other selling,
general and administrative expenses totaled $700,000. For the year ended April
30, 2005, total selling, general and administrative expenses for the specialty
communication and wireless infrastructure segments were $4,658,000 and
$1,180,000, respectively.
Depreciation
and Amortization
For
the
years ended April 30, 2006 and 2005, depreciation was approximately $544,000
and
$372,000, 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 year ended April 30, 2006
was $294,000 as compared to $310,000 for the same period of the prior year.
The
decrease in amortization is due to the amortization of backlog for Heinz in
the
prior year, partially offset by an increase in amortization from 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. Backlog is amortized
over
a period of one year from the date of acquisition.
Interest
Expense and Interest Income
For
the
years ended April 30, 2006 and 2005, interest expense was approximately $256,000
and $32,000, respectively. The increase in interest expense is due principally
from borrowings on the revolving line of credit and the amortization of debt
issuance costs under the credit agreement entered into on June 3,
2005.
For
the
years ended April 30, 2006 and 2005, interest income was approximately $122,000
and $11,000, respectively. The increase in interest earned is due principally
to
the increase in our cash and cash equivalent balance in fiscal 2006 from the
proceeds received from the exercise of warrants and issuance of common stock.
23
Loss
(Gain) on Fair Value of Warrants
Loss
on
fair value of warrants for the year ended April 30, 2006 was approximately
$4,078,000. The loss in fiscal 2006 was due principally to the increase in
the
market value of our common stock in fiscal 2006. The loss represents the
unrealized non-cash change in the fair value of certain warrants for the year,
using the Black-Scholes option pricing model. For the year ended April 30,
2005,
the gain on fair value of warrants was approximately $1,414,000, due principally
to the decrease in the market value of our common stock. The non-cash loss
or
gain on fair value of warrants has no impact on our cash flows or liquidity.
Net
Income (Loss)
As
a
result of the above, the net loss was approximately $1,624,000 for the year
ended April 30, 2006. Net loss is net of federal and state income tax expense
of
approximately $1,516,000. The variation in effective tax rates between periods
is primarily due to the Quality acquisition and change in fair value of warrants
described above.
We
recognized net income of approximately $1,329,000 for the year ended April
30,
2005. Income tax of approximately $52,000 was expensed for federal and state
income taxes.
Liquidity
and Capital Resources
At
April
30, 2007, we had working capital of approximately $30,320,000, which consisted
of current assets of approximately $43,665,000 and current liabilities of
$13,345,000.
Operating
activities provided approximately $6,169,000 in cash for the year ended April
30, 2007. The sources of cash from operating activities total approximately
$9,115,000, comprised of $4,594,000 net income, $1,294,000 in net non-cash
charges, a $2,320,000 decrease in accounts receivable, $319,000 decrease in
inventory and prepaid expenses, a $329,000 increase in billings in excess of
costs and estimated earnings on uncompleted contracts payable, $222,000 increase
in deferred revenue and a $37,000 increase in income taxes payable. The uses
of
cash from operating activities total approximately $2,946,000, comprised of
a
$421,000 increase in costs and estimated earnings in excess of billings on
uncompleted contracts, a $180,000 increase in other assets, and a $2,345,000
decrease in accounts payable and accrued expenses.
Our
investing activities utilized approximately $8,632,000 in cash during the year
ended April 30, 2007, which consisted of $673,000 paid for property and
equipment, and $7,959,000 paid for the acquisitions of NECS, SECS, Voacolo,
and
TAGS, net of cash acquired of $1,055,000.
Our
financing activities provided cash of approximately $11,743,000 during the
year
ended April 30, 2007. Financing activities include the net proceeds from the
exercise of warrants of $198,000, net proceeds from the issuance of common
stock
of $9,338,000, net proceeds from the exercise of stock options of $1,226,000,
borrowings under lines of credit of $1,454,000 and a $258,000 tax benefit from
the exercise of stock options, offset by equity issuance costs of
$51,000, debt issuance costs of $10,000, net repayments of equipment loans
and capital lease obligations of approximately $481,000, and $189,000 to pay
amounts due 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
April
10, 2007, we entered into a loan agreement with Bank of America, N.A. (BOA).
The
loan agreement (the Loan Agreement), provides for a revolving line of credit
in
an amount not to exceed $12,000,000, together with a letter of credit facility
not to exceed $2,000,000. We and our subsidiaries also entered into security
agreements with BOA, pursuant to which we granted a security interest to BOA
in
all of our assets. The Loan Agreement contains customary covenants, including
but not limited to (i) funded debt to tangible net worth, and (ii) minimum
interest coverage ratio. The loan commitment shall expire on April 10, 2010,
and
we may prepay the loan at any time. Loans under the Loan Agreement bear interest
at a rate equal to BOA’s prime rate, minus one percentage point, or we have the
option to elect to use the optional interest rate of LIBOR plus one hundred
seventy-five basic points (5.32% LIBOR rate plus one and three quarters percent
as of April 30, 2007). We used the initial funds provided by the loan, in the
gross amount of $4,454,217 to repay the existing credit agreement with Bank
Leumi USA, which credit agreement was terminated in connection with the Loan
Agreement.
At
April
30, 2007, we had cash and cash equivalents of approximately $21,559,000 and
working capital of approximately $30,320,000. 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 April 30,
2008. 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.
24
Effective
June 1, 2006, we acquired NECS, a Connecticut corporation. The aggregate
consideration paid the NECS selling shareholders, including acquisition
transaction costs of $69,775, was $4,737,017, of which $4,333,987 was paid
at
closing. Additional purchase price adjustments of $189,077 were paid in October
2006 to settle working capital adjustments. In March 2007, aggregate additional
consideration of $144,178 was paid to the NECS selling shareholders based on
the
earn out settlement for the calendar year ending December 31, 2006. In
connection with the acquisition, NECS entered into employment agreements with
two of the shareholders, each for a period of two years and a consulting
agreement with one of the shareholders for a period of seven years. 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 NECS provides us with additional project engineering expertise
for specialty communication systems, broadens our customer base especially
in
the public safety and gaming markets, including the Massachusetts State Police,
University of Connecticut and Foxwoods Resort Casino, and expands our geographic
presence in New England.
Effective
July 19, 2006, we acquired SECS of Sarasota, Florida. The aggregate
consideration we paid to the SECS selling shareholders, including acquisition
transaction costs of $21,833, was $3,482,346, of which $1,620,000 was paid
at
closing, and we issued 200,288 shares of common stock valued at approximately
$1,400,000. Additional purchase price adjustments of $440,513 were paid in
November 2006, to settle working capital adjustments. We filed a registration
statement with the SEC on August 14, 2006 to register the shares of common
stock
issued to the former SECS shareholders, which was declared effective by the
SEC
on August 24, 2006. In connection with the acquisition, SECS entered into
employment agreements and a consulting agreement with certain officers or former
officers of SECS. 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 SECS provides us with additional project engineering expertise
for wireless infrastructure services, broadens our customer base of corporate,
government and educational clients, including the National Oceanic and
Atmospheric Administration (NOAA), Verizon, BellSouth, Comcast, Time Warner,
University of Florida and Puerto Rico Telephone, and expands our geographic
presence in the Southeastern United States.
Effective
March 30, 2007, we acquired Voacolo. The aggregate consideration we paid to
the
Voacolo selling shareholders, including acquisition transaction costs of
$24,288, was $2,461,788 of which $1,187,500 was paid at closing, and we issued
113,534 shares of common stock valued at approximately $1,250,000. The purchase
price is subject to adjustment for any excess or shortfall between the net
tangible asset value of Voacolo as of the closing date and $1,200,000. In
addition, we agreed to pay an additional $2,500,000 in cash or Company common
stock if Voacolo’s earnings before interest and taxes for the period ending
twelve months from March 30, 2007 shall equal or exceed $1,100,000. In
connection with the acquisition, Voacolo entered into employment agreements
with
the former Voacolo shareholders, each for a period of two
years.
Voacolo
is an electrical contractor in the Mid-Atlantic area that specializes in both
high and low voltage applications structured cabling and voice/data/video
solutions, as well as beginning to expand its operations particularly in
wireless video surveillance. The company is headquartered in Trenton, New Jersey
and has completed many major projects for commercial and government
entities.
Effective
April 5, 2007, we acquired a 60% working interest (the Equity Interest) and
a
60% profit interest (the Profit Interest and together with the Equity Interest,
the Interest) in TAGS, a joint venture enterprise in the City of Taian, Shandong
province, the People's Republic of China from American Gas Services, Inc. (AGS)
and American Gas Services, Inc. Consultants (AGS Consultants), respectively.
The
purchase price for the Interest was $800,000 in cash and 61,277 shares of common
stock of the Company having a value of $720,000. The purchase price is subject
to adjustment in an amount equal to 60% of any shortfall between the net
tangible asset value of TAGS as of the closing date and $3,300,000.
Founded
in 1997 and headquartered in the Province of Shandong, TAGS is a communications
infrastructure engineering company serving the China market. TAGS is certified
by the People's Republic of China as both a Construction Enterprise of Reform
Development company and a Technically Advanced Construction Enterprise company
for the Province of Shandong, which are two of the highest certifications
achievable for engineering and construction based businesses in China. TAGS
is
also licensed in 17 other provinces and has completed projects for a diverse
customer base of businesses and government institutions in over 30 cities in
China.
We
recently announced the signing of letters of intent to acquire two companies.
These transactions are expected to close by August 1, 2007, subject to
completion of due diligence and the execution of definitive
agreements.
We
intend
to acquire 100% of Major Electric, Inc (Major) for $4 million in cash and stock
at closing with additional purchase price to be paid upon the achievement of
a
certain earnings target for the twelve months ending December 31, 2007. Founded
in 1994, Major is headquartered in the Seattle area and is a wireless and
electric contractor specializing in direct digital controls,
security, wireless supervisory control and data acquisition (SCADA) applications
and wireless infrastructure services. Major has completed major projects for
many commercial entities.
25
We
intend
to acquire 100% of Max Engineering LLC (Max) for $800,000 in cash and stock
at
closing with additional purchase price to be paid upon the achievement of a
specific two-year earnings goal. Founded in 2000, Max is an engineering firm
headquartered in Houston, Texas, specializing in the design of specialty
communication systems and wireless infrastructure for telecommunications, oil,
gas and wind energy.
Backlog
As
of
April 30, 2007, we had a backlog of unfilled orders of approximately $34.9
million compared to approximately $15.9 million at April 30, 2006. 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:
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 revenue recognition based
on
the estimation of percentage of completion on uncompleted contracts, valuation
of inventory, allowance for doubtful accounts, estimated life of customer lists
and estimates of the fair value of reporting units and discounted cash flows
used in determining whether goodwill has been impaired. Actual results could
differ from those estimates.
Accounts
Receivable
Accounts
receivable are due within contractual payment terms and are stated at amounts
due from customers net of an allowance for doubtful accounts. Credit is extended
based on evaluation of a customer's financial condition. Accounts outstanding
longer than the contractual payment terms are considered past due. The Company
determines its allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, the Company's previous
loss history, the customer's current ability to pay its obligation to the
Company, and the condition of the general economy and the industry as a whole.
The Company writes off accounts receivable when they become uncollectible,
and
payment subsequently received on such receivables are credited to the allowance
for doubtful accounts.
26
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 2007 and 2006 found
that no impairment existed. Our impairment review is based on comparing the
fair
value to the carrying value of the reporting units with goodwill. The fair
value
of a reporting unit is measured at the business unit level using a discounted
cash flow approach that incorporates our estimates of future revenues and costs
for those business units. Reporting units with goodwill include Invisinet and
Heinz within our wireless infrastructure segment and Walker, Clayborn and
Quality within our specialty communications segment. Our estimates are
consistent with the plans and estimates that we are using to manage the
underlying businesses. If we fail to deliver products and services for these
business units, or market conditions for these businesses fail to improve,
our
revenue and cost forecasts may not be achieved and we may incur charges for
goodwill impairment, which could be significant and could have a material
adverse effect on our net equity and results of operations.
Deferred
Income Taxes
We
determine deferred tax liabilities and assets at the end of each period based
on
the future tax consequences that can be attributed to net operating loss and
credit carryovers and differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases,
using
the tax rate expected to be in effect when the taxes are actually paid or
recovered. The recognition of deferred tax assets is reduced by a valuation
allowance if it is more likely than not that the tax benefits will not be
realized. The ultimate realization of deferred tax assets depends upon the
generation of future taxable income during the periods in which those temporary
differences become deductible.
We
consider past performance, expected future taxable income and prudent and
feasible tax planning strategies in assessing the amount of the valuation
allowance. Our forecast of expected future taxable income is based over such
future periods that we believe can be reasonably estimated. Changes in market
conditions that differ materially from our current expectations and changes
in
future tax laws in the U.S. may cause us to change our judgments of future
taxable income. These changes, if any, may require us to adjust our existing
tax
valuation allowance higher or lower than the amount we have
recorded.
Revenue
Recognition
We
generate our revenue by providing engineering and deployment services for
wireless infrastructure services and specialty communication systems. We provide
a range of services including
site
design, spectrum analysis, product integration, structured cabling, electrical
work, trenching, construction, testing, project management and
maintenance.
Our
engineering and deployment services report revenue pursuant to customer
contracts that span varying periods of time. We report revenue from contracts
when persuasive evidence of an arrangement exists, fees are fixed or
determinable, and collection is reasonably assured.
We
record
revenue and profit from long-term contracts on a percentage-of-completion basis,
measured by the percentage of contract costs incurred to date to the estimated
total costs for each contracts. Contracts in process are valued at cost plus
accrued profits less earned revenues and progress payments on uncompleted
contracts. Contract costs include direct materials, direct labor, third party
subcontractor services and those indirect costs related to contract performance.
Contracts are generally considered substantially complete when engineering
is
completed and/or site construction is completed.
We
have
numerous contracts that are in various stages of completion. Such contracts
require estimates to determine the appropriate cost and revenue recognition.
Cost estimates are reviewed monthly on a contract-by-contract basis, and are
revised periodically throughout the life of the contract such that adjustments
to profit resulting from revisions are made cumulative to the date of the
revision. Significant management judgments and estimates, including the
estimated cost to complete projects, which determines the project’s percent
complete, must be made and used in connection with the revenue recognized in
the
accounting period. Current estimates
may be revised as additional information becomes available. If estimates of
costs to complete long-term contracts indicate a loss, provision is made
currently for the total loss anticipated.
27
We
also
recognize certain revenue from short-term contracts when equipment is delivered
or the services have been provided to the customer. For maintenance contracts,
revenue is recognized ratably over the service period.
Recently
Issued Accounting Pronouncements
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, we are required to expense the fair value of employee
stock options effective May 1, 2006. The revised standard requires us to expense
the fair value of employee stock options and other share-based payments over
the
service period.
In
June
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48, Accounting
for Uncertainty in Income Taxes - an interpretation of FAS No. 109
(FIN
48),
which clarifies the accounting for uncertainty in income taxes is subject to
significant and varied interpretations that have resulted in diverse and
inconsistent accounting practices and measurements. Addressing such diversity,
FIN 48 prescribes a consistent recognition threshold and measurement attribute,
as well as clear criteria for subsequently recognizing, derecognizing and
measuring changes in such tax positions for financial statement purposes. FIN
48
also requires expanded disclosure with respect to the uncertainty in income
taxes. FIN 48 is effective for fiscal years beginning after December 15, 2006.
We have not yet determined the impact of FIN 48 on our consolidated financial
position, results of operations, cash flows or financial statement
disclosures.
On
September 15, 2006, the FASB issued Statement of Financial Accounting Standards
No. 157,
Fair
Value Measurements
(SFAS
157), which is effective for fiscal years beginning after November 15, 2007
and
for interim periods within those years. SFAS 157 defines fair value, establishes
a framework for measuring fair value and expands the related disclosure
requirements. We are currently evaluating the potential impact, if any, of
the
adoption of SFAS 157 on our consolidated financial position, results of
operations and cash flows or financial statement disclosures.
In
September 2006, the SEC issued SAB No. 108 Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements(SAB
108), which is effective for fiscal years beginning after November 15, 2006
provides interpretive guidance on how registrants should quantify financial
statement misstatements. Under SAB 108 registrants are required to consider
both
a “rollover” method, which focuses primarily on the income statement impact of
misstatements, and the “iron curtain” method, which focuses primarily on the
balance sheet impact of misstatements. The effects of prior year uncorrected
errors include the potential accumulation of improper amounts that may result
in
a material misstatement on the balance sheet or the reversal of prior period
errors in the current period that result in a material misstatement of the
current period income statement amounts. Adjustments to current or prior period
financial statements would be required in the event that after application
of
various approaches for assessing materiality of a misstatement in current period
financial statements and consideration of all relevant quantitative factors,
a
misstatement is determined to be material. We are currently evaluating the
potential impact, if any, of the adoption of SAB 108 on our consolidated
financial position, results of operations and cash flows or financial statement
disclosures.
In
February, 2007, the FASB issued FASB Statement of Financial Accounting Standards
No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(SFAS
159), which permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS
159
is effective for fiscal years beginning after November 15, 2007. We have not
yet
determined the impact SFAS 159 may have on our results of operations or
financial position.
No
other
recently issued accounting pronouncement issued or effective after the end
of
the fiscal year is expected to have a material impact on our consolidated
financial statements.
Contractual
Obligations and Commitments
The
following is a summary of our significant contractual cash obligations for
the
periods indicated that existed as of April 30, 2007, and is based on information
appearing in the notes to consolidated financial statements included elsewhere
in this filing.
|
Less
than
|
1-2
|
3-5
|
More
than
|
|||||||||||||
|
Total
|
1
Year
|
Years
|
Years
|
5
Years
|
||||||||||||
|
Borrowings
under line of credit
|
$
|
4,454,217
|
$
|
-
|
$ |
-
|
$
|
4,454,217
|
$ |
-
|
||||||
|
Loans
payable
|
2,882,888
|
2,598,872
|
227,381
|
47,115
|
9,520
|
|||||||||||
|
Operating
leases
|
2,242,566
|
759,245
|
837,736
|
544,870
|
100,715
|
|||||||||||
|
Employment
agreements
|
5,494,583
|
2,612,800
|
2,881,783
|
-
|
-
|
|||||||||||
|
Total
obligations
|
$
|
15,074,254
|
$
|
5,970,917
|
$
|
3,946,900
|
$
|
5,046,202
|
$
|
110,235
|
||||||
28
ITEM
7A - QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest
Rate Risk
Interest
rate risk represents the potential loss from adverse changes in market interest
rates. We
are
subject to interest rate risk with respect to amounts borrowed under our credit
facility because such amounts bear interest at a variable rate. The interest
rate is equal to the BOA’s prime rate minus one percent, or LIBOR plus one and
three-quarters (1.75%) percent, as we may request (5.32% LIBOR rate plus one
and
three-quarters percent as of April 30, 2007). At April 30, 2007, we had
approximately $4,454,000 of indebtedness outstanding under our revolving credit
facility. A 1.0% increase in interest rates on un-hedged variable rate
borrowings of $4.4 million at April 30, 2007 would result in additional interest
expense of approximately $44,000 for twelve months ended April 30,
2007.
29
ITEM
8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
||||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|||
|
Consolidated
Balance Sheets as of April 30, 2007 and 2006
|
F-3
- F-4
|
|||
|
Consolidated
Statements of Operations for the years ended April
30, 2007, 2006 and 2005
|
F-5
|
|||
|
Consolidated
Statements of Shareholders' Equity for the years ended April 30,
2007,
2006 and 2005
|
F-6
- F-8
|
|||
|
Consolidated
Statements of Cash Flows for the years ended April
30, 2007, 2006 and 2005
|
F-9
- F-11
|
|||
|
Notes
to Consolidated Financial Statements
|
F-12
- F-31
|
|||
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Shareholders
WPCS
International Incorporated and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of WPCS International
Incorporated and Subsidiaries as of April 30, 2007 and 2006, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended April 30, 2007. Our audits
also included the consolidated financial statement schedule for the years ended
April 30, 2007, 2006 and 2005 listed in the Index at Item 15(schedule II).
These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. Our audits included examining,
on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the 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, 2007 and 2006, and their
consolidated results of operations and cash flows for each of the three years
in
the period ended April 30, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related consolidated financial statement schedule for the years ended April
30,
2007, 2006 and 2005, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, WPCS International
Incorporated and Subsidiaries adopted Statement of Financial Accounts
Standards No. 123(R), “Share-Based Payment” effective May 1, 2006.
/
s /
J.H. COHN LLP
J.H.
COHN LLP
Roseland
, New Jersey
July 24, 2007
July 24, 2007
F-2
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
April
30,
|
April
30,
|
||||||
|
ASSETS
|
2007
|
2006
|
|||||
|
CURRENT
ASSETS:
|
|||||||
|
Cash
and cash equivalents
|
$
|
21,558,739
|
$
|
12,279,646
|
|||
|
Accounts
receivable, net of allowance of $98,786 and $104,786 at April 30,
2007 and
2006, respectively
|
16,560,636
|
12,141,789
|
|||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
2,499,940
|
1,441,977
|
|||||
|
Inventory
|
2,260,082
|
1,204,540
|
|||||
|
Prepaid
expenses and other current assets
|
732,043
|
286,625
|
|||||
|
Deferred
tax assets
|
54,000
|
78,000
|
|||||
|
Total
current assets
|
43,665,440
|
27,432,577
|
|||||
|
PROPERTY
AND EQUIPMENT, net
|
5,488,920
|
1,352,216
|
|||||
|
OTHER
INTANGIBLE ASSETS, net
|
1,683,349
|
864,388
|
|||||
|
GOODWILL
|
20,469,608
|
14,239,918
|
|||||
|
DEBT
ISSUANCE COSTS, net
|
10,000
|
111,091
|
|||||
|
DEFERRED
TAX ASSETS
|
111,000
|
51,000
|
|||||
|
OTHER
ASSETS
|
263,353
|
71,128
|
|||||
|
Total
assets
|
$
|
71,691,670
|
$
|
44,122,318
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS (continued)
|
April
30,
|
April
30,
|
||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
2007
|
2006
|
|||||
|
CURRENT
LIABILITIES:
|
|||||||
|
Current
portion of loans payable
|
$
|
2,598,872
|
$
|
231,065
|
|||
|
Accounts
payable and accrued expenses
|
6,802,110
|
4,989,861
|
|||||
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
2,272,688
|
1,085,312
|
|||||
|
Deferred
revenue
|
504,458
|
128,052
|
|||||
|
Due
to shareholders
|
707,000
|
381,377
|
|||||
|
Income
taxes payable
|
433,361
|
420,066
|
|||||
|
Deferred
tax liabilities
|
27,000
|
21,000
|
|||||
|
Total
current liabilities
|
13,345,489
|
7,256,733
|
|||||
|
Borrowings
under line of credit
|
4,454,217
|
3,000,000
|
|||||
|
Loans
payable, net of current portion
|
284,016
|
256,692
|
|||||
|
Due
to shareholders, net of current portion
|
-
|
514,623
|
|||||
|
Deferred
tax liabilities
|
722,000
|
531,000
|
|||||
|
Total
liabilities
|
18,805,722
|
11,559,048
|
|||||
|
Minority
interest in subsidiary
|
1,353,965
|
-
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
SHAREHOLDERS'
EQUITY:
|
|||||||
|
Preferred
stock - $0.0001 par value, 5,000,000 shares authorized, none
issued
|
-
|
-
|
|||||
|
Common
stock - $0.0001 par value, 75,000,000 shares authorized, 6,971,698
and
5,264,284 shares issued and outstanding at April 30, 2007 and 2006,
respectively
|
696
|
526
|
|||||
|
Additional
paid-in capital
|
47,901,160
|
33,525,130
|
|||||
|
Retained
earnings (accumulated deficit)
|
3,631,215
|
(962,386
|
)
|
||||
|
Accumulated
other comprehensive loss on translation of currency
exchange
|
(1,088
|
)
|
-
|
||||
|
Total
shareholders' equity
|
51,531,983
|
32,563,270
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
71,691,670
|
$
|
44,122,318
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
Year
Ended
|
||||||||||
|
April
30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
REVENUE
|
$
|
70,000,070
|
$
|
52,144,575
|
$
|
40,148,233
|
||||
|
COSTS
AND EXPENSES:
|
||||||||||
|
Cost
of revenue
|
47,781,351
|
38,010,945
|
32,445,470
|
|||||||
|
Selling,
general and administrative expenses
|
13,244,909
|
9,191,392
|
7,032,504
|
|||||||
|
Depreciation
and amortization
|
1,239,486
|
837,789
|
682,397
|
|||||||
|
Total
costs and expenses
|
62,265,746
|
48,040,126
|
40,160,371
|
|||||||
|
OPERATING
INCOME (LOSS)
|
7,734,324
|
4,104,449
|
(12,138
|
)
|
||||||
|
OTHER
EXPENSE (INCOME):
|
||||||||||
|
Interest
expense
|
496,330
|
256,022
|
31,865
|
|||||||
|
Interest
income
|
(525,524
|
)
|
(121,720
|
)
|
(10,817
|
)
|
||||
|
Minority
interest
|
23,099
|
-
|
- | |||||||
|
Loss
(gain) on change in fair value of warrants
|
-
|
4,078,494
|
(1,414,263
|
)
|
||||||
|
INCOME
(LOSS) BEFORE INCOME TAX PROVISION
|
7,740,419
|
(108,347
|
)
|
1,381,077
|
||||||
|
Income
tax provision
|
3,146,818
|
1,515,773
|
52,096
|
|||||||
|
NET
INCOME (LOSS)
|
$
|
4,593,601
|
($1,624,120
|
)
|
$
|
1,328,981
|
||||
|
Basic
net income (loss) per common share
|
$
|
0.80
|
($0.40
|
)
|
$
|
0.50
|
||||
|
Diluted
net income (loss) per common share
|
$
|
0.72
|
($0.40
|
)
|
$
|
0.49
|
||||
|
Basic
weighted average number of common shares outstanding
|
5,772,423
|
4,057,940
|
2,679,529
|
|||||||
|
Diluted
weighted average number of common shares outstanding
|
6,409,333
|
4,057,940
|
2,729,866
|
|||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ 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, 2004
|
-
|
$
|
-
|
1,737,498
|
$
|
174
|
$
|
11,993,387
|
$
|
(38,559
|
)
|
($667,247
|
)
|
$
|
11,287,755
|
||||||||||
|
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.
F-6
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY - CONTINUED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
Preferred
Stock
|
Common
Stock
|
Paid-In
|
(Accumulated
|
Shareholders'
|
||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit)
|
Equity
|
||||||||||||||||
|
Reclassification
of proceeds from sales of common stock
|
||||||||||||||||||||||
|
with
registration rights to additional paid-in capital
|
-
|
-
|
2,083,887
|
208
|
5,731,908
|
-
|
5,732,116
|
|||||||||||||||
|
Net
proceeds from exercise of warrants
|
-
|
-
|
554,717
|
55
|
4,167,092
|
-
|
4,167,147
|
|||||||||||||||
|
Reclassification
of fair value of warrant liability to additional
|
||||||||||||||||||||||
|
paid-in
capital from exercise of warrants
|
-
|
-
|
-
|
-
|
2,849,302
|
-
|
2,849,302
|
|||||||||||||||
|
Reclassification
of fair value of warrant liability to additional
|
||||||||||||||||||||||
|
paid-in
capital from the termination of liquidated
|
||||||||||||||||||||||
|
damages
provision under registration rights agreement
|
-
|
-
|
-
|
-
|
3,223,760
|
-
|
3,223,760
|
|||||||||||||||
|
Net
proceeds from issuance of common stock
|
-
|
-
|
876,931
|
88
|
5,528,078
|
-
|
5,528,166
|
|||||||||||||||
|
Net
proceeds from exercise of stock options
|
-
|
-
|
11,251
|
1
|
58,491
|
-
|
58,492
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(1,624,120
|
)
|
(1,624,120
|
)
|
|||||||||||||
|
BALANCE,
APRIL 30, 2006
|
-
|
-
|
5,264,284
|
526
|
33,525,130
|
(962,386
|
)
|
32,563,270
|
||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-7
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY - CONTINUED
|
Accumulated
|
|||||||||||||||||||||||||
|
|
Other
|
||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Compre-
|
Total
|
|||||||||||
|
Preferred
Stock
|
Common
Stock
|
Paid-In
|
Retained
|
hensive
|
Shareholders' | ||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Earnings
|
|
Loss
|
Equity
|
|||||||||||||||||
|
Net
issuance of common stock, acquisition of
|
|||||||||||||||||||||||||
|
Southeastern
Communication Service, Inc.
|
-
|
-
|
200,288
|
20
|
1,349,631
|
- | - |
1,349,651
|
|||||||||||||||||
|
Net
issuance of common stock, acquisition of
|
|||||||||||||||||||||||||
|
Voacolo
Eletric Inc
|
113,534
|
11
|
1,249,869
|
- | - |
1,249,880
|
|||||||||||||||||||
|
Net
issuance of common stock, acquisition of
|
|||||||||||||||||||||||||
|
TAGS
|
61,277
|
6
|
719,864
|
- | - |
719,870
|
|||||||||||||||||||
|
Net
issuance of common stock
|
-
|
-
|
1,109,023
|
111
|
9,337,780
|
- | - |
9,337,891
|
|||||||||||||||||
|
Net
proceeds from exercise of warrants
|
-
|
-
|
30,281
|
3
|
197,873
|
- | - |
197,876
|
|||||||||||||||||
|
Fair
value of stock options granted to employees
|
-
|
-
|
-
|
-
|
37,526
|
- | - |
37,526
|
|||||||||||||||||
|
Net
proceeds from exercise of stock options
|
-
|
-
|
193,011
|
19
|
1,225,487
|
- | - |
1,225,506
|
|||||||||||||||||
|
Excess
tax benefit from exercise of stock options
|
- | - | - | - |
258,000
|
- | - |
258,000
|
|||||||||||||||||
|
Accumulated
other comprehensive loss
|
- | - | - | - |
-
|
- |
($1,088
|
) |
(1,088
|
) | |||||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
$
|
4,593,601
|
- |
4,593,601
|
||||||||||||||||
|
BALANCE,
APRIL 30, 2007
|
-
|
$
|
-
|
6,971,698
|
$
|
696
|
$
|
47,901,160
|
$
|
3,631,215
|
($1,088
|
)
|
$
|
51,531,983
|
|||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-8
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
Year
Ended
|
||||||||||
|
April
30,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
OPERATING
ACTIVITIES:
|
||||||||||
|
Net
income (loss)
|
$
|
4,593,601
|
$
|
(1,624,120
|
)
|
$
|
1,328,981
|
|||
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in)
operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
1,239,486
|
837,789
|
682,397
|
|||||||
|
Fair
value of stock options granted to employees
|
37,526
|
-
|
-
|
|||||||
|
Change
in fair value of warrant liability
|
-
|
4,078,494
|
(1,414,263
|
)
|
||||||
|
(Recovery
of) provision for doubtful accounts
|
(6,000
|
)
|
29,000
|
14,007
|
||||||
|
Amortization
of debt issuance costs
|
111,091
|
47,696
|
-
|
|||||||
|
Amortization
of unearned consulting services
|
-
|
-
|
38,559
|
|||||||
|
Fair
value of stock options granted
|
-
|
-
|
||||||||
|
Excess
tax benefit from exercise of stock options
|
(258,000
|
)
|
-
|
-
|
||||||
|
Minority
interest
|
23,099
|
-
|
-
|
|||||||
|
Gain
on sale of fixed assets
|
(13,675
|
)
|
-
|
-
|
||||||
|
Deferred
income taxes
|
161,000
|
(43,000
|
)
|
(134,000
|
)
|
|||||
|
Changes
in operating assets and liabilities, net of effects of
acquisitions:
|
||||||||||
|
Accounts
receivable
|
2,320,439
|
(2,265,623
|
)
|
(1,898,625
|
)
|
|||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
(421,204
|
)
|
(533,022
|
)
|
1,214,076
|
|||||
|
Inventory
|
229,358
|
(318,916
|
)
|
(536,772
|
)
|
|||||
|
Prepaid
expenses and other current assets
|
89,273
|
249,706
|
(14,306
|
)
|
||||||
|
Other
assets
|
(180,187
|
)
|
37,001
|
(148,596
|
)
|
|||||
|
Accounts
payable and accrued expenses
|
(2,345,468
|
)
|
(376,943
|
)
|
(337,355
|
)
|
||||
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
329,544
|
8,873
|
(1,146,930
|
)
|
||||||
|
Deferred
revenue
|
222,092
|
-
|
-
|
|||||||
|
Income
taxes payable
|
37,244
|
381,758
|
(328,751
|
)
|
||||||
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
6,169,219
|
508,693
|
(2,681,578
|
)
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-9
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS - CONTINUED
|
INVESTING
ACTIVITIES:
|
||||||||||
|
Acquisition
of property and equipment, net
|
(673,237
|
) |
(234,792
|
) |
(215,844
|
) | ||||
|
Acquisition
of Quality, net of cash received
|
-
|
-
|
(6,708,904
|
) | ||||||
|
Acquisition
of Heinz, net of cash received
|
-
|
-
|
(82,283
|
) | ||||||
|
Acquisition
transaction costs
|
-
|
(4,304
|
) |
(17,553
|
) | |||||
|
Acquisition
of NECS, net of cash received
|
(4,607,268
|
) |
-
|
-
|
||||||
|
Acquisition
of SECS, net of cash received
|
(1,882,321
|
) |
-
|
-
|
||||||
|
Acquisition
of Voacolo, net of cash received
|
(627,694
|
) |
-
|
-
|
||||||
|
Acquisition
of TAGS, net of cash received
|
(841,252
|
) |
-
|
-
|
||||||
|
NET
CASH USED IN INVESTING ACTIVITIES
|
(8,631,772
|
) |
(239,096
|
) |
(7,024,584
|
) | ||||
|
FINANCING
ACTIVITIES:
|
||||||||||
|
Net
proceeds from exercise of warrants
|
197,876
|
4,167,147
|
-
|
|||||||
|
Net
proceeds from issuance of common stock
|
9,337,891
|
5,528,166
|
-
|
|||||||
|
Net
proceeds from exercise of stock options
|
1,225,506
|
58,492
|
-
|
|||||||
|
Net
proceeds from issuance of common stock with continuing registration
rights
|
-
|
-
|
9,140,949
|
|||||||
|
Excess
tax benefit from exercise of stock options
|
258,000
|
-
|
-
|
|||||||
|
Equity
issuance costs
|
(50,613
|
) |
-
|
(26,888
|
) | |||||
|
Debt
issuance costs
|
(10,000
|
) |
(158,787
|
) |
-
|
|||||
|
Borrowings
(repayments) under lines of credit, net
|
1,454,217
|
2,617,719
|
(303,848
|
) | ||||||
|
Repayments
of loans payable
|
(456,405
|
) |
(227,952
|
) |
(96,901
|
) | ||||
|
Payments
of amounts due to shareholders
|
(189,000
|
) |
(961,915
|
) |
-
|
|||||
|
Payments
of capital lease obligations
|
(24,738
|
) |
(2,073
|
) |
(2,534
|
) | ||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
11,742,734
|
11,020,797
|
8,710,778
|
|||||||
|
Effect
of exchange rate changes on cash
|
(1,088
|
) |
-
|
-
|
||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
9,279,093
|
11,290,394
|
(995,384
|
) | ||||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
12,279,646
|
989,252
|
1,984,636
|
|||||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$
|
21,558,739
|
$
|
12,279,646
|
$
|
989,252
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-10
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS - CONTINUED
|
Year
Ended
|
|||||||||||||
|
April
30,
|
|||||||||||||
|
2007
|
2006
|
2005
|
|||||||||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|||||||||||||
|
Cash
paid during the period for:
|
|
||||||||||||
|
Interest
|
$
|
433,742
|
$
|
189,435
|
$
|
32,196
|
|||||||
|
Income
taxes
|
$
|
2,897,944
|
$
|
1,187,556
|
$
|
434,289
|
|||||||
|
SCHEDULE
OF NON CASH INVESTING AND FINANCING ACTIVITIES:
|
|||||||||||||
|
Issuance
of common stock for net non-cash assets received in acquisition
|
$
|
3,370,011
|
$
|
-
|
$
|
-
|
|||||||
|
Unpaid
purchase price adjustments related to acquisition
|
$
|
-
|
$
|
-
|
$
|
742,295
|
|||||||
|
Reversal
of accruals established in purchase accounting
|
$
|
-
|
$
|
2,150
|
$
|
40,022
|
|||||||
|
Issuance
of notes for property and equipment
|
$
|
74,382
|
$
|
266,834
|
$
|
192,210
|
|||||||
|
Reclassification
of proceeds from sales of common stock with registration
rights,
|
|||||||||||||
|
to
additional paid-in capital
|
$
|
-
|
$
|
5,732,116
|
$
|
-
|
|||||||
|
Reclassification
of fair value of warrant liability to additional paid-in capital
|
|||||||||||||
|
from
the exercise of warrants
|
$
|
-
|
$
|
2,849,302
|
$
|
-
|
|||||||
|
Reclassification
of fair value of warrant liability to additional paid-in capital
from
the
|
|||||||||||||
|
termination
of liquidated damages provision under registration rights
agreement
|
$
|
-
|
$
|
3,223,760
|
$
|
-
|
|||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-11
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - BASIS OF PRESENTATION
The
accompanying consolidated financial statements include the accounts of WPCS
International Incorporated (WPCS) and its wholly owned subsidiaries, WPCS
Incorporated , Invisinet, Inc. (Invisinet), Walker Comm, Inc. (Walker), Clayborn
Contracting Group, Inc. (Clayborn), Heinz Corporation (Heinz), Quality
Communications & Alarm Company, Inc. (Quality), New England Communications
Systems, Inc. (NECS) from June 1, 2006 (date of acquisition), Southeastern
Communication Services, Inc. (SECS) from July 19, 2006 ( date of acquisition),
Voacolo Electric Incorporated (Voacolo) from March 30, 2007 ( date of
acquisition), and its 60% interest in Taian AGS Pipeline Construction
Co., Ltd. (TAGS) from April 5, 2007 ( 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 20,849,976 shares
to 1,737,498 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.
Effective
June 1, 2006, the Company acquired all of the issued and outstanding common
stock of NECS. The aggregate consideration paid by the Company to the NECS
selling shareholders, including acquisition transaction costs of $69,775, was
$4,737,017, of which $4,333,987 was paid at closing. Additional purchase price
adjustments of $189,077 were paid in October 2006 to settle working capital
adjustments. In March 2007, aggregate additional consideration of $144,178
was
paid to the NECS selling shareholders based on the earn out settlement for
the
calendar year ending December 31, 2006. In connection with the acquisition,
NECS
entered into employment agreements with two of the shareholders, each for a
period of two years and a consulting agreement with one of the shareholders
for
a period of seven years.
Effective
July 19, 2006, the Company acquired all of the issued and outstanding common
stock of SECS. The aggregate consideration paid by the Company to the SECS
selling shareholders, including acquisition transaction costs of $21,833, was
$3,482,346, of which $1,620,000 was paid at closing, and the Company issued
200,288 shares of common stock valued at approximately $1,400,000. Additional
purchase price adjustments of $440,513 were paid in November 2006, to settle
working capital adjustments. The Company filed a registration statement with
the
SEC on August 14, 2006 to register the shares of common stock issued to the
former SECS shareholders, which was declared effective by the SEC on August
24,
2006. In connection with the acquisition, SECS entered into employment
agreements and a consulting agreement with certain officers or former officers
of SECS.
Effective
March 30, 2007, the Company acquired Voacolo. The aggregate consideration paid
by the Company to the Voacolo selling shareholders, including acquisition
transaction costs of $24,288, was $2,461,788 of which $1,187,500 was paid at
closing, and the Company issued 113,534 shares of common stock valued at
approximately $1,250,000. The purchase price is subject to adjustment for any
excess or shortfall between the net tangible asset value of Voacolo as of the
closing date and $1,200,000. In addition, the Company shall pay an additional
$2,500,000 in cash or Company common stock if Voacolo’s earnings before interest
and taxes for the period ending twelve months from March 30, 2007 shall equal
or
exceed $1,100,000. Voacolo was acquired pursuant to a Stock Purchase Agreement
among WPCS International Incorporated, and the former Voacolo shareholders,
dated and effective as of March 30, 2007. In connection with the acquisition,
Voacolo entered into employment agreements with the former Voacolo shareholders,
each for a period of two years.
Effective
April 5, 2007, the Company acquired a 60% working interest (the Equity Interest)
and a 60% profit interest (the Profit Interest and together with the Equity
Interest, the Interest) in TAGS from American Gas Services, Inc. (AGS) and
American Gas Services, Inc. Consultants (AGS Consultants), respectively The
aggregate consideration paid by the Company to AGS and AGS Consultants,
including acquisition transaction costs of $182,815, was $1,702,816 of which
$800,000 was paid at closing, and the Company issued 61,277 shares of common
stock valued at approximately $720,000. The purchase price is subject to
adjustment in an amount equal to 60% of any shortfall between the net tangible
asset value of TAGS as of the closing date and $3,300,000. The Interest was
acquired pursuant to a Interest Purchase Agreement among WPCS International
Incorporated, AGS and AGS Consultants, dated and effective as of April 5,
2007.
F-12
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A
summary
of significant accounting policies consistently applied in the preparation
of
the accompanying consolidated financial statements follows:
Principles
of Consolidation
All
significant intercompany transactions and balances have been eliminated in
these
consolidated financial statements.
Cash
and Cash Equivalents
Cash
and
cash equivalents include all cash and highly-liquid investments with an original
maturity at time of purchase of three months or less.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents 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
payments subsequently received on such receivables are credited to the allowance
for doubtful accounts. Included in the accounts receivable is retainage
receivable of $750,249 and $895,368 at April 30, 2007 and 2006, respectively,
which is expected to be collected within one year.
Inventory
Inventory
consists of materials, parts and supplies principally valued at the lower of
cost using the first-in-first-out (FIFO) method, or market.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation and amortization are provided
for, using straight-line methods, in amounts sufficient to charge the cost
of
depreciable assets to operations over their estimated service lives. Repairs
and
maintenance costs are charged to operations as incurred.
Goodwill
and Other Intangible Assets
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
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 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 is 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 value.
F-13
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
The
Company determines the fair value of the businesses acquired (reporting units)
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 at April 30, 2007
and
2006. Accordingly, step two was unnecessary and no impairment charge was
recognized in the consolidated statement of operations for the years ended
April
30, 2007, 2006 and 2005. On an ongoing basis, the Company expects to perform
its
annual impairment test at April 30 absent any interim impairment
indicators.
Goodwill
through the years ended April 30, 2007 and 2006 consisted of the
following:
|
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 adjustment
|
226,798
|
|||
|
Ending
balance, April 30, 2006
|
14,239,918
|
|||
|
Additional
transaction costs for prior acquisitions
|
13,781
|
|||
|
NECS
acquisition
|
3,380,111
|
|||
|
SECS
acquisition
|
1,823,205
|
|||
|
Voacolo
acqusition
|
1,012,593
|
|||
|
Ending
balance, April 30, 2007
|
$
|
20,469,608
|
||
Other
intangible assets consist of the following at April 30:
|
Estimated
useful life (years)
|
2007
|
2006
|
||||||||
|
Customer
lists
|
5
- 8
|
$
|
2,607,000
|
$
|
1,585,000
|
|||||
|
Contract
backlog
|
1-3
|
325,200
|
65,000
|
|||||||
|
2,932,200
|
1,650,000
|
|||||||||
|
Less
accumulated amortization expense
|
1,248,851
|
785,612
|
||||||||
|
$
|
1,683,349
|
$
|
864,388
|
|||||||
Amortization
expense for other intangible assts for the years ended April 30, 2007, 2006
and
2005 was approximately $463,000, $294,000 and $310,000
respectively.
F-14
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
There
are
no expected residual values related to these intangible assets. Estimate future
amortization expense by fiscal year is as follows:
|
Year
ending April 30,
|
||||
|
2008
|
$
|
472,599
|
||
|
2009
|
352,665
|
|||
|
2010
|
301,831
|
|||
|
2011
|
195,353
|
|||
|
2012
|
138,965
|
|||
|
Thereafter
|
221,936
|
|||
|
Total
|
$
|
1,683,349
|
||
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 services including
site
design, spectrum analysis, product integration, structured cabling, electrical
work, trenching, construction, testing, project management and
maintenance.
The
Company’s engineering and deployment services report revenue pursuant to
customer contracts that span varying periods of time. The Company reports
revenue from contracts when persuasive evidence of an arrangement exists, fees
are fixed or determinable, and collection is reasonably assured.
The
Company records revenue and profit from long-term contracts on a
percentage-of-completion basis, measured by the percentage of contract costs
incurred to date to the estimated total costs for each contract. Contracts
in
process are valued at cost plus accrued profits less earned revenues and
progress payments on uncompleted contracts. Contract costs include direct
materials, direct labor, third party subcontractor services and those indirect
costs related to contract performance. Contracts are generally considered
substantially complete when engineering is completed and/or site construction
is
completed.
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.
The
Company also recognizes certain revenue from short-term contracts when equipment
is delivered or the services have been provided to the customer. For maintenance
contracts, revenue is recognized ratably over the service period.
Other
Concentrations
For
the
year ended April 30, 2007, the Company had two separate customers totaling
approximately $12.7 million and $8.2 million, which comprised 18.1% and 11.7%
of
total revenue. For the year ended April 30, 2006, the Company had revenue from
two separate customers totaling approximately $10.8 million and $7.6 million,
which comprised 20.8% and 14.5% of total revenue, respectively. For the fiscal
year ended April 30, 2005, the Company had revenue from one customer totaling
$6.2 million, 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 these customers and their
financial strength.
The
Company has approximately 106 union employees. A contract with 15 union
employees expires on May 31, 2007. A new contract with this union has been
negotiated and is in the process of completion. A contract with six union
employees expired on September 30, 2007. A contract with 85 union employees
expires on November 30, 2008. At April 30, 2007, 29% of the Company’s labor
force is subject to collective bargaining agreements, of which 6% will expire
within one year.
F-15
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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 common 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 and warrants.
At
April
30, 2007, the Company had 560,834 stock options and 1,883,796 warrants
outstanding which are potentially dilutive securities. For the year ended April
30, 2007, 91,791 options were not included in the computation of fully diluted
earnings per common share, because the stock option exercise price exceeded
the
market price of common stock and, therefore, the effects would be antidilutive.
The assumed conversion of the remaining 469,043 stock options and 1,883,796
warrants resulted in a 636,910 share increase in weighted average shares for
fully diluted earnings per common share.
At
April
30, 2006, 786,432 stock options and 2,017,453 warrants were not included in
the
computation of fully diluted earnings per share because the Company had a net
loss and, therefore, the effects would be antidilutive.
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 in fiscal 2005.
Stock-Based
Compensation Plans
Prior
to
May 1, 2006, the Company accounted for stock-based employee compensation under
the recognition provisions of Accounting Principles Board Opinion No. 25
(“APB 25”), Accounting
for Stock Issued to Employees
and
related interpretations.
Effective
May 1, 2006, the Company adopted the fair value recognition provisions of SFAS
123(R) (revised December 2004), Share-Based
Payment,
an
amendment of SFAS 123, Accounting
for Stock-Based Compensation,
for
stock-based employee compensation, using the modified prospective transition
method. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB
107), to provide guidance regarding the adoption of SFAS 123(R), and then
amended the compliance date for SFAS 123R to begin with the first fiscal year
beginning on or after December 15, 2005. Under SFAS 123(R), the Company is
required to recognize compensation cost for share-based compensation issued
to
employees, net of estimated forfeitures, under share-based compensation plans
using a fair value method. Using the modified prospective transition method,
compensation expense recognized for the year ended April 30, 2007 includes
(a)
compensation cost for all share-based payments granted subsequent to May 1,
2006, based on the grant date fair value estimated in accordance with the
provisions of SFAS 123(R) and (b) compensation cost for all share-based payments
granted prior to, but not yet vested as of, May 1, 2006, based on the intrinsic
value method. Results for prior periods have not been restated.
As
a
result of adopting SFAS 123(R) on May 1, 2006, the Company’s income before
income taxes and net income for the year ended April 30, 2007 were each
approximately $38,000 lower than if it had continued to account for share-based
compensation under APB 25. At April 30, 2007, the total compensation cost
related to unvested stock options granted to employees under the Company’s stock
option plans but not yet recognized was approximately $61,000 and is expected
to
be recognized over a weighted-average period of 0.98 years. For the year ended
April 30, 2007 and 2006, the weighted average fair value of stock options
granted was $3.86 and $2.15, respectively.
The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing model. Compensation cost is then recognized
on a straight-line basis over the vesting or service period and is net of
estimated forfeitures. The following assumptions were used to compute the fair
value of stock options granted during the year ended April 30, 2007:
F-16
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
Risk-free
interest rate
|
4.73%
to 4.96%
|
|
Expected
volatility
|
61.0%
to 62.4%
|
|
Expected
dividend yield
|
0.0%
|
|
Expected
term ( in years)
|
3.5
|
The
risk-free rate is based on the rate of U.S. Treasury zero-coupon issues with
a
remaining term equal to the expected term of the option grants. Expected
volatility is based on the historical volatility of the Company’s common stock
using the weekly closing price of the Company’s common stock, pursuant to SAB
107. The expected dividend yield is zero based on the fact that the Company
has
never paid cash dividends and has no present intention to pay cash dividends.
The expected term represents the period that the
Company’s
stock-based awards are expected to be outstanding and was calculated using
the
simplified method pursuant to SAB 107.
Prior
to
May 1, 2006, the Company applied the intrinsic value method in accounting for
its stock-based compensation plan. Had the Company measured compensation under
the fair value-based method for stock options granted and amortized the cost
over the related vesting period, the Company’s net income and net income per
share would have been as follows:
|
2006
|
2005
|
||||||
|
Net
income (loss), as reported
|
($1,624,120
|
)
|
$
|
1,328,981
|
|||
|
Deduct
total stock-based employee compensation expense determined under
fair
value based method for all awards, net of tax
|
(453,092
|
)
|
(452,820
|
)
|
|||
|
Pro
forma net income (loss)
|
($2,077,212
|
)
|
$
|
876,161
|
|||
|
Basic
net income (loss) per share
|
|||||||
|
As
reported
|
($0.40
|
)
|
|
$0.50
|
|||
|
Pro
forma
|
($0.51
|
)
|
|
$0.33
|
|||
|
Diluted
net income (loss) per share
|
|||||||
|
As
reported
|
($0.40
|
)
|
|
$0.49
|
|||
|
Pro
forma
|
($0.51
|
)
|
|
$0.32
|
|||
The
Company has elected to adopt the shortcut method provided in Staff Position
No. FAS 123(R)-3, “Transition Election Related to Accounting for the
Tax Effects of Share-Based Payment Awards,” for determining the initial pool of
excess tax benefits available to absorb tax deficiencies related to stock-based
compensation subsequent to the adoption of SFAS No. 123R. The shortcut
method includes simplified procedures for establishing the beginning balance
of
the pool of excess tax benefits (the APIC Tax Pool) and for determining the
subsequent effect on the APIC Tax Pool and the Company’s Consolidated Statements
of Cash Flows of the tax effects of share-based compensation awards.
SFAS No. 123R requires that excess tax benefits related to share-based
compensation be reflected as financing cash inflows.
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, life of customer lists, and estimates of the fair value
of reporting units and discounted cash flows used in determining whether
goodwill has been impaired. Actual results could differ from those
estimates.
Recently
Issued Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (FASB) issued Interpretation
No.
48, Accounting
for Uncertainty in Income Taxes - an interpretation of FAS No. 109
(FIN
48),
which clarifies the accounting for uncertainty in income taxes is subject to
significant and varied interpretations that have resulted in diverse and
inconsistent accounting practices and measurements. Addressing such diversity,
FIN 48 prescribes a consistent recognition threshold and measurement attribute,
as well as clear criteria for
F-17
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
subsequently
recognizing, derecognizing and measuring changes in such tax positions for
financial statement purposes. FIN 48 also requires expanded disclosure with
respect to the uncertainty in income taxes. FIN 48 is effective for fiscal
years
beginning after December 15, 2006. The Company has not yet determined the impact
of FIN 48 on its consolidated financial position, results of operations, cash
flows or financial statement disclosures.
On
September 15, 2006, the FASB issued Statement of Financial Accounting Standards
No. 157,
Fair
Value Measurements
(SFAS
157), which is effective for fiscal years beginning after November 15, 2007
and
for interim periods within those years. SFAS 157 defines fair value, establishes
a framework for measuring fair value and expands the related disclosure
requirements. The Company is currently evaluating the potential impact, if
any,
of the adoption of SFAS 157 on its consolidated financial position, results
of
operations and cash flows or financial statement disclosures.
In
September 2006, the SEC issued SAB No. 108 Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements(SAB
108), which is effective for fiscal years beginning after November 15, 2006
provides interpretive guidance on how registrants should quantify financial
statement misstatements. Under SAB 108 registrants are required to consider
both
a “rollover” method, which focuses primarily on the income statement impact of
misstatements, and the “iron curtain” method, which focuses primarily on the
balance sheet impact of misstatements. The effects of prior year uncorrected
errors include the potential accumulation of improper amounts that may result
in
a material misstatement on the balance sheet or the reversal of prior period
errors in the current period that result in a material misstatement of the
current period income statement amounts. Adjustments to current or prior period
financial statements would be required in the event that after application
of
various approaches for assessing materiality of a misstatement in current period
financial statements and consideration of all relevant quantitative factors,
a
misstatement is determined to be material. The Company is currently evaluating
the potential impact, if any, of the adoption of SAB 108 on its consolidated
financial position, results of operations and cash flows or financial statement
disclosures.
In
February, 2007, the FASB issued FASB Statement of Financial Accounting Standards
No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities
(SFAS
159), which permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. SFAS
159
is effective for fiscal years beginning after November 15, 2007. The Company
has
not yet determined the impact SFAS 159 may have on our results of operations
or
financial position.
No
other
recently issued accounting pronouncement issued or effective after the end
of
the fiscal year is expected to have a material impact on the Company’s
consolidated financial statements.
NOTE
3 - 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.
NECS
Effective
June 1, 2006, the Company acquired all of the issued and outstanding common
stock of NECS. The aggregate consideration paid by the Company to the NECS
selling shareholders, including acquisition transaction costs of $69,775, was
$4,737,017, of which $4,333,987 was paid at closing. Additional purchase price
adjustments of $189,077 were paid in October 2006 to settle working capital
adjustments. In March 2007, aggregate additional consideration of $144,178
was
paid to the NECS selling shareholders based on the earnout settlement for the
calendar year ending December 31, 2006. In connection with the acquisition,
NECS
entered into employment agreements with two of the shareholders, each for a
period of two years and a consulting agreement with one of the shareholders
for
a period of seven years.
The
acquisition of NECS provides the Company with additional project engineering
expertise for specialty communication systems, broadens the Company’s customer
base especially in the public safety and gaming markets, including the
Massachusetts State Police, University of Connecticut and Foxwoods Resort
Casino, and expands the Company’s geographic presence in New
England.
A
valuation of certain assets was completed, including property and equipment,
list of major customers, and the Company internally determined the fair value
of
other assets and liabilities. In determining the fair value of acquired assets,
standard valuation techniques were used including the market and income
approach.
F-18
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
The
purchase price allocation has been determined as follows:
|
Assets
purchased:
|
|
||||||
|
Cash
|
$
|
129,749
|
|||||
|
Accounts
receivable
|
968,982
|
||||||
|
Inventory
|
348,579
|
||||||
|
Prepaid
expenses
|
33,237
|
||||||
|
Fixed
assets
|
244,740
|
||||||
|
Other
assets
|
3,455
|
||||||
|
Customer
list
|
570,000
|
||||||
|
Goodwill
|
3,380,111
|
||||||
|
5,678,853
|
|||||||
|
Liabilities
assumed:
|
|||||||
|
Accounts
payable
|
(611,862
|
)
|
|||||
|
Accrued
expenses
|
(199,681
|
)
|
|||||
|
Deferred
revenue
|
(94,802
|
)
|
|||||
|
Capital
lease obligations
|
(24,738
|
)
|
|||||
|
Accrued
property taxes
|
(10,753
|
)
|
|||||
|
(941,836
|
)
|
||||||
|
Purchase
price
|
$
|
4,737,017
|
|||||
SECS
Effective
July 19, 2006, the Company acquired all of the issued and outstanding common
stock of SECS. The aggregate consideration paid by the Company to the SECS
selling shareholders, including acquisition transaction costs of $21,833, was
$3,482,346, of which $1,620,000 was paid at closing, and the Company issued
200,288 shares of common stock valued at approximately $1,400,000. Additional
purchase price adjustments of $440,513 were paid in November 2006, to settle
working capital adjustments. The Company filed a registration statement with
the
SEC on August 14, 2006 to register the shares of common stock issued to the
former SECS shareholders, which was declared effective by the SEC on August
24,
2006. In connection with the acquisition, SECS entered into employment
agreements and a consulting agreement with certain officers or former officers
of SECS.
The
acquisition of SECS provides the Company with additional project engineering
expertise for wireless infrastructure services, broadens the Company’s customer
base of corporate, government and educational clients, including the National
Oceanic and Atmospheric Administration (NOAA), Verizon, BellSouth, Comcast,
Time
Warner, University of Florida and Puerto Rico Telephone, and expands the
Company’s geographic presence in the Southeastern United States.
A
valuation of certain assets was completed, including property and equipment,
list of major customers, and the Company internally determined the fair value
of
other assets and liabilities. In determining the fair value of acquired assets,
standard valuation techniques were used including the market and income
approach.
F-19
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
The
purchase price allocation has been determined as
follows:
.
|
Assets
purchased:
|
|
||||||
|
Cash
|
$
|
200,012
|
|||||
|
Accounts
receivable
|
1,945,618
|
||||||
|
Inventory
|
97,096
|
||||||
|
Prepaid
expenses
|
54,186
|
||||||
|
Costs
in excess of billings
|
421,616
|
||||||
|
Fixed
assets
|
273,980
|
||||||
|
Other
assets
|
400
|
||||||
|
Backlog
|
60,000
|
||||||
|
Customer
list
|
320,000
|
||||||
|
Goodwill
|
1,823,205
|
||||||
|
5,196,113
|
|||||||
|
Liabilities
assumed:
|
|||||||
|
Accounts
payable
|
(727,612
|
)
|
|||||
|
Accrued
expenses
|
(323,497
|
)
|
|||||
|
Pension
plan payable
|
(75,000
|
)
|
|||||
|
Profit
sharing
|
(40,056
|
)
|
|||||
|
Notes
payable
|
(378,103
|
)
|
|||||
|
Billings
in excess of costs
|
(169,499
|
)
|
|||||
|
(1,713,767
|
)
|
||||||
|
Purchase
price
|
$
|
3,482,346
|
Voacolo
On
March
30, 2007, the company acquired Voacolo. The aggregate consideration paid by
the
Company to the Voacolo selling shareholders, including acquisition transaction
costs of $24,288, was $2,461,788 of which $1,187,500 was paid at closing, and
the Company issued 113,534 shares of common stock valued at approximately
$1,250,000. The purchase price is subject to adjustment for any excess or
shortfall between the net tangible asset value of Voacolo as of the closing
date
and $1,200,000. In addition, the Company shall pay an additional $2,500,000
in
cash or Company common stock if Voacolo’s earnings before interest and taxes for
the period ending twelve months from March 30, 2007 shall equal or exceed
$1,100,000. Voacolo was acquired pursuant to a Stock Purchase Agreement among
WPCS International Incorporated, and the former Voacolo shareholders, dated
and
effective as of March 30, 2007. In connection with the acquisition, Voacolo
entered into employment agreements with the former Voacolo shareholders, each
for a period of two years.
Voacolo
is an electrical contractor in the Mid-Atlantic area that specializes in both
high and low voltage applications structured cabling and voice/data/video
solutions, as well as beginning to expand its operations particularly in
wireless video surveillance. The company is headquartered in Trenton, New Jersey
and has completed many major projects for commercial and government
entities.
Based
on
the preliminary information currently available, the acquisition resulted in
goodwill and other intangible assets of approximately $1,345,000. Upon
completion of a formal purchase price allocation, there may be a increase or
decrease in the amount assigned to goodwill and a corresponding increase or
decrease in tangible or other intangible assets.
The
preliminary purchase price allocation has been determined as
follows:
|
Assets
purchased:
|
||||
|
Cash
|
$
|
584,094
|
||
|
Accounts
receivable
|
2,119,362
|
|||
|
Inventory
|
217,500
|
|||
|
Prepaid
expenses
|
55,788
|
|||
|
Costs
in excess of billings
|
215,143
|
|||
|
Fixed
assets
|
217,899
|
|||
|
Backlog
|
200,200
|
|||
|
Customer
list
|
132,000
|
|||
|
Goodwill
|
1,012,593
|
|||
|
4,754,579
|
||||
|
Liabilities
assumed:
|
||||
|
Accounts
payable
|
(732,252
|
)
|
||
|
Accrued
expenses
|
(90,120
|
)
|
||
|
Payroll
and other payable
|
(80,672
|
)
|
||
|
Loan
payable
|
(602,984
|
)
|
||
|
Notes
payable
|
(100,436
|
)
|
||
|
Billings
in excess of costs
|
(686,327
|
)
|
||
|
|
(2,292,791
|
)
|
||
|
Purchase
price
|
$
|
2,461,788
|
||
F-20
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
TAGS
On
April
5, 2007, the company acquired a 60% Equity Interest and a 60% Profit
Interest in TAGS from American Gas Services, Inc. (AGS) and American Gas
Services, Inc. Consultants (AGS Consultants), respectively. The aggregate
consideration paid by the Company to AGS and AGS Consultants, including
acquisition transaction costs of $182,816, was $1,702,816 of which $800,000
was
paid at closing, and the Company issued 61,277 shares of common stock valued
at
approximately $720,000. The purchase price is subject to adjustment in an amount
equal to 60% of any shortfall between the net tangible asset value of TAGS
as of
the closing date and $3,300,000. The Interest was acquired pursuant to a
Interest Purchase Agreement among WPCS International Incorporated, AGS and
AGS
Consultants, dated and effective as of April 5, 2007.
Founded
in 1997 and headquartered in the Province of Shandong, TAGS is a communications
infrastructure engineering company serving the China market. TAGS is certified
by the People's Republic of China as both a Construction Enterprise of Reform
Development company and a Technically Advanced Construction Enterprise company
for the Province of Shandong, which are two of the highest certifications
achievable for engineering and construction based businesses in China. TAGS
is
also licensed in 17 other provinces and has completed projects for a diverse
customer base of businesses and government institutions in over 30 cities in
China.
The
preliminary purchase price allocation has been determined as
follows:
|
Assets
purchased:
|
|
||||||
|
Cash
|
$
|
141,564
|
|||||
|
Accounts
receivable
|
1,699,320
|
||||||
|
Inventory
|
621,725
|
||||||
|
Other
current assets
|
399,664
|
||||||
|
Fixed
assets
|
3,415,035
|
||||||
|
6,277,308
|
|||||||
|
Liabilities
assumed:
|
|||||||
|
Accounts
payable
|
(72,710
|
)
|
|||||
|
Accrued
expenses and other payable
|
(714,126
|
)
|
|||||
|
Payroll
and other payable
|
(165,423
|
)
|
|||||
|
Dividends
payable
|
(312,724
|
)
|
|||||
|
Income
tax payable
|
(235,279
|
)
|
|||||
|
Notes
payable
|
(1,681,846
|
)
|
|||||
|
Deferred
Revenue
|
(61,519
|
)
|
|||||
|
Minority
Interest
|
(1,330,865
|
)
|
|||||
|
(4,574,492
|
)
|
||||||
|
Purchase
price
|
$
|
1,702,816
|
|||||
Pro
forma Information
The
following unaudited pro forma financial information presents the combined
results of operations of the Company, NECS, SECS, Voacolo and TAGS for the
year
ended April 30, 2007, 2006 and 2005 as if the acquisitions had occurred at
May
1, 2004 , including the issuance of the Company’s common stock as consideration
for the acquisitions of SECS, Voacolo, and TAGS. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company, NECS, SECS, Voacolo and TAGS been a single entity
during this period.
|
|
Consolidated
Pro Forma
|
|||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Revenues
|
$
|
81,176,137
|
$
|
76,551,105
|
$
|
68,248,366
|
||||
|
Net
income (loss)
|
5,167,349
|
(567,876
|
)
|
2,071,474
|
||||||
|
Basic
weighted shares
|
5,983,074
|
4,439,847
|
3,061,436
|
|||||||
|
Diluted
weighted shares
|
6,620,059
|
4,439,847
|
3,111,774
|
|||||||
|
Basic
net income (loss) per share
|
|
$0.86
|
($0.13
|
)
|
|
$0.68
|
||||
|
Diluted
net income (loss) per share
|
|
$0.78
|
($0.13
|
)
|
|
$0.67
|
||||
F-21
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
The
asset, “Costs and estimated earnings in excess of billings on uncompleted
contracts”, represents revenue recognized in excess of amounts billed. The
liability, “Billings in excess of costs and estimated earnings on uncompleted
contracts”, represents billings in excess of revenue recognized. Costs and
estimated earnings on uncompleted contracts consist of the following at April
30:
|
2007
|
2006
|
||||||
|
Costs
incurred on uncompleted contracts
|
$
|
39,431,006
|
$
|
24,694,056
|
|||
|
Estimated
contract profit
|
12,513,277
|
6,593,218
|
|||||
|
51,944,283
|
31,287,274
|
||||||
|
Less:
billings to date
|
51,717,031
|
30,930,609
|
|||||
|
Net
excess of costs
|
$
|
227,252
|
$
|
356,665
|
|||
|
Costs
and estimated earnings in excess of billings
|
$
|
2,499,940
|
$
|
1,441,977
|
|||
|
Billings
in excess of costs and estimated earnings
|
|||||||
|
on
uncompleted contracts
|
(2,272,688
|
)
|
(1,085,312
|
)
|
|||
|
Net
excess of costs
|
$
|
227,252
|
$
|
356,665
|
|||
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at April 30:
|
Estimated
useful life (years)
|
2007
|
2006
|
||||||||
|
Furniture
and fixtures
|
5
- 7
|
$
|
222,963
|
$
|
135,383
|
|||||
|
Computers
and software
|
2-3
|
722,072
|
476,342
|
|||||||
|
Office
equipment
|
5-7
|
92,337
|
55,612
|
|||||||
|
Vehicles
|
5
- 7
|
1,903,142
|
1,256,568
|
|||||||
|
Machinery
and equipment
|
5
|
4,231,918
|
393,436
|
|||||||
|
Leasehold
improvements
|
2-3
|
436,477
|
227,774
|
|||||||
|
7,608,909
|
2,545,115
|
|||||||||
|
Less
accumulated depreciation and amortization expense
|
2,119,989
|
1,192,899
|
||||||||
|
$
|
5,488,920
|
$
|
1,352,216
|
|||||||
F-22
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE
6 - LONG-TERM DEBT
Line
of Credit
On
April
10, 2007, WPCS International Incorporated (the “Company”), and each of its
subsidiaries entered into a loan agreement with Bank of America, N.A. (“BOA”).
The loan agreement (the “Loan Agreement”), provides for a revolving line of
credit in an amount not to exceed $12,000,000, together with a letter of credit
facility not to exceed $2,000,000. The Company and its subsidiaries also entered
into security agreements with BOA, pursuant to which each entity granted a
security interest to BOA in all of their assets.
The
Loan
Agreement contains customary covenants, including but not limited to (i) funded
debt to tangible net worth, and (ii) minimum interest coverage ratio. The loan
commitment shall expire on April 10, 2010. The Company may prepay the loan
at
any time.
Loans
under the Loan Agreement bear interest at a rate equal to BOA’s prime rate,
minus one percentage point. The Company has the option to elect to use the
optional interest rate of LIBOR plus one hundred seventy-five basis points
(5.32% LIBOR rate plus one and three quarters percent as of April 30, 2007).
The
Company used the initial funds provided by the loan, in the gross amount of
$4,454,217 to repay the existing credit agreement with Bank Leumi USA, which
credit agreement was terminated in connection with the Loan Agreement.
Loans
Payable
The
Company’s long-term debt also consists of notes issued to the company or assumed
in acquisitions related to the purchase of property and equipment in the
ordinary course of business. At April 30, 2007, loans payable totaled
approximately $2,882,888 with interest rates ranging from 0% to 9.49%.
The
aggregate maturities of long-term debt, including the line of credit and loans
payable are as follows:
|
Year
ending April 30,
|
|
||||||
|
2008
|
$
|
2,598,872
|
|||||
|
2009
|
128,850
|
||||||
|
2010
|
4,552,748
|
||||||
|
2011
|
28,207
|
||||||
|
2012
|
18,909
|
||||||
|
Thereafter
|
|
9,519
|
|||||
|
Total
long-term debt
|
$
|
7,337,105
|
|||||
NOTE
7 - RELATED PARTY TRANSACTIONS
In
connection with the acquisition of Walker, the Company assumed a ten-year lease
with a trust, of which, a certain officer of the Company is the trustee, for
a
building and land located in Fairfield, California, which is occupied by its
Walker subsidiary. For the years ended April 30, 2007 and 2006, the rent paid
for this lease was $88,000.
In
connection with the acquisition of Clayborn, an additional $1,100,000 is due
by
September 30, 2007, payable in quarterly distributions to the Clayborn former
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 April 30,
2007, payments of $393,000 have been made to the former Clayborn shareholders
and the total remaining due is $707,000.
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 was paid in April 2006 and $50,000 was paid in April
2007.
F-23
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
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.
In
connection with the acquisition of SECS in fiscal 2007, the Company leases
its
Sarasota, Florida location from a trust, of which one of the former shareholders
of SECS, is the trustee. For the year ended April 30, 2007, the rent paid for
this lease was $40,315.
In
connection with the acquisition of Voacolo in fiscal 2007, the Company leases
its Trenton, New Jersey location from Voacolo Properties LLC, of which the
former shareholders of Voacolo, are the members. For the year ended April 30,
2007, the rent paid for this lease was $4,500.
NOTE
8 - RETIREMENT PLANS
The
Company and its subsidiaries participate in employee savings plans under Section
401(k) of the Internal Revenue Code pursuant to which eligible employees may
elect to defer a portion of their annual salary by contributing to the plan.
There were approximately $241,000, $141,000, and $8,800 in contributions made
for the years ended April 30, 2007, 2006, and 2005 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 $1,816,000, $2,050,000 and $2,178,000 for such costs
for
the years ended April 30, 2007, 2006 and 2005, respectively.
NOTE
9 - INCOME TAXES
The
provision for income taxes for the years ended at April 30, 2007, 2006 and
2005
is summarized as follows:
|
2007
|
2006
|
2005
|
||||||||
|
Current
|
||||||||||
|
Federal
|
$
|
2,201,000
|
$
|
1,248,000
|
$
|
99,000
|
||||
|
State
and foreign
|
784,818
|
310,773
|
87,096
|
|||||||
|
Deferred
|
||||||||||
|
Federal
|
147,000
|
(70,000
|
)
|
(76,000
|
)
|
|||||
|
State
|
14,000
|
27,000
|
(58,000
|
)
|
||||||
|
Totals
|
$
|
3,146,818
|
$
|
1,515,773
|
$
|
52,096
|
||||
The
actual provision for income taxes reflected in the consolidated statements
of
operations for the years ended April 30, 2007, 2006 and 2005 differs from the
provision (benefit) computed at the federal statutory tax rates. The principal
differences between the statutory income tax and the actual provision for income
taxes are summarized as follows:
|
2007
|
2006
|
2005
|
||||||||
|
Expected
tax (benefit) provision at statutory rate (34%)
|
$
|
2,631,742
|
$
|
(36,838
|
)
|
$
|
469,566
|
|||
|
State
and local taxes, net of federal tax benefit
|
527,675
|
205,530
|
19,000
|
|||||||
|
Foreign
income taxes
|
30,117
|
-
|
-
|
|||||||
|
Loss
(gain) on fair value of warrants
|
-
|
1,386,688
|
(481,566
|
)
|
||||||
|
Other
|
(42,716
|
)
|
(39,607
|
) |
45,096
|
|||||
|
Totals
|
$
|
3,146,818
|
$
|
1,515,773
|
$
|
52,096
|
||||
F-24
The
tax
effects of temporary differences which give rise to deferred tax assets and
liabilities are summarized as follows:
|
2007
|
2006
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Allowance
for doubtful accounts
|
$
|
27,000
|
$
|
33,000
|
|||
|
Reserve
for loss on work-in-progress
|
-
|
31,000
|
|||||
|
Net
operating loss carryforward
|
16,000
|
-
|
|||||
|
Federal
benefit of deferred state tax liabilities
|
11,000
|
14,000
|
|||||
|
Deferred
tax assets-current
|
54,000
|
78,000
|
|||||
|
Customer
lists
|
111,000
|
51,000
|
|||||
|
Net
operating loss carryforward
|
154,000
|
83,000
|
|||||
|
Valuation
allowance
|
(154,000
|
)
|
(83,000
|
)
|
|||
|
Deferred
tax assets-long term
|
111,000
|
51,000
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Inventory
|
(14,000
|
)
|
(13,000
|
)
|
|||
|
Federal
benefit of deferred state tax liabilities
|
(13,000
|
)
|
(8,000
|
)
|
|||
|
Deferred
tax liabilities-current
|
(27,000
|
)
|
(21,000
|
)
|
|||
|
Fixed
assets
|
(107,000
|
)
|
(126,000
|
)
|
|||
|
Customer
lists
|
(90,000
|
)
|
(175,000
|
)
|
|||
|
Goodwill
|
(525,000
|
)
|
(230,000
|
)
|
|||
|
Deferred
tax liabilities-long term
|
(722,000
|
)
|
(531,000
|
)
|
|||
|
Net
deferred tax liabilities
|
$
|
(584,000
|
)
|
$
|
(423,000
|
)
|
At
April
30, 2007, the Company has net operating loss carryforwards for state tax
purposes approximating $1.4 million 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 against the deferred tax asset
related to these loss carryforwards.
NOTE
10 - STOCK OPTION PLANS
In
September 2006, the Company adopted the 2007 Incentive Stock Plan, under which
officers, directors, key employees or consultants may be granted options. Under
the 2007 Incentive Stock Plan, 400,000 shares of common stock were reserved
for
issuance upon the exercise of stock options, stock awards or restricted stock.
At April 30, 2007, there were no stock options granted under this plan.
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.
These shares were registered under Form S-8. 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. These
options generally vest based on between one to three years of continuous service
and have five-year contractual terms. At April 30, 2007, options to purchase
327,259 shares were outstanding at exercise prices ranging from $6.14 to $8.79.
At April 30, 2007, there were 6,498 options available for grant under the 2006
Incentive Stock Plan.
In
March
2003, the Company established a 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"). These shares were registered under Form S-8. Under
the terms of the 2002 Plan, the options 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. These options
generally vest based on between one to three years of continuous service and
have five-year contractual terms. At
April
30, 2007, options to purchase 233,575 shares were outstanding at exercise prices
ranging from $4.80 to $19.92. At April 30, 2007, there were 45,073 shares
available for grant under the 2002 Plan.
F-25
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
The following table summarizes stock option activity for
the
years ended April 30, 2007, 2006 and 2005:
|
2002
Stock Option Plan
|
2006
Stock Option Plan
|
||||||||||||
|
Number
of Shares
|
Weighted-average
Exercise Price
|
Number
of Shares
|
Weighted-average
Exercise Price
|
||||||||||
|
Outstanding,
May 1, 2004
|
299,322
|
12.49
|
- | - | |||||||||
|
Granted
|
266,890
|
6.15
|
- | - | |||||||||
|
Cancelled
|
(111,585
|
)
|
6.58
|
||||||||||
|
Outstanding,
May 1, 2005
|
454,627
|
8.77
|
-
|
-
|
|||||||||
|
Granted
|
18,730
|
6.94
|
383,500
|
6.16
|
|||||||||
|
Cancelled
|
(59,174
|
)
|
14.96
|
-
|
-
|
||||||||
|
Exercised
|
(11,251
|
)
|
5.22
|
-
|
-
|
||||||||
|
Outstanding,
May 1, 2006
|
402,932
|
7.87
|
383,500
|
6.16
|
|||||||||
|
Granted
|
- | - |
11,252
|
8.01
|
|||||||||
|
Cancelled
|
(42,589
|
)
|
6.46
|
(1,250
|
)
|
6.15
|
|||||||
|
Exercised
|
(126,768
|
)
|
9.00
|
(66,243
|
)
|
7.22
|
|||||||
|
Outstanding,
May 1, 2007
|
233,575
|
8.43
|
327,259
|
6.22
|
|||||||||
The
following is a summary of information with respect to stock options granted
under the 2002 Plan and 2006 Incentive Stock Plan at April 30, 2007 and April
30, 2006:
|
Options
Outstanding at April 30, 2007
|
Options
Exercisable at April 30, 2007
|
|||||||||||||||
|
Exercise
prices
|
Shares
under option
|
Weighted-average
remaining life in years
|
Weighted-average
Exercise Price
|
Shares
under option
|
Weighted-average
Exercise Price
|
|||||||||||
|
$4.80
- $5.52
|
40,593
|
2.73
|
$
|
5.11
|
39,009
|
$
|
5.10
|
|||||||||
|
$6.10
- $9.00
|
451,000
|
3.17
|
$
|
6.48
|
429,700
|
$
|
6.42
|
|||||||||
|
$10.92-$14.40
|
62,823
|
1.35
|
$
|
12.13
|
62,823
|
$
|
12.13
|
|||||||||
|
$16.20-$19.92
|
6,418
|
0.74
|
$
|
17.41
|
6,418
|
$
|
17.41
|
|||||||||
|
Total
|
560,834
|
2.91
|
$
|
7.14
|
537,950
|
$
|
7.13
|
|||||||||
F-26
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS
The
following table summarizes stock option activity for the year ended April
30,
2007, during which there were 193,011 options exercised under the Company’s
stock option plans:
|
2002
Plan
|
2006
Plan
|
||||||||||||||||||||||||
|
Number
of Shares
|
Weighted-average
Exercise Price
|
Weighted-
average Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
Number
of Shares
|
Weighted-average
Exercise Price
|
Weighted-average
Remaining Contractual Term
|
Aggregate
Intrinsic Value
|
||||||||||||||||||
|
Outstanding,
May 1, 2006
|
402,932
|
$
|
7.87
|
383,500
|
$
|
6.16
|
- | - | |||||||||||||||||
|
|
|||||||||||||||||||||||||
|
Granted
|
-
|
-
|
- | - |
11,252
|
$
|
8.01
|
- | - | ||||||||||||||||
|
Exercised
|
(126,768
|
) |
$
|
6.46
|
- | - |
(66,243
|
) |
$
|
6.15
|
- | - | |||||||||||||
|
Forfeited/Expired
|
(42,589
|
) |
$
|
9.00
|
- | - |
(1,250
|
) |
$
|
7.22
|
-
|
- | |||||||||||||
|
Outstanding,
April 30, 2007
|
233,575
|
$
|
8.43
|
2.1
|
$
|
1,200,630
|
327,259
|
$
|
6.22
|
3.5
|
$
|
2,366,810
|
|||||||||||||
|
|
|||||||||||||||||||||||||
|
Vested
and expected to vested, April 30, 2007
|
232,580
|
$
|
8.44
|
2.1
|
$
|
1,194,301
|
325,533
|
$
|
6.21
|
3.5
|
$
|
2,357,062
|
|||||||||||||
|
|
|||||||||||||||||||||||||
|
Exercisable,
April 30, 2007
|
223,360
|
$
|
8.50
|
2.0
|
$
|
1,134,453
|
314,590
|
$
|
6.15
|
3.5
|
$
|
2,296,929
|
|||||||||||||
NOTE
11 - SHAREHOLDERS' EQUITY
Common
Stock Issuance
On
January 30, 2007, the Company sold an aggregate of 1,109,023 shares of the
Company’s common stock (Common Stock) to twelve investors for aggregate proceeds
of $10,092,109. The Company paid the placement agents of the offering a cash
fee
of 7% of the proceeds of the offering. The Company has received net proceeds
of
$9,337,891 from the offering.
The
Common Stock was 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 agreed to cause a resale registration statement covering the Common
Stock to be filed no later than 30 days after the closing and declared effective
no later than 120 days after the closing. If
the
Company failed to comply with the registration statement filing or effective
date requirements, it would have been required to pay the investors a fee equal
to 2% of the aggregate amount invested by the purchasers per each 30 day period
of delay, not to exceed 10%. The Company accounts for such penalties as
contingent liabilities, applying the accounting guidance of SFAS No. 5,
“Accounting for Contingencies” (“FAS 5”). This accounting is consistent with
views established by the Emerging Issues Task Force in its consensus set forth
in EITF 05-04 and FASB Staff Positions FSP EITF 00-19-2 “Accounting for
Registration Payment Arrangements”, which was issued December 21, 2006.
Accordingly, the Company recognizes damages when it becomes probable that they
will be incurred and amounts are reasonably estimable. The Company filed a
resale registration statement on February 9, 2007 covering the Common Stock,
which was declared effective by the SEC on March 2, 2007, which was within
the
agreed upon timeframe under the terms of sale.
On
April
12, 2006, the Company closed a purchase agreement with four selected
institutional investors for the registered direct sale of 876,931 shares of
common stock at an offering price of $7.00 per share. The Company paid the
placement agent of the offering a cash fee of 6.5% of the proceeds of the
offering. The Company received net proceeds of $5,528,166 from this offering.
The Company made the sale pursuant to a registration statement declared
effective by the Securities and Exchange Commission on April 11, 2006.
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 that provided for liquidated
damages in the event the Company failed to timely perform under the registration
rights agreements.
During
the third quarter of fiscal 2006, the Company became aware that the SEC had
recently announced its preferred interpretation of the accounting for common
stock and warrants with registration rights under Emerging Issues Task Force
(“EITF”) 00-19, “Accounting for Derivative Financial Instruments Indexed To, and
Potentially Settled in the Company’s Own Stock,” and EITF
05-04,
F-27
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
“The
Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument
Subject to EITF 00-19.” Although the EITF was still reviewing the guidance in
EITF 05-04, the SEC concluded that under EITF 00-19, the 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 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 SEC concluded that the likelihood
or
probability related to the failure to maintain an effective registration
statement was not a factor at that time.
During
fiscal 2006, the warrant liability increased by $4,078,494, due to the increase
in the market value of our common stock, resulting in us recording a net
non-cash loss on fair value of warrants for the fiscal year ended April 30,
2006. The non-cash loss on warrants had no effect on our cash flows or
liquidity.
On
April
11, 2006, the Company entered into a waiver agreement with the institutional
investors related to this private placement. Under the waiver, the parties
agreed to modify the registration rights agreement associated with the common
stock and warrants issued in November 2004 affected by EITF 00-19, thereby
eliminating the penalty provisions that could have resulted from not maintaining
an effective registration statement related to these common shares and shares
underlying the warrants, and eliminating any similar non-cash charges in
subsequent fiscal years and reclassified the amounts to permanent equity.
Common
Stock Purchase Warrants
The
Company sold an aggregate of 2,083,887 shares of common stock and 2,083,887
common stock purchase warrants on November 16, 2004, as discussed above. Each
of
these warrants is exercisable for a period of five years and was original issued
at an exercise price of $8.40 per share. 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. As a result of the issuance of common stock at $6.99
per
share to the selling shareholders of SECS, discussed above, the exercise price
of 1,592,781 common stock purchase warrants were adjusted to $6.99 per share,
and 320,741 additional warrants were issued under the “make-whole” provisions of
the warrant agreement. 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.
All
unexercised warrants issued in connection with the company’s June 2003 private
placement of common stock expired during fiscal year 2007.
The
following table summarizes the activity of the common stock purchase warrants
for the years ended April 30, 2007, 2006 and 2005:
|
Number
of Shares
|
Weighted
Average Exercise Price
|
||||||
|
Outstanding,
May 1, 2004
|
425,784
|
$
|
10.57
|
||||
|
Granted
|
2,146,387
|
8.40
|
|||||
|
Outstanding,
May 1, 2005
|
2,572,171
|
8.76
|
|||||
|
Granted
|
-
|
-
|
|||||
|
Exercised
|
(554,717
|
)
|
8.40
|
||||
|
Outstanding,
May 1, 2006
|
2,017,454
|
8.62
|
|||||
|
Granted
|
320,741
|
6.99
|
|||||
|
Exercised
|
(30,281
|
)
|
6.99
|
||||
|
Expired
|
(424,118
|
)
|
10.57
|
||||
|
Outstanding,
April 30, 2007
|
1,883,796
|
$
|
6.99
|
||||
NOTE
12 - SEGMENT REPORTING
The
Company's reportable segments are determined and reviewed by management based
upon the nature of the services, the external customers and customer industries
and the sales and distribution methods used to market the products. The Company
has two reportable segments: wireless infrastructure services and specialty
communication systems. Management evaluates performance based upon (loss) income
before income taxes. Corporate includes corporate salaries and external
professional fees, such as accounting,
legal and investor relations costs which are not allocated to the other
subsidiaries. Corporate assets primarily include cash and prepaid expenses.
Segment results for the years ended April 30, 2007, 2006 and 2005 are as
follows:
F-28
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
As
of and for year ended April 30, 2007
|
|||||||||||||
|
Corporate
|
Wireless
Infrastructure
|
Specialty
Communication
|
Total
|
||||||||||
|
Revenue
|
$
|
-
|
$
|
13,250,499
|
$
|
56,749,571
|
$
|
70,000,070
|
|||||
|
Depreciation
and amortization
|
$
|
57,368
|
$
|
259,097
|
$
|
923,021
|
$
|
1,239,486
|
|||||
|
Income
(loss) before income taxes
|
$ |
(1,851,995
|
)
|
$
|
976,769
|
$
|
8,615,645
|
$
|
7,740,419
|
||||
|
Goodwill
|
$
|
-
|
$
|
4,319,071
|
$
|
16,150,537
|
$
|
20,469,608
|
|||||
|
Total
assets
|
$
|
10,419,087
|
$
|
10,878,557
|
$
|
50,394,026
|
$
|
71,691,670
|
|||||
|
As
of and for year ended April 30, 2006
|
|||||||||||||
|
Corporate
|
Wireless
Infrastructure
|
Specialty
Communication
|
Total
|
||||||||||
|
Revenue
|
$
|
-
|
$
|
9,300,228
|
$
|
42,844,347
|
$
|
52,144,575
|
|||||
|
Depreciation
and amortization
|
$
|
59,474
|
$
|
103,264
|
$
|
675,051
|
$
|
837,789
|
|||||
|
Income
(loss) before income taxes
|
$ |
(5,615,080
|
)
|
$
|
1,240,928
|
$
|
4,265,805
|
$ |
(108,347
|
)
|
|||
|
Goodwill
|
$
|
-
|
$
|
2,482,085
|
$
|
11,757,833
|
$
|
14,239,918
|
|||||
|
Total
assets
|
$
|
10,627,658
|
$
|
6,531,651
|
$
|
26,963,009
|
$
|
44,122,318
|
|||||
|
As
of and for year ended April 30, 2005
|
|||||||||||||
|
Corporate
|
Wireless
Infrastructure
|
Specialty
Communication
|
Total
|
||||||||||
|
Revenue
|
$
|
-
|
$
|
8,651,555
|
$
|
31,496,678
|
$
|
40,148,233
|
|||||
|
Depreciation
and amortization
|
$
|
20,423
|
$
|
161,485
|
$
|
500,489
|
$
|
682,397
|
|||||
|
Income
(loss) before income taxes
|
$
|
207,777
|
$
|
783,014
|
$
|
390,286
|
$
|
1,381,077
|
|||||
|
Goodwill
|
$
|
-
|
$
|
2,479,410
|
$
|
11,482,232
|
$
|
13,961,642
|
|||||
|
Total
assets
|
$
|
1,169,887
|
$
|
4,604,335
|
$
|
24,402,489
|
$
|
30,176,711
|
|||||
F-29
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
13 - QUARTERLY RESULTS FOR 2007 AND 2006 (UNAUDITED)
This
table summarizes the unaudited results of operation for each quarter of fiscal
2007 and 2006:
|
Year
Ended April 30, 2007
|
1Q07
|
2Q07
|
3Q07
|
4Q07
|
|||||||||
|
Revenue
|
$
|
16,436,278
|
$
|
17,753,044
|
$
|
18,121,405
|
$
|
17,689,343
|
|||||
|
Operating
income
|
1,414,839
|
1,815,102
|
2,122,564
|
2,381,819
|
|||||||||
|
Net
income
|
$
|
914,427
|
$
|
1,064,647
|
$
|
1,251,879
|
$
|
1,362,648
|
|||||
|
Basic
net income per common share
|
$
|
0.17
|
$
|
0.19
|
$
|
0.23
|
$
|
0.20
|
|||||
|
Diluted
net income per common share
|
$
|
0.16
|
$
|
0.18
|
$
|
0.20
|
$
|
0.18
|
|||||
|
Year
Ended April 30, 2006
|
1Q06
|
2Q06
|
3Q06
|
4Q06
|
|||||||||
|
Revenue
|
$
|
12,171,639
|
$
|
14,250,243
|
$
|
11,821,189
|
$
|
13,901,504
|
|||||
|
Operating
income
|
563,378
|
1,345,837
|
1,140,776
|
1,054,455
|
|||||||||
|
Loss
(gain) on change in fair value of warrants
|
4,110,594
|
(2,382,912
|
)
|
9,678,732
|
(7,327,920
|
)
|
|||||||
|
Net
income ( loss)
|
($3,795,319
|
)
|
$
|
3,167,717
|
($9,012,290
|
)
|
$
|
8,015,769
|
|||||
|
Basic
net income (loss) per common share
|
($0.99
|
)
|
$
|
0.82
|
($2.26
|
)
|
$
|
1.75
|
|||||
|
Diluted
net income (loss) per common share
|
($0.99
|
)
|
$
|
0.82
|
($2.26
|
)
|
$
|
1.62
|
|||||
Earnings
per share calculations for each of the quarters are based on the weighted
average number of shares outstanding in each quarter. Therefore, the sum of
the
quarterly earnings per share does not necessarily equal the full year earnings
per share disclosed on the consolidated statements of operations.
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Employment
Agreements
The
Company has entered into employment contracts ranging from one to three years
with certain of its employees. The aggregate base salary commitments under
these
contracts at April 30, 2007 are approximately $5,500,000.
Litigation
From
time
to time, the Company may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm the Company's business. The
Company is currently not aware of any such legal proceedings or claims that
we
believe will have, individually or in the aggregate, a material adverse affect
on our business, consolidated financial condition or operating
results.
F-30
WPCS
INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease
Commitments
The
Company leases its office facilities pursuant to non-cancelable operating leases
expiring through April 2014. The Company also has non-cancelable vehicle leases.
The minimum rental commitments under these non-cancelable leases at April 30,
2007 are summarized as follows:
|
Year
ending April 30,
|
||||
|
2008
|
$
|
759,245
|
||
|
2009
|
469,068
|
|||
|
2010
|
368,668
|
|||
|
2011
|
251,706
|
|||
|
2012
|
192,449
|
|||
|
Thereafter
|
201,430
|
|||
|
Total
minimum lease payments
|
$
|
2,242,566
|
||
Rent
expense for all operating leases was approximately $559,000, $396,000 and
$358,000 in 2007, 2006 and 2005, respectively.
NOTE
15 - SUBSEQUENT EVENTS
The
Company recently announced the signing of letters of intent to acquire two
companies. These transactions are expected to close by August 1, 2007, subject
to completion of due diligence and the execution of definitive
agreements.
The
Company intends to acquire 100% of Major Electric, Inc (Major) for $4 million
in
cash and stock at closing with additional purchase price to be paid upon the
achievement of a certain earnings target for a period ending December 31, 2007.
Founded in 1994, Major is headquartered in the Seattle area and is a wireless
and electric contractor specializing in direct digital controls, security,
wireless SCADA applications and wireless infrastructure services. Major Electric
has completed many major projects for many commercial entities.
The
Company intends to acquire 100% of Max Engineering LLC (Max) for $800,000 in
cash and stock at closing with additional purchase price to be paid upon the
achievement of a specific two-year earnings goal. Founded in 2000, Max is an
engineering firm headquartered in Houston, Texas, specializing in the design
of
specialty communication systems and wireless infrastructure for
telecommunications, oil, gas and wind energy.
F-31
ITEM
9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
ITEM
9A - CONTROLS AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures.
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934
as
of April 30, 2007. In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their costs.
Based
on our evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were designed at a
reasonable assurance level and were effective as of April 30, 2007 to provide
reasonable assurance that information required to be disclosed in reports filed
or submitted under the Exchange Act was recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms, and that such information was accumulated and communicated
to
our management, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosure.
(b)
Changes in internal control over financial reporting.
We regularly
review our system of internal control over financial reporting and make changes
to our processes and systems to improve controls and increase efficiency, while
ensuring that we maintain an effective internal control environment. Changes
may
include such activities as implementing new, more efficient systems,
consolidating activities, and migrating processes.
There
were no changes in our internal control over financial reporting that occurred
during the period covered by this Annual Report that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM
9B - OTHER INFORMATION
None
30
PART
III
ITEM
10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our
directors and executive officers and their ages as of the date hereof are as
follows:
|
NAME
|
AGE
|
OFFICES
HELD
|
||
|
Andrew
Hidalgo
|
51
|
Chairman,
Chief Executive Officer and Director
|
||
|
Joseph
Heater
|
43
|
Chief
Financial Officer
|
||
|
Donald
Walker
|
44
|
Executive
Vice President
|
||
|
James
Heinz
|
47
|
Executive
Vice President
|
||
|
Richard
Schubiger
|
42
|
Executive
Vice President
|
||
|
Charles
Madenford
|
44
|
Executive
Vice President
|
||
|
Norm
Dumbroff
|
46
|
Director
|
||
|
Neil
Hebenton
|
51
|
Director
|
||
|
Gary
Walker
|
52
|
President
of Walker Comm, Inc and Director
|
||
|
William
Whitehead
|
51
|
Director
|
Set
forth
below is a biographical description of each executive officer and
director.
Andrew
Hidalgo, Chairman, Chief Executive Officer and
Director
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.
31
Charles
Madenford,
Executive
Vice President
Mr.
Madenford has been Executive Vice President since April 2007. He is also
currently president of the Clayborn subsidiary, a position he has held since
September 2005. From May 2003 to August 2005, Mr. Madenford was a Vice President
for Clayborn. Prior to that, from September 2002 to May 2003, he served as
Project Manager for W.E. Lyons Construction Company, a general contractor.
Prior
to that, from August 1995 to August 2002, Mr. Madenford served as a vice
president for N.V. Heathorn, a West Coast mechanical and architectural firm.
Mr.
Madenford has over twenty-one years of project engineering experience in
mechanical and construction engineering. He holds a B.S. degree in civil
engineering with a minor in industrial engineering from the University of
Dayton.
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, President of Walker Comm, Inc. and Director
Mr.
Walker became a director of WPCS in December 2002. He is currently the president
of the Walker Comm subsidiary, 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.
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 auditor, (iii)
pre-approving the professional services provided by the independent auditor,
(iv) reviewing the scope of the annual audit and reports and recommendations
submitted by the independent auditor, and (v) reviewing our financial reporting
and accounting policies, including any significant changes, with management
and
the independent auditor. Our Audit Committee also prepares the Audit Committee
report that is required pursuant to the rules of the SEC.
32
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.
Section
16(a) Beneficial Ownership Reporting Compliance
Based
solely upon a review of Forms 3, 4 and 5, and amendments thereto, furnished
to
us during fiscal year 2007, we are not aware of any director, officer or
beneficial owner of more than ten percent of our Common Stock that failed to
file reports required by Section 16(a) of the Securities Exchange Act of 1934
on
a timely basis during fiscal year 2007.
Code
of Ethics
WPCS
adopted a Code of Ethics for its officers, directors and employees. A copy
of
the Code of Ethics is incorporated by reference as an exhibit.
33
ITEM
11 - EXECUTIVE COMPENSATION
Under
the rules of the SEC, this Compensation Discussion and Analysis Report is not
deemed to be incorporated by reference by any general statement incorporating
this Annual Report by reference into any filings with the SEC.
The
Executive Committee has reviewed and discussed the following
Compensation Discussion and Analysis with management. Based on this review
and these discussions, the Executive Committee recommended to the Board of
Directors that the following Compensation Discussion and Analysis be
included in this Annual Report on Form 10-K.
Submitted
by the Executive Committee
Norm
Dumbroff, Chairman
Neil
Hebenton
William
Whitehead
COMPENSATION
DISCUSSION AND ANALYSIS (CD&A)
The
following discussion and analysis of compensation arrangements of our named
executive officers for the fiscal year ended April 30, 2007 should be read
together with the compensation tables and related disclosures set forth below.
Compensation
Philosophy and Objectives
We
believe our success depends on the continued contributions of our named
executive officers. Our named executive officers are primarily responsible
for
our growth and operations strategy, and the management of the day-to-day
operations of our subsidiaries. Therefore, it is important to our success that
we retain the services of these individuals to ensure our future success and
prevent them from competing with us should their employment with us
terminate.
Our
overall compensation philosophy is to provide an executive compensation package
that enables us to attract, retain and motivate executive officers to achieve
our short-term and long-term business goals. We strive to apply a uniform
philosophy regarding compensation of all employees, including members of senior
management. This philosophy is based upon the premise that the achievements
of
the company result from the combined and coordinated efforts of all employees
working toward common goals and objectives in a competitive, evolving market
place. The goals of our compensation program are to align remuneration with
business objectives and performance and to enable us to retain and competitively
reward executive officers and employees who contribute to our long-term success.
In making executive compensation and other employment compensation decisions,
the Executive Committee considers achievement of certain criteria, some of
which
relate to our performance and others of which relate to the performance of
the
individual employee.
The
Executive Committee will evaluate our compensation policies on an ongoing basis
to determine whether they enable us to attract, retain and motivate key
personnel. To meet these objectives, the Executive Committee may from time
to
time increase salaries, award additional stock options or provide other short
and long-term incentive compensation to executive officers and other
employees.
Compensation
Program & Forms of Compensation
We
provide our executive officers with a compensation package consisting of base
salary and participation in benefit plans generally available to other
employees. In setting total compensation, the Executive Committee considers
individual and company performance, as well as market information regarding
compensation paid by other companies in our industry.
In
order
to achieve the above goals, our total compensation packages include base salary,
annual bonus, as well as long-term compensation in the form of stock
options.
Base
Salary.
Salaries
for our executive officers are initially set based on negotiation with
individual executive officers at the time of recruitment and with reference
to
salaries for comparable positions in the industry for individuals of similar
education and background to the executive officers being recruited. We also
consider the individual’s experience, and expected contributions to our company.
Base salary is continuously evaluated by competitive pay and individual job
performance. Base salaries for executives are reviewed annually or more
frequently should there be significant changes in responsibilities. In each
case, we take into account the results achieved by the executive, his or her
future potential, scope of responsibilities and experience, and competitive
salary practices.
34
Bonus.
A
component of each executive officer’s potential annual compensation may take the
form of a performance-based bonus. Contractually, our Executive Vice Presidents
are entitled to receive an annual bonus equal to 3% of the annual profit before
interest and taxes of the designated subsidiaries assigned to the him. Our
CEO
and CFO are entitled to an annual bonus, to be determined at the discretion
of
the Executive Committee, based on our financial performance and the achievement
of the officer’s individual performance objectives.
Long-Term
Incentives.
Longer-term incentives are provided through stock options, which reward
executives and other employees through the growth in value of our stock. The
Executive Committee believes that employee equity ownership provides an
incentive for employees to build stockholder value and serves to align the
interests of employees with those of our stockholders. Grants of stock options
to executive officers are based upon each officer’s relative position,
responsibilities and contributions, with primary weight given to the executive
officers’ relative rank and responsibilities. Initial stock option grants
designed to recruit an executive officer may be based on negotiations with
the
officer and with reference to historical option grants to existing officers.
Stock options are generally granted at an exercise price equal to the market
price of our common stock on the date of grant and will provide value to the
executive officers only when the price of our common stock increases over the
exercise price.
Although
the expenses of stock options affect our financial statements negatively, we
continue to believe that this is a strong element of compensation that focuses
the employees on financial and operational performance to create value for
the
long-term.
With
regard to our option grant practice, the Executive Committee has the
responsibility of approving stock option grants to all employees. Stock
option grants for plan participants are generally determined within ranges
established for each job level. These ranges are established based on our
desired pay positioning relative to the competitive market. Specific recruitment
needs are taken into account for establishing the levels of initial option
grants. Annual option grants take into consideration a number of factors,
including performance of the individual, job level, prior grants and competitive
external levels. The goals of option grant guidelines are to ensure future
grants remain competitive from a grant value perspective and to ensure option
usage consistent with option pool forecasts. Based on the definition of fair
market value in our stock option plan, options are granted at 100% of the
closing sales price of our stock on the last market trading date prior to the
grant date. We do not time the granting of our options with any favorable or
unfavorable news released by us. Proximity of any awards to an earnings
announcement or other market events is coincidental.
Executive
Equity Ownership
We
encourage our executives to hold an equity interest in our company. However,
we
do not have specific share retention and ownership guidelines for our
executives.
Performance-Based
Compensation and Financial Restatement
We
have
not considered or implemented a policy regarding retroactive adjustments to
any
cash or equity-based incentive compensation paid to our executives and other
employees where such payments were predicated upon the achievement of certain
financial results that were subsequently the subject of a financial restatement.
Tax
and Accounting Considerations
Compliance
with Internal Revenue Code Section 162(m).
Section
162(m) of the Internal Revenue Code of 1986, as amended, restricts deductibility
of executive compensation paid to our Chief Executive Officer and each of the
four other most highly compensated executive officers holding office at the
end
of any year to the extent such compensation exceeds $1,000,000 for any of such
officers in any year and does not qualify for an exception under Section 162(m)
or related regulations. The Executive Committee’s policy is to qualify its
executive compensation for deductibility under applicable tax laws to the extent
practicable. Income related to stock options granted under our 2002 Stock Option
Plan, the 2006 Incentive Stock Plan, and the 2007 Incentive Stock Plan,
generally qualify for an exemption from these restrictions imposed by
Section 162(m). In the future, the Executive Committee will continue to
evaluate the advisability of qualifying its executive compensation for full
deductibility.
Accounting
for Stock-Based Compensation.
Effective May 1, 2006, we adopted the fair value recognition provisions of
FASB
Statement 123(R) for stock-based compensation.
35
Employment Contracts and Termination of Employment
and
Change-In-Control Arrangements
Contract
with Andrew Hidalgo
On
February 1, 2005, 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
was
$168,000 per annum through April 30, 2007. Effective May 1, 2007, the base
salary under the agreement was amended to $250,000 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
through April 30, 2007. Effective May 1, 2007, the base salary under the
agreement was amended to $195,000. 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, who is an Executive
Vice President, and also a Vice-President of Walker Comm. The base salary under
the agreement was $140,000 per annum through January 31, 2007. Mr. Walker was
also entitled to a quarterly bonus of 3.0% of the operating income of Walker
Comm, prior to the deduction of interest, taxes, depreciation and amortization
through January 31, 2007.
Effective
February 1, 2007, we renewed the employment contract with Mr. Walker for three
years with a base salary of $160,000 per annum. Upon each one year anniversary
of the agreement, the agreement will automatically renew for another three
years
from the anniversary date. 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 3.0%
of
the operating income of Walker Comm, prior to the deduction of interest and
taxes.
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 was
$140,000 per annum through January 31, 2007. Mr. Walker was also entitled to
a
quarterly bonus of 3.0% of the operating income of Walker Comm, prior to the
deduction of interest, taxes, depreciation and amortization through January
31,
2007.
Effective
February 1, 2007, we renewed the employment contract with Mr. Walker for three
years with a base salary of $150,000 per annum. Upon each one year anniversary
of the agreement, the agreement will automatically renew for another three
years
from the anniversary date. 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 3.0%
of
the operating income of Walker Comm, prior to the deduction of interest and
taxes.
Contract
with James Heinz
On
April
2, 2004, we entered into a three-year employment contract with James Heinz,
who
is an Executive Vice President. and also a Vice-President of Heinz, The base
salary under the agreement was $140,000 per annum through March 31, 2007. Mr.
Heinz was also entitled to receive an annual bonus of 3.0% of operating income,
before the deduction of interest and income taxes of Heinz, WPCS Incorporated
and Invisinet, Inc. through March 31, 2007.
Effective
April 1, 2007, we renewed the employment contract with Mr. Heinz with a base
salary of $160,000 per annum. Upon each one year anniversary of the agreement,
the agreement will automatically renew for another three years from the
anniversary date. 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 3.0% of operating income, before
the
deduction of interest and income taxes of designated subsidiaries assigned
by
us.
36
Contract
with Richard Schubiger
On
August
1, 2005, we entered into a three-year employment contract with Richard
Schubiger, who is an Executive Vice President and also the President of Quality.
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 was $140,000 per annum through April 30, 2007.
Effective May 1, 2007, the base salary under the agreement was amended to
$195,000. 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., Mr. Schubiger is entitled to receive an annual
bonus of 3.0% of earnings before the deduction of interest and income taxes
of
designated subsidiaries assigned by us.
Contract
with Charles Madenford
Effective
April 1, 2007, we entered into an employment contract with Mr. Madenford with
a
base salary of $150,000 per annum. Upon each one year anniversary of the
agreement, the agreement will automatically renew for another three years from
the anniversary date. In addition, Mr. Madenford 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. Madenford is also entitled to the full-time
use of an automobile owned or leased by us, for which we reimburse Mr. Madenford
for all maintenance and gasoline expenses associated with the use of the
automobile. Mr. Madenford is also entitled to receive an annual bonus of 3.0%
of
operating income, before the deduction of interest and income taxes of
designated subsidiaries assigned by us.
For
each
of the named executive officers listed above, in the event of a change in
control, whereby the executive officer is terminated without cause, or resigns
for certain “good reasons” we are required to pay the named executive officer a
severance payment. The severance payment is the salary and benefits amount
owed
under the respective employment agreement from the date of termination through
the remaining term of the employment agreement.
Summary
Compensation Table
The
following table provides certain summary information concerning compensation
awarded to, earned by or paid to our Chief Executive Officer, Chief Financial
Officer and four other highest paid executive officers whose total annual salary
and bonus exceeded $100,000 (collectively, the “named executive officers”) for
fiscal year 2007.
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
All
Other Compensation ($)
|
Total
($)
|
|
|
Andrew
Hidalgo
|
2007
|
168,000
|
60,000
|
10,800
(7)
|
|
238,800
|
|
Chairman,
Chief Executive Officer
|
2006
|
168,000
|
-
|
11,492
(7)
|
|
179,492
|
|
and
Director (1)
|
2005
|
168,000
|
-
|
9,549
(7)
|
|
177,549
|
|
|
|
|
||||
|
Joseph
Heater
|
2007
|
140,000
|
40,000
|
-
|
180,000
|
|
|
Chief
Financial Officer (2)
|
2006
|
139,333
|
-
|
-
|
139,333
|
|
|
2005
|
132,000
|
-
|
-
|
132,000
|
||
|
|
|
|||||
|
Donald
Walker
|
2007
|
145,000
|
131,448
|
13,200
(8)
|
|
289,648
|
|
Executive
Vice President (3)
|
2006
|
140,000
|
37,215
|
-
|
177,215
|
|
|
2005
|
140,000
|
10,269
|
-
|
150,269
|
||
|
|
|
-
|
||||
|
Gary
Walker
|
2007
|
142,500
|
131,448
|
12,190
(8)
|
|
286,138
|
|
President-
Walker and Director (4)
|
2006
|
140,000
|
37,215
|
-
|
177,215
|
|
|
2005
|
140,000
|
10,269
|
-
|
150,269
|
||
|
|
|
|||||
|
Richard
Schubiger
|
2007
|
140,000
|
107,829
|
-
|
247,829
|
|
|
Executive
Vice President (5)
|
2006
|
140,000
|
73,658
|
-
|
213,658
|
|
|
2005
|
50,000
|
-
|
-
|
50,000
|
||
|
|
|
|||||
|
James
Heinz
|
2007
|
141,667
|
33,577
|
-
|
175,244
|
|
|
Executive
Vice President (6)
|
2006
|
140,005
|
31,985
|
-
|
171,990
|
|
|
2005
|
140,000
|
-
|
-
|
140,000
|
(1)
Mr.
Hidalgo has served as Chairman, Chief Executive Officer and Director since
May
24, 2002.
(2) Mr.
Heater has served as Chief Financial Officer since July 15, 2003.
(3)
Mr.
Walker has served as Executive Vice President since December 30,
2002.
(4)
Mr.
Walker has served as President of Walker Comm and as a Director since December
30, 2002.
(5)
Mr.
Schubiger has served as Executive Vice President since Novermber 24,
2004.
(6)
Mr.
Heinz has served as Executive Vice President since April 2, 2004.
(7) Represents
lease payments for use of company-leased vehicle.
(8)
Represents 401(k) matching contributions.
37
GRANTS
OF PLAN-BASED AWARDS
There
were no grants of plan-based awards to named officers in fiscal 2007.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The
following table sets forth information for the named executive officers
regarding the number of shares subject to both exercisable and unexercisable
stock options, as well as the exercise prices and expiration dates thereof,
as
of April 30, 2007.
|
Name
|
Number
of Securities underlying Unexercised Options (#)
Exercisable
|
Number
of Securities underlying Unexercised Options (#)
Unexercisable
|
Option
Exercise Price ($/Sh)
|
Option
Expiration Date
|
|||||||||
|
Andrew
Hidalgo
|
73,046
|
-
|
$
|
6.60
|
10/6/2009
|
||||||||
|
126,690
|
-
|
$
|
6.14
|
10/13/2010
|
|||||||||
|
|
|||||||||||||
|
Joseph
Heater
|
20,834
|
-
|
$
|
9.00
|
6/12/2008
|
||||||||
|
12,500
|
-
|
$
|
12.84
|
8/6/2008
|
|||||||||
|
7,500
|
-
|
$
|
6.60
|
10/6/2009
|
|||||||||
|
63,345
|
-
|
$
|
6.14
|
10/13/2010
|
|||||||||
|
|
|||||||||||||
|
James
Heinz
|
10,000
|
-
|
$
|
5.25
|
2/1/2010
|
||||||||
|
38,007
|
-
|
$
|
6.14
|
10/13/2010
|
|||||||||
|
Richard
Schubiger
|
10,000
|
-
|
$
|
5.25
|
2/1/2010
|
||||||||
|
38,007
|
-
|
$
|
6.14
|
10/13/2010
|
|||||||||
Option
Exercises - Fiscal 2007
The
following table summarizes the options exercised by the named executives during
the fiscal year ended April 30, 2007:
|
Option
Awards
|
|||||||
|
Name
|
Number
of Shares Acquired on Exercise
|
Value
Realized Upon Exercise ($)
|
|||||
|
Andrew
Hidalgo
|
81,121
|
305,662
|
|||||
|
Joseph
Heater
|
27,500
|
120,833
|
|||||
|
Donald
Walker
|
38,007
|
157,181
|
|||||
|
Gary
Walker
|
19,820
|
10,136
|
|||||
Director
Compensation
The
following table sets forth summary information concerning the total compensation
paid to our non-employee directors in 2007 for services to our
company.
|
Name
|
Option
Awards
($)(*)
|
Total
($)
|
|||||
|
JeNorm
Dumbroff (1)
|
8,762
|
8,762
|
|||||
|
Neil
Hebenton (2)
|
8,762
|
8,762
|
|||||
|
William
Whitehead (3)
|
8,762
|
8,762
|
|||||
|
Total:
|
26,286
|
26,286
|
|||||
|
*
|
Amounts
represent the aggregate grant date fair value of stock-based compensation
expense for stock options granted in fiscal 2007 under SFAS 123R as
discussed in Note 2, "Summary of Significant Accounting Policies” of
the Notes to Consolidated Financial Statements included elsewhere
in this
Annual Report on Form 10-K.
|
|
(1)
|
23,988
options were outstanding as of April 30, 2007, of which 21,904 were
exercisable as of April 30, 2007.
|
|
(2)
|
13,988
options were outstanding as of April 30, 2007, of which 11,904 were
exercisable as of April 30, 2007.
|
|
(3)
|
23,988
options were outstanding as of April 30, 2007, of which 21,904 were
exercisable as of April 30, 2007.
|
Cash
Compensation.
Our
non-employee directors serve without cash compensation and without other fixed
remuneration. We reimburse our non-employee Directors for all reasonable
out-of-pocket expenses incurred in the performance of their duties as Directors.
Employee directors are not compensated for Board services in addition to their
regular employee compensation.
38
ITEM
12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED
STOCKHOLDER MATTERS
The
following table sets forth certain information regarding beneficial ownership
of
our common stock as of July 15, 2007:
|
•
|
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.
|
|
Number
of
|
Percentage
|
|||||||||
|
Name
And Address Of Beneficial Owner (1)
|
Shares
Owned (2)
|
of
Class (3)
|
||||||||
|
Andrew
Hidalgo
|
403,953
|
(4)
|
|
5.63
|
%
|
|||||
|
Joseph
Heater
|
104,179
|
(4)
|
|
1.47
|
%
|
|||||
|
Donald
Walker
|
- |
-
|
||||||||
|
James
Heinz
|
107,531
|
(4)
|
|
1.53
|
%
|
|||||
|
Richard
Schubiger
|
48,007
|
(4)
|
|
*
|
||||||
|
Charles
Madenford
|
4,084 |
(4)
|
* | |||||||
|
Norm
Dumbroff
|
94,822
|
(4)
|
|
1.36
|
%
|
|||||
|
Neil
Hebenton
|
13,988
|
(4)
|
|
*
|
||||||
|
Gary
Walker
|
66,280
|
(4)
|
|
*
|
||||||
|
William
Whitehead
|
30,155
|
(4)
|
|
*
|
||||||
|
All
Officers and Directors as a Group (10 persons)
|
872,999
|
(4)
|
|
11.73
|
%
|
|||||
|
|
||||||||||
|
Special
Situations Private Equity Fund, L.P.
|
1,045,466
|
(5)
|
|
13.95
|
%
|
|||||
|
153
E. 53rd Street, 55th Floor
|
|
|||||||||
|
New
York, NY 10022
|
||||||||||
|
Special
Situations Fund III QP, L.P.
|
1,442,666
|
(5)
|
|
18.88
|
%
|
|||||
|
527
Madison Avenue, Suite 2600
|
||||||||||
|
New
York, NY 10022
|
||||||||||
|
SF
Capital Partners Ltd.
|
500,360
|
(6)
|
|
6.93
|
%
|
|||||
| 3600 South Lake Dr. | ||||||||||
| St. Francis, WI 53235 | ||||||||||
___________
* 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 July 15, 2007 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 6,971,698 shares of common stock outstanding.
(4) Includes
the following number of shares of common stock which may be acquired by certain
officers and directors through the exercise of stock options which were
exercisable as of July 15, 2007 or become exercisable within 60 days of that
date: Andrew Hidalgo, 199,736 shares; Joseph Heater, 104,179 shares; James
Heinz, 48,007 shares; Richard Schubiger, 48,007 shares; Charles Madenford,
4,084
shares; Norm Dumbroff, 23,988 shares; Neil Hebenton, 13,988 shares; William
Whitehead, 28,155 shares; and all officers and directors as a group, 470,144
shares.
(5) Includes
the following number of shares of common stock which may be acquired through
the
exercise of common stock purchase warrants which were exercisable as of July
15,
2007 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, based on the information in the most recent Form 4 filed
on July 11, 2007.
(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 July 15, 2007 or become exercisable within 60 days of that date: 250,360
shares.
.
39
EQUITY
COMPENSATION PLAN INFORMATION
The
following table sets forth information about the shares of our common stock
that
may be issued upon the exercise of options granted to employees under the 2002
Stock Option Plan, which were approved by the Board of Directors, and the 2006
and 2007 Incentive Stock Plans approved by the Board of Directors and
shareholders, as well as certain shares that may be issued upon the exercise
of
options under the 2002 Stock Option Plan, that were issued to consultants,
which
were not approved by the Board of Directors.
|
Plan
Category
|
(a)
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
(b)
Weighted-average
exercise price of outstanding options, warrants and rights
|
(c)
Number
of securities remaining available for future issuance under equity
compensation plans excluding securities reflected in column (a)
(1)
|
|||||||
|
Equity
compensation plan approved by board of directors (1)
|
233,575
|
$
|
8.43
|
45,073
|
||||||
|
Equity
compensation plan approved by security holders (2)
|
327,259
|
$
|
6.22
|
6,498
|
||||||
|
Equity
compensation plan approved by security holders (3)
|
-
|
-
|
400,000
|
|||||||
|
Total
|
560,834
|
$
|
7.14
|
451,571
|
||||||
|
(1)
|
We
established a nonqualified stock option plan pursuant to which options
to
acquire a maximum of 416,667 shares of our common stock were reserved
for
grant (the 2002 Plan). As of April 30, 2007, included above in the
2002
Plan are 204,096 shares issuable upon exercise of options granted
to
employees and directors, and 29,334 options granted to outside consultants
for services rendered to our
company.
|
|
(2)
|
We
established the 2006 Incentive Stock Plan, under which 400,000 shares
of
common stock were reserved for issuance upon the exercise of stock
options, stock awards or restricted stock. As of April 30, 2007,
383,500
shares were issuable upon exercise of options granted to employees
and
directors.
|
|
(3)
|
We
established the 2007 Incentive Stock Plan, under which 400,000 shares
of
common stock were reserved for issuance upon the exercise of stock
options, stock awards or restricted stock. As of April 30, 2007,
400,000
shares were issuable upon exercise of options granted to employees
and
directors.
|
40
ITEM
13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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 each of the fiscal
years
ended April 30, 2007, 2006, and 2005, the rent paid for this lease was $88,000.
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 April 30, 2007, payments of $393,000 have been
made to the former Clayborn stockholders and the total remaining due is
$707,000.
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 was paid 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.
On
July
19, 2006, we acquired SECS and we lease our Sarasota, Florida location from
a
trust, of which one of the former shareholders of SECS, is the trustee. For
the
year ended April 30, 2007, the rent paid for this lease was $40,315.
On
March
30, 2007, we lease our Trenton, New Jersey location from Voacolo Properties
LLC,
of which the former shareholders of Voacolo, are the members. For the year
ended
April 30, 2007, the rent paid for this lease was $4,500.
ITEM
14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit
Fees. The aggregate fees billed by our independent auditors, for professional
services rendered for the audit of our annual financial statements for the
years
ended April 30, 2007 and 2006, and for the reviews of the financial statements
included in our Quarterly Reports on Form 10-Q or 10-QSB during the fiscal
year
were $278,471 and $250,161, respectively.
Audit
Related Fees. We incurred fees to our independent auditors of $14,400 and
$57,150, respectively, for audit related fees during the fiscal years ended
April 30, 2007 and 2006. These fees were primarily related to the review of
our
registration statements prior to filing with the SEC.
Tax
and
Other Fees. We did not incur fees to our independent auditors for tax compliance
services during the fiscal years ended April 30, 2007 and 2006.
Consistent
with SEC policies and guidelines regarding audit independence, the Audit
Committee is responsible for the pre-approval of all audit and permissible
non-audit services provided by our principal accountants on a case-by-case
basis. Our Audit Committee has established a policy regarding approval of all
audit and permissible non-audit services provided by our principal accountants.
Our Audit Committee pre-approves these services by category and service. Our
Audit Committee has pre-approved all of the services provided by our principal
accountants.
41
PART
IV
ITEM
15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits:
|
3.1
|
Certificate
of Incorporation, as amended, incorporated by reference to Exhibit
3.1 of
WPCS International Incorporated’s registration statement on Form SB-2,
filed April 7, 2006.
|
|
3.2
|
Amended
and Restated Bylaws, incorporated by reference to Exhibit 3.2 of
WPCS
International Incorporated’s registration statement on Form SB-2, filed
April 7, 2006.
|
|
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.
|
|
4.7
|
2007
Incentive Stock Plan, incorporated by reference to Exhibit A of WPCS
International Incorporated’s definitive proxy statement on Schedule 14A,
filed August 18, 2006.
|
|
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.
|
42
|
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
|
Purchase
Agreement, dated as of April 11, 2006, incorporated by reference
to
Exhibit 10.1 of WPCS International Incorporated’s current report on Form
8-K, filed April 12, 2006.
|
|
10.18
|
Waiver,
dated as of April 11, 2006, incorporated by reference to Exhibit
10.2 of
WPCS International Incorporated’s current report on Form 8-K, filed April
12, 2006.
|
|
10.19
|
Stock
Purchase Agreement, dated as of June 7, 2006, by and among WPCS
International Incorporated, New England Communications Systems, Inc.,
Myron Polulak, Carolyn Windesheim and Gary Tallmon, incorporated
by
reference to Exhibit 10.1 of WPCS International Incorporated’s current
report on Form 8-K, filed June 9,
2006.
|
|
|
|
10.20
|
Employment
Agreement, dated as of June 7, 2006, between New England Communications
Systems, Inc. and Myron Polulak, incorporated by reference to Exhibit
10.2
of WPCS International Incorporated’s current report on Form 8-K, filed
June 9, 2006.
|
|
|
|
10.21
|
Employment
Agreement, dated as of June 7, 2006, between New England Communications
Systems, Inc. and Carolyn Windesheim, incorporated by reference to
Exhibit
10.3 of WPCS International Incorporated’s current report on Form 8-K,
filed June 9, 2006.
|
|
10.22
|
Stock
Purchase Agreement, dated as of July 19, 2006, by and among WPCS
International Incorporated, Southeastern Communication Service, Inc.,
Daniel G. Lester, Christopher P. Lester, Thomas A. Lester, Michael
D.
Lester, Karl F. Eickmeyer and Anthony Ankersmit, incorporated by
reference
to Exhibit 10.1 of WPCS International Incorporated’s current report on
Form 8-K, filed July 20, 2006.
|
|
|
|
10.23
|
Registration
Rights Agreement, dated as of July 19, 2006, by and among WPCS
International Incorporated, Southeastern Communication Service, Inc.,
Daniel G. Lester, Christopher P. Lester, Thomas A. Lester, Michael
D.
Lester, Karl F.Eickmeyer
and Anthony Ankersmit, incorporated by reference to Exhibit 10.2
of WPCS
International Incorporated’s current report on Form 8-K, filed July 20,
2006.
|
43
|
10.24
|
Form
of Securities Purchase Agreement, dated as of January 30, 2007,
incorporated by reference to Exhibit 10.1 of WPCS International
Incorporated’s current report on Form 8-K, filed February 1,
2007.
|
|
10.25
|
Form
of Registration Rights Agreement, dated as of January 30, 2007,
incorporated by reference to Exhibit 10.2 of WPCS International
Incorporated’s current report on Form 8-K, filed February 1,
2007
|
|
10.26
|
Stock
Purchase Agreement, dated as of March 30, 2007, by and among WPCS
International Incorporated, Voacolo Electric Incorporated, Jeffrey
Voacolo, David Voacolo, Joseph Voacolo and Tracy Hossler, incorporated
by
reference to Exhibit 10.1 of WPCS International Incorporated’s current
report on Form 8-K, filed April 2,
2007.
|
|
|
|
10.27
|
Registration
Rights Agreement, dated as of March 30, 2007, by and among WPCS
International Incorporated, Voacolo Electric Incorporated, Jeffrey
Voacolo, David Voacolo, Joseph Voacolo and Tracy Hossler, incorporated
by
reference to Exhibit 10.2 of WPCS International Incorporated’s current
report on Form 8-K, filed April 2,
2007.
|
|
|
|
10.28
|
Employment
Agreement, dated as of March 30, 2007, between Voacolo Electric
Incorporated and Jeffrey Voacolo, incorporated by reference to Exhibit
10.4 of WPCS International Incorporated’s current report on Form 8-K,
filed April 2, 2007.
|
|
10.29
|
Employment
Agreement, dated as of March 30, 2007, between Voacolo Electric
Incorporated and David Voacolo, incorporated by reference to Exhibit
10.5
of WPCS International Incorporated’s current report on Form 8-K, filed
April 2, 2007.
|
|
10.30
|
Employment
Agreement, dated as of March 30, 2007, between Voacolo Electric
Incorporated and Joseph Voacolo, incorporated by reference to Exhibit
10.6
of WPCS International Incorporated’s current report on Form 8-K, filed
April 2, 2007.
|
|
10.31
|
Interest
Purchase Agreement, dated as of April 5, 2007, by and among WPCS
International Incorporated, American Gas Services, Inc. and American
Gas
Services, Inc. Consultants, incorporated by reference to Exhibit
10.1 of
WPCS International Incorporated’s current report on Form 8-K, filed April
9, 2007.
|
|
10.32
|
Loan
Agreement, dated April 10, 1007, by and among WPCS International
Incorporated, Bank of America, N.A. Clayborn Contracting Group, Inc.,
Heinz Corporation, New England Communications Systems, Inc., Quality
Communications & Alarm Company., Inc., Southeastern Communication
Service, Inc., and Walker Comm,
incorporated by reference to Exhibit 10.1 of WPCS International
Incorporated’s amended current report on Form 8-K/A, filed April 17,
2007.
|
|
10.33
|
Security
Agreement, dated April 10, 1007, by and among WPCS International
Incorporated, Bank of America, N.A. Clayborn Contracting Group, Inc.,
Heinz Corporation, New England Communications Systems, Inc., Quality
Communications & Alarm Company., Inc., Southeastern Communication
Service, Inc., and Walker Comm, Inc.,
incorporated by reference to Exhibit 10.2 of WPCS International
Incorporated’s amended current report on Form 8-K/A, filed April 17,
2007.
|
|
10.34
|
Non-binding
letter of intent setting forth the agreement and understanding as
to the
terms of the acquisition of Major electric, Inc, dated June 14, 2007,
filed herewith.
|
|
10.35
|
Non-binding
letter of intent setting forth the agreement and understanding as
to the
terms of the acquisition of Max Engineering LLC, dated June 25, 2007,
filed herewith.
|
|
10.36
|
Employment
Agreement, effective as of April 1, 2007, between WPCS International
Incorporated and Charles Madenford, filed
herewith.
|
|
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, filed herewith.
|
|
23.1
|
Consent
of J.H. Cohn LLP, Independent Registered Public Accounting
Firm.
|
44
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a),
promulgated under the Securities and Exchange Act of 1934, as
amended
|
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer)
|
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer)
|
45
SCHEDULE
II
VALUATION
AND QUALIFYING ACCOUNTS
For the
years
ended April 30, 2007, 2006 and 2005
|
(A)
Description
|
(B)
Balance
at
Beginning of Period
|
(C)
Additions Charged to Costs and Expenses
|
(D)
Deductions
|
(E)
Balance
at
end of Period
|
||||||||||||
|
Allowance
for
Doubtful Accounts
|
||||||||||||||||
|
April
30, 2005
|
$
|
61,779
|
$
|
17,037
|
($3,030
|
)
|
(1)
|
|
$
|
75,786
|
||||||
|
April
30, 2006
|
75,786
|
35,877
|
(6,877
|
)
|
(1)
|
|
104,786
|
|||||||||
|
April
30, 2007
|
$
|
104,786
|
-
|
|
($6,000
|
)
|
(1)
|
|
$
|
98,786
|
(1).
Write-off of uncollectible accounts.
46
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused
this
report
to
be signed on its behalf by the undersigned, thereunto duly authorized.
| WPCS INTERNATIONAL INCORPORATED | ||
| |
|
|
| Date: July 30, 2007 | By: | /s/ ANDREW HIDALGO |
|
Andrew
Hidalgo
|
||
|
Chief
Executive Officer (Principal Executive
Officer)
|
||
| |
|
|
| Date: July 30, 2007 | By: | /s/ JOSEPH HEATER |
|
Joseph
Heater
|
||
|
Chief
Financial Officer (Principal Accounting
Officer)
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Name
|
Position
|
Date
|
|||||
|
/s/
ANDREW HIDALGO
Andrew
Hidalgo
|
Chairman
of the Board
|
July
30, 2007
|
|||||
|
|
|||||||
|
/s/
NORM DUMBROFF
Norm Dumbroff |
Director
|
July
30, 2007
|
|||||
|
/s/
NEIL HEBENTON
Neil
Hebenton
|
Director
|
July
30, 2007
|
|||||
|
/s/
GARY WALKER
Gary Walker |
Director
|
July
30, 2007
|
|||||
|
/s/
WILLIAM WHITEHEAD
William
Whitehead
|
Director
|
July
30, 2007
|
|||||
47