UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 2003
[ ] 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
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WPCS INTERNATIONAL INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 98-0204758
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 South Village Avenue
Suite 20
Exton, Pennsylvania 19341
(Address of principal executive offices)
(610) 903-0400
--------------
(Registrant's telephone number, including area code)
Phoenix Star Ventures, Inc.
2438 Marine Drive, Suite 215
West Vancouver, British Columbia, Canada V7V 1L2
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 after the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date: 13,078,844 shares issued and
outstanding as of July 22, 2003.
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PART I
ITEM 1. - BUSINESS
This Annual Report on Form 10-KSB (including the section regarding Management's
Discussion and Analysis of Financial Condition and Results of Operations)
contains forward-looking statements regarding our business, financial condition,
results of operations and prospects. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates" and similar expressions or
variations of such words are intended to identify forward-looking statements,
but are not deemed to represent an all-inclusive means of identifying
forward-looking statements as denoted in this Annual Report on Form 10-KSB.
Additionally, statements concerning future matters are forward-looking
statements.
Although forward-looking statements in this Annual Report on Form 10-KSB
reflect the good faith judgment of our management, such statements can only be
based on facts and factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, without
limitation, those specifically addressed under the heading "Risks Related to Our
Business" below, as well as those discussed elsewhere in this Annual Report on
Form 10-KSB. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-KSB. We file reports with the Securities and Exchange
Commission ("SEC"). We make available on our website under "Investor
Relations/SEC Filings," free of charge, our annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after we electronically file
such materials with or furnish them to the SEC. Our website address is
www.wpcs.com. You can also read and copy any materials we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
You can obtain additional information about the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including us.
We undertake no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Annual Report on Form 10-KSB. Readers are urged to carefully
review and consider the various disclosures made throughout the entirety of this
Annual Report, which attempt to advise interested parties of the risks and
factors that may affect our business, financial condition, results of operations
and prospects.
Description of the Business
Overview
WPCS International Incorporated is a project engineering company that
focuses on the implementation requirements of specialty communication systems,
wireless fidelity (WiFi) deployment and fixed wireless deployment. WPCS offers
the ability to integrate superior solutions across a vast majority of
communication requirements.
History
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On May 17, 2002, pursuant to an agreement and plan of merger, Phoenix Star
Ventures Inc., a publicly held Delaware corporation, through its wholly owned
subsidiary WPCS Acquisition Corp., acquired WPCS Holdings Inc., a Delaware
corporation by issuing 5,500,000 shares of its common stock to shareholders of
WPCS Holdings, Inc. in exchange of all the outstanding shares of WPCS Holdings,
Inc. Concurrently with the acquisition, Phoenix Star Ventures Inc. changed its
name to WPCS International Incorporated ("WPCS" or the "Company").
On November 13, 2002, we entered into an agreement and completed a merger
with Invisinet Acquisitions Inc., a wholly owned subsidiary of the Company, and
Invisinet, Inc. ("Invisinet"), an unrelated Delaware corporation. Pursuant to
the terms of the Agreement and Plan of Merger, Invisinet Acquisitions, Inc.
acquired 100% of the common stock of Invisinet, Inc., by issuing 1,000,000
shares of our Common Stock. Subsequently, Invisinet Acquisitions Inc. was merged
into Invisinet, Inc. with Invisinet, Inc. being the surviving company. Invisinet
specializes in providing wireless solutions and deployment services for indoor
wireless connectivity and for mobile wireless connectivity.
On December 30, 2002, through our wholly owned subsidiary Walker Comm
Merger Corp., we acquired all of the outstanding common stock of Walker Comm,
Inc. ("Walker"), a Fairfield, CA based full service contractor specializing in
the engineering and installation of fiber optics, voice & data cabling,
audio/visual systems, networking and the hardware sales of LAN systems -
routers, hubs, switches, etc. As a result of and at the effective time of the
merger, all of the issued and outstanding shares of common stock of Walker were
exchanged for aggregate merger consideration consisting of $500,000 in cash and
2,486,000 of our Common Shares. Subsequently on that date, the subsidiary was
merged with and into Walker, with Walker being the surviving corporation. Walker
then became a wholly owned subsidiary of WPCS.
In June 2003, WPCS entered into a Letter of Intent to acquire Calyborn
Contracting Group, Inc.. Founded in 1988, Clayborn Contracting is a diversified
project services firm that operates primarily on the west coast. As a diverse
services engineering company, Clayborn Contracting has designed and installed
smart highway systems and substations for state and local municipalities in
California. In addition, Clayborn Contracting has performed structured cabling,
underground and utility work.
Our Business
Connecting a company's network is critical in achieving the timely flow of
information. Today, a company's network expands beyond its existing headquarters
to remote offices and remote users. The networking applications are larger and
the demand for high-speed connectivity to move data back and forth is growing
dramatically. Until recently, a company's only alternative in obtaining
high-speed connectivity was to contact the telephone company and have a
high-speed landline service installed so that connectivity could be achieved
between its locations. The issue today is that these high-speed landlines
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take too much time to install, are not available in all locations, do not solve
remote application usage and are costly to use on a monthly basis.
WPCS was formed to take advantage of the growing
demand in high-speed connectivity by providing complete wireless solutions
including best of breed wireless products, engineering services, structured
cabling and deployment. WPCS offers the ability to integrate superior
solutions across the vast majority of communication requirements.
There are multiple products associated with the deployment of a wireless
solution including microwave equipment, free space optical equipment and
specialty components. There are also important services such as site design,
product integration, structured cabling, network security, training and
technical support. . The integration of all these products and services is
critical in achieving the desired results for the customer. The specific
products used and services offered vary depending on the connection speed
required and distances between points. WPCS provides specialty communication
systems, wireless fidelity (WiFi) deployment and fixed wireless deployment to
corporations, government entities and educational institutions both domestically
and internationally.
WPCS defines wireless deployment as the internal and external design and
installation of a wireless solution to support connectivity between two or more
points without the utilization of landline infrastructure.
End users turn to WPCS to design and integrate a wireless solution, as
there are many components from various technology providers. Wireless solutions
can offer a user the following.
o High-speed connectivity
o Immediate installation
o Network ownership o Low costs
WPCS also provides network security, trains end users and provides on-going
technical support to insure a successful installation.
Sales and Marketing
We market and sell our engineering services through a direct team of sales
and project engineering professionals.
Customers
We provide specialty communication systems, wireless fidelity (WiFi)
deployment and fixed wireless deployment to many major corporations, government
entities and educational institutions. At April 30, 2003, we had a backlog of
approximately $4,800,000 on its uncompleted contracts.
Competition
Our market is relatively competitive and is represented typically by small
service providers. We believe that the principal competitive factors in our
market include the ability to deliver results within budget (time and cost),
reputation, accountability, staffing flexibility, project management expertise,
industry experience and competitive pricing. In addition, expertise in new and
evolving technologies has become increasingly important. We believe that the
ability to integrate these technologies from multiple
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vendors gives us a competitive advantage. Our ability to compete also depends on
a number of additional factors which are outside of our control, including:
o competitive pricing for similar services;
o the ability and willingness of our competitors to finance
customers' projects on favorable terms;
o the ability of our customers to perform the services themselves;
and
o the responsiveness of our competitors to customer needs.
Internal Growth Strategy
WPCS generates revenue opportunities through bid responses, end user
referrals, contracting assignments from technology providers and subcontracting
assignments from general infrastructure providers. WPCS maintains strong
relationships with these sources. Also, WPCS, through its subsidiaries, is
listed on the Federal GSA Schedule for government contracts. WPCS gains national
recognition through press releases, testimonials and its website. WPCS has also
gained recognition in its unique deployment of wireless solutions for vertical
applications.
Acquisition Strategy
The primary goal is to build WPCS into a recognized leader in specialty
communication systems, wireless fidelity (WiFi) deployment and fixed wireless
deployment. To meet this challenge, WPCS is planning to make acquisitions of
companies familiar with the deployment of these solutions. The goal for each
acquisition will be to expand the product and services offering, strengthen our
project services capabilities, expand the customer base and add accretive
revenue and earnings. At the present time, WPCS has no plans, arrangement or
agreements for any acquisitions, other than Clayborn Contracting Group, Inc.
Management Strategy
In anticipation of internal growth and future acquisitions, the company
will organize resources to manage the company's development effectively. The
president is responsible for strategic direction, operations, corporate
governance and building shareholder value.
The financial officer is responsible for overall financial management,
financial reporting and corporate administration. The strategic development
officer is focused on strategic issues such as acquisition candidates, investor
relations, corporate marketing and major account opportunities.
The Executive VP is tasked with business integration, creating operational
efficiencies and operations management for a set number of acquired companies.
As each acquisition occurs, personnel will increase in a variety of capacities.
Employees
As of July 31, 2003, we employed 81 full time employees, of which 62 are
project engineers, nine are project managers, five are in administration and
five are executives. 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.
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RISK RELATED TO BUSINESS
You should carefully consider the following risk factors and all other
information contained herein as well as the information included in this Annual
Report in evaluating our business and prospects. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties, other than those we describe below, that are not presently known
to us or that we currently believe are immaterial, may also impair our business
operations. If any of the following risks occur, our business and financial
results could be harmed. You should refer to the other information contained in
this Annual Report, including our consolidated financial statements and the
related notes.
Our success is dependent on growth in the deployment of wireless networks, and
to the extent that such growth slows down, our business may be harmed.
The wireless industry has historically experienced a dramatic rate of
growth both in the United States and internationally. Recently, however, many
end users have been re-evaluating their network deployment plans in response to
downturns in the capital markets, changing perceptions regarding industry
growth, the adoption of new wireless technologies, increased price competition
and a general economic slowdown in the United States and internationally. It is
difficult to predict whether these changes will result in a downturn in the
wireless industry. If the rate of growth should slow down and end users continue
to reduce their capital investments in wireless infrastructure or fail to expand
their networks, our business may be significantly harmed.
The uncertainty associated with rapidly changing wireless technologies may
also continue to negatively impact the rate of deployment of wireless networks
and the demand for our services. End users face significant challenges in
assessing their bandwidth demands and in acceptance of rapidly changing enhanced
wireless capabilities. If end users continue to perceive that the rate of
acceptance of next generation wireless products will grow more slowly than
previously expected, they may, as a result, continue to slow their deployment of
next generation wireless technologies. Any significant slowdown will reduce the
demand for our services and adversely affect our financial results.
The increase of services offered by equipment vendors could adversely impact our
business.
Recently, the wireless equipment vendors have increased the services they
offer for their technology. This activity and the potential continuing trend
towards offering services may lead to a greater ability among equipment vendors
to provide a comprehensive range of wireless services, and may simplify
integration and installation, which could lead to a reduction in demand for our
services. Moreover, by offering certain services to end users, equipment vendors
could reduce the number of our current or potential customers and increase the
bargaining power of our remaining customers, which may adversely impact our
business.
Our quarterly results fluctuate and may cause our stock price to decline.
Our quarterly operating results have fluctuated in the past and will likely
fluctuate in the future. As a result, we believe that period to period
comparisons of our results of operations are not a good indication of our future
performance. A number of factors, many of which are outside of our control, are
likely to cause these fluctuations.
The factors outside of our control include:
o Wireless market conditions and economic conditions generally;
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o The timing and size of wireless deployments by end users.
o fluctuations in demand for our services;
o the length of sales cycles;
o the ability of certain customers to sustain capital resources to
pay their trade accounts receivable balances;
o reductions in the prices of services offered by our competitors;
and
o Costs of integrating technologies or businesses that we add. The
factors substantially within our control include:
o changes in the actual and estimated costs and time to complete
fixed-price, time-certain projects that may result in revenue
adjustments for contracts where revenue is recognized under the
percentage of completion method;
o the timing of expansion into new markets, both domestically and
internationally; and
o the timing and payments associated with possible acquisitions.
Because our operating results may vary significantly from quarter to
quarter, our operating results may not meet the expectations of securities
analysts and investors, and our common stock could decline significantly which
may expose us to risks of securities litigation, impair our ability to attract
and retain qualified individuals using equity incentives and make it more
difficult to complete acquisitions using equity as consideration.
Our business is dependent upon our ability to keep pace with the latest
technological changes.
The market for our services is characterized by rapid change and
technological improvements. Failure to respond in a timely and cost-effective
way to these technological developments could result in serious harm to our
business and operating results. We have derived, and we expect to continue to
derive, a substantial portion of our revenues from creating wireless networks
that are based upon today's leading technologies and that are capable of
adapting to future technologies. As a result, our success will depend, in part,
on our ability to develop and market service offerings that respond in a timely
manner to the technological advances of our customers, evolving industry
standards and changing client preferences.
Failure to properly manage projects may result in costs or claims.
Our engagements often involve large scale, highly complex projects. The
quality of our performance on such projects depends in large part upon our
ability to manage the relationship with our customers, and to effectively manage
the project and deploy appropriate resources, including third-party contractors,
and our own personnel, in a timely manner. Any defects or errors or failure to
meet clients' expectations could result in claims for substantial damages
against us. Our contracts generally limit our liability for damages that arise
from negligent acts, error, mistakes or omissions in rendering services to our
clients. However, we cannot be sure that these contractual provisions will
protect us from liability for damages in the event we are sued. In addition, in
certain instances, we guarantee customers that we will complete a project by a
scheduled date or that the network will achieve certain performance standards.
If the project or network experiences a performance problem, we may not be able
to recover the additional costs we will incur, which could exceed revenues
realized from a project. Finally, if we miscalculate the resources or time we
need to complete a project with capped or fixed fees, our operating results
could be seriously harmed.
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Potential future acquisitions could be difficult to integrate, disrupt our
business, dilute stockholder value and adversely affect our operating results.
We intend to expand our operations through acquisitions over time. This may
require significant management time and financial resources because we may need
to integrate widely dispersed operations with distinct corporate cultures. Our
failure to manage future acquisitions successfully could seriously harm our
operating results. Also, acquisition costs could cause our quarterly operating
results to vary significantly. Furthermore, our stockholders would be diluted if
we financed the acquisitions by incurring convertible debt or issuing
securities. To the extent we acquire an international operation; we will face
additional risks, including:
o difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
o different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
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, new SEC
regulations and other trading market rules, are creating uncertainty 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 all
appropriate resources to comply with evolving standards, and this investment may
result in increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities to compliance
activities.
Our President, Andrew Hidalgo, owns approximately 41% of our Common Shares.
As of the date hereof, Andrew Hidalgo, our President, beneficially owned,
in the aggregate, approximately 41% of our outstanding common stock. As a
result, Mr. Hidalgo is able to exercise significant control over matters
requiring stockholder approval, such as the election of directors and the
approval of significant corporate transactions. These types of transactions
include transactions involving an actual or potential change in control or other
transactions that the non-controlling stockholders may deem to be in their best
interests and in which such stockholders could receive a premium for their
shares.
We have a history of operating losses
We incurred a net losses of approximately $381,000 for the year ended April
30, 2003. There can be no assurance that we will achieve or sustain
profitability or positive cash flow from operating activities in the future. If
we cannot achieve operating profitability or positive cash flow from operating
activities, we may not be able to meet our working capital requirements.
We may be unable to obtain the additional capital required to grow our business.
Our ability to grow depends significantly on our ability to expand our
operations through internal growth and by acquiring other companies or assets
that require significant capital resources. We may need
9
to seek additional capital from public or private equity or debt sources to fund
our growth and operating plans and respond to other contingencies such as:
o shortfalls in anticipated revenues or increases in expenses;
o the development of new services; or
o the expansion of our operations, including the recruitment of
additional personnel.
We cannot be certain that we will be able to raise additional capital in
the future on terms acceptable to us or at all. If alternative sources of
financing are insufficient or unavailable, we may be required to modify our
growth and operating plans in accordance with the extent of available financing.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in Our Securities is Limited, Which Makes Transactions in Our
Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock" for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for
transactions in penny stocks; and
o the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and
quantity of the penny stock to be purchased.
In order to approve a person's account for transactions in penny stocks, the
broker or dealer must:
o obtain financial information and investment experience objectives
of the person; and
o make a reasonable determination that the transactions in penny
stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of
evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny
stock, a disclosure schedule prescribed by the Commission relating to the penny
stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement
from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities
subject to the "penny stock" rules. This may make it more difficult for
investors to dispose of our common stock and cause a decline in the market value
of our stock.
Disclosure also has to be made about the risks of investing in penny stocks
in both public offerings and in secondary trading and about the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and the rights and remedies available to an
investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent
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price information for the penny
stock held in the account and information on the limited market in penny stocks.
ITEM 2 - PROPERTIES
Our principal executive offices are located in approximately 2,000 square
feet of office space in Exton, Pennsylvania. The lease for such space expires in
November 2004. The aggregate annual base rental for this space is $28,000.
In conjunction with acquisitions that occurred in 2002, we assumed the
operating leases of additional office space in the following locations:
Location Lease Expiration Date Minimum Annual Rental
-------- --------------------- -------------------
Fairfield, California (a) February 28, 2011 $89,000
Rocklin, California January 31, 2004 $17,000
Livermore, California October 31, 2003 $20,000
Denville, New Jersey month-to-month
(a) The lease for our Fairfield, California location is with trusts, of
which, certain officers and shareholders of the Company are the trustees. We
believe that our existing facilities are suitable and adequate to meet our
current business requirements.
ITEM 3 - LEGAL PROCEEDINGS
From time to time, the Company may become involved in various lawsuits and
legal proceedings which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these
or other matters may arise from time to time that may harm the Company's
business. The Company is currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
During the fiscal year ended April 30, 2003, our common stock was quoted on
the over-the-counter bulletin board under the symbol "WPCS". The following table
sets forth the range of the high and low bid quotations for our common stock for
the periods indicated. Such market quotations reflect inter-dealer prices,
without mark-up, mark-down or commission and may not necessarily represent
actual transactions.
High Low
2003
First quarter $2.55 $0.07
Second quarter 1.90 1.35
Third quarter 2.08 1.05
Fourth quarter 1.95 1.11
As of July 22, 2003, there were approximately 53 holders of record of our
common stock and the closing bid quotation of our common stock was $1.12 per
share.
Dividend Policy
We have never paid any cash dividends on our capital stock and do not
anticipate paying any cash dividends on the Common Shares in the foreseeable
future. We intend to retain future earnings to fund ongoing operations and
future capital requirements of our business. Any future determination to pay
cash dividends will be at the discretion of the Board and will be dependent upon
our financial condition, results of operations, capital requirements and such
other factors as the Board deems relevant.
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ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Overview
WPCS International Incorporated is a project engineering company that
focuses on the implementation requirements of specialty communication systems,
wireless fidelity ("WiFi") deployment and fixed wireless deployment. WPCS offers
the ability to integrate superior solutions across a vast majority of
communication requirements.
Significant Transactions and Events
On May 17, 2002, pursuant to the agreement and plan of merger, Phoenix Star
Ventures Inc. ("PSVI"), a publicly held corporation, acquired WPCS Holdings
Inc., a Delaware corporation ("Holdings") by issuing 5,500,000 shares of its
common stock to shareholders of Holdings in exchange of all the outstanding
shares of Holdings. The shareholders of Holdings, after the acquisition, owned
the majority of the combined company. Accordingly, the combination has been
accounted for as a reverse acquisition, whereby, for accounting purposes,
Holdings is the accounting acquirer and PSVI is the accounting acquiree.
Concurrently with the acquisition, PSVI, the parent company, changed its name to
WPCS International Incorporated.
On November 13, 2002, the Company entered into an agreement and completed a
merger with Invisinet Acquisitions Inc., a wholly owned subsidiary of the
Company, and Invisinet, Inc. ("Invisinet"), an unrelated Delaware corporation.
Pursuant to the terms of the Agreement and Plan of Merger, Invisinet
Acquisitions, Inc. acquired 100% of the common stock of Invisinet, by issuing
1,000,000 shares of the Company's common stock with a fair value of $1,750,000,
based on the average value of the Company's common stock as of a few days before
and after the merger was announced. Based on the net assets acquired of
Invisinet, the Company recognized goodwill of approximately $1,627,000.
Subsequently, Invisinet Acquisitions Inc. was merged into Invisinet with
Invisinet being the surviving company. Invisinet is in the same business as the
Company, providing fixed wireless technology solutions to its customers.
On December 30, 2002, the Company through its wholly owned subsidiary
Walker Comm Merger Corp. ("Subsidiary") acquired all of the outstanding common
stock of Walker Comm, Inc. ("Walker"). The aggregate consideration paid by the
Company for the entire equity interest in Walker was approximately $5,171,000.
As a result of and at the effective time of the merger, all of the issued and
outstanding shares of common stock, par value $1.00 per share, of Walker were
exchanged for aggregate merger consideration consisting of $500,000 in cash and
the common stock of the Company with a value of approximately $4,574,000, or
2,486,000 shares valued at $1.84 per share based on the average value of the
Company's common stock as of a few days before and after the merger was
announced. Based on the net assets acquired of Walker, the Company recognized
goodwill of approximately $3,762,000. Subsequently on that date, the Subsidiary
was merged with and into Walker, with Walker being the surviving corporation.
Walker then became a wholly owned subsidiary of WPCS.
Results of Operations
Fiscal Year ended April 30, 2003 Compared to period November 15, 2001 (date of
inception) to April 30, 2002
Operating Revenues
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Sales were approximately $5,423,000 and $402,000 for the years ended April
30, 2003 and the period ended April 30, 2002, respectively. The primary reason
for the increase in revenues comparing 2003 to 2002 is attributable to the two
acquisitions made by the Company in November 2002 of Invisinet and December 2002
of Walker. These acquisitions accounted for $4,720,000 or 94% of the
increase in revenues over the prior year.
Cost of Sales
In the case of WPCS and Invisinet, cost of sales consists of component and
material costs and direct labor cost payments to third party sub-contractors for
its installation. For Walker, cost of sales consists of direct costs on
contracts, including materials, labor, and other overhead costs. The Company's
gross margin varies from job to job. For the year ended April 30, 2003 and the
period ended April 30, 2002, gross margin was 30.5% and 33.6%, respectively.
Selling expenses
Selling expenses include expenses incurred for marketing and promotional
activities. For the year ended April 30, 2003 and for the period ended April 30,
2002, selling expenses were approximately $28,000 and $4,900, respectively. We
expect selling expenses to increase in the near future as we start to market our
products and services in expanded markets.
General and administrative expenses
For the year ended April 30, 2003, general and administrative expenses were
$1,833,000. Included in the general and administrative expenses are $714,000
paid for salaries, commissions and payroll taxes and $374,000 for professional
fees. Walker employs union employees for whom it paid $239,000 in union
benefits. Insurance costs amounted to $146,000 and rent for our office
facilities amounted to $100,000. Other general and administrative expenses
amounted to $260,000.
For the period November 15, 2001 to April 30, 2002, general and
administrative expenses were $112,000. Included in the general and
administrative expenses are $54,000 paid for salaries, commissions and payroll
taxes, rent for our office facilities amounted to $10,000 and $6,000 in
professional fees. The Company incurred $17,000 in travel and entertainment
expenses to develop new business and paid $7,000 in telephone expenses. Other
general and administrative expenses amounted to $18,000.
Depreciation and amortization
Depreciation for the year ended April 30, 2003 was $75,000 as compared to
$2,600 for the period ended April 30, 2002. The increase is due to the
acquisition of fixed assets on acquiring Walker and Invisinet. The amortization
expense for the year ended April 30, 2003 was $41,000. We acquired customer
lists from Walker and Invisinet which are being amortized over a period of five
years from the date of their acquisition.
Net (loss) income from operations
We incurred a net loss of approximately $381,000 from operations for the
year ended April 30, 2003, as compared to a net income of $11,000 for the period
ended April 30, 2002. We acquired Walker and Invisinet during the third quarter
of our fiscal year 2003 resulting in increase in selling, general and
administrative expenses.
14
Liquidity and capital resources
At April 30, 2003, we had working capital of approximately $1,435,000,
which consisted of current assets of approximately $3,264,000 and current
liabilities of $1,829,000. Current assets included $168,000 in cash, $2,805,000
in accounts receivable and costs and estimated earnings in excess of billings on
uncompleted contracts, $78,000 in inventories, $143,000 in prepaid expenses and
$70,000 in current portion of deferred tax assets. Current liabilities included
$1,494,000 in accounts payable, accrued expenses and billings in excess of costs
and estimated earnings on uncompleted contracts, $100,000 payable to an officer
of the Company, $58,000 payable to shareholders of the company, $23,000 in
current lease obligations and equipment loans payable, $24,000 in income taxes
payable and $129,000 in current portion of deferred tax liabilities.
We used approximately $965,000 in cash from operating activities during the
year ended April 30, 2003. This was mainly comprised of a $381,000 net operating
loss for the year ended April 30, 2003, offset by $153,000 in net non-cash
charges, a $676,000 net increase in accounts receivables, $10,000 increase in
costs and estimated earnings in excess of billings on uncompleted contracts,
$100,000 increase in prepaid expenses, offset by a $2,000 decrease in inventory,
$27,000 increase in accounts payable and billings in excess of costs and
estimated earnings on uncompleted contracts and $20,000 increase in income taxes
payable.
The Company's investing activities utilized approximately $165,000, which
consisted of $500,000 paid for the acquisition of Walker to its shareholders,
$54,000 paid as acquisition costs for acquiring Invisinet and Walker, offset by
approximately $178,000 received in cash on acquisition of these businesses. The
Company collected on a note receivable in connection with the acquisition of
Invisinet in the amount of $173,000. Additionally, $38,000 was received on
disposition of property and equipment, net of acquisitions.
The Company's financing activities generated cash of approximately
$1,282,000 during the year ended April 30, 2003. This was comprised of
$1,455,000 from proceeds of the sale of Series B and Series C Preferred Stock to
investors in a private placement, $3,000 of cash received from PSVI on reverse
acquisition, $100,000 received as a loan from an officer of the Company, offset
by repayment of $200,000 bank line of credit, $55,000 in repayment of notes
payable and principal on capital lease obligations and $21,000 due to a
stockholder.
Our capital requirements depend on numerous factors, including market for
our products and services, the resources we devote to developing, marketing,
selling and supporting our products and services, the timing and extent of
establishing additional markets and other factors. We expect that our cash and
income from operations will be sufficient to meet our working capital and
capital expenditure needs for at least the next 12 months. After that, we may
need to raise additional funds for a number of uses. We may not be able to
obtain additional funds on acceptable terms, or at all. We expect to devote
substantial capital resources to search for, investigate and, potentially,
acquire new businesses, companies or technologies. We acquired Invisinet and
Walker primarily by issuing the Company's common stock. The sale of additional
equity or convertible debt securities may result in additional dilution to our
shareholders.
On June 25, 2003, (and amended July 24, 2003), the Company offered in a
private placement memorandum, up to 100 units (the Units) for sale to accredited
investors at a price of $25,000 per Unit (the Offering). The Offering is on a
"best efforts" basis of a minimum offering of $1,000,000 and a maximum offering
of $2,500,000. Each Unit consists of (i) 44,444 shares of the Company's common
stock, and (ii) warrants to purchase 44,444 shares of common stock, exercisable
for a period of three years at an exercise price of $0.90 per share (the
Warrants). The Warrants may be redeemed in whole or in part
15
at the option of the Company, if the closing price of the Company's common stock
is at least $1.25 per share on average for 10 consecutive trading days, ending
not earlier than 30 days before the Warrants are called for redemption. In
connection with the offering, the placement agent was issued warrants to
purchase 665,000 shares of the Company's common stock, exercisable for a period
of three years at an exercise price of $0.75 per share. On July 22, 2003, we
received net proceeds of $898,000 from the Offering.
In June 2003, WPCS entered into a Letter of Intent to acquire Calyborn
Contracting Group, Inc.. Founded in 1988, Clayborn Contracting is a diversified
project services firm that operates primarily on the west coast. As a diverse
services engineering company, Clayborn Contracting has designed and installed
smart highway systems and substations for state and local municipalities in
California. In addition, Clayborn Contracting has performed structured cabling,
underground and utility work. The proposed terms of the acquisition include:
o the payment of $900,000 at closing;
o the issuance at closing of such number of shares of our common
stock as equals $1,000,000, based on the market price of the
stock at the time of closing; and
o $1,100,000, payable by the delivery to the Clayborn shareholders
of 50% of the post tax net income of Clayborn, payable on a
quarterly basis.
A definitive agreement with respect to acquisition has not been executed to
date and there can be no assurance that such acquisition will be completed on
the foregoing terms, or at all.
Critical Accounting Policies
Financial Reporting Release No. 60, published by the SEC, recommends that
all companies include a discussion of critical accounting policies used in the
preparation of their financial statements. The Company's significant accounting
policies are summarized in Note 2 of its consolidated financial statements.
While all these significant accounting policies impact its financial condition
and results of operations, the Company views certain of these policies as
critical. Policies determined to be critical are those policies that have the
most significant impact on the Company's consolidated financial statements and
require management to use a greater degree of judgment and estimates. Actual
results may differ from those estimates.
The Company believes that given current facts and circumstances, it is
unlikely that applying any other reasonable judgments or estimate methodologies
would cause a material effect on the Company's consolidated results of
operations, financial position or liquidity for the periods presented in this
report.
The accounting policies identified as critical are as follows:
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. The most significant estimates relate to estimation of percentage of
completion on uncompleted contracts, valuation of inventory, allowance for
doubtful accounts and estimated life of customer lists. Actual results could
differ from those estimates.
16
Accounts receivable
Accounts receivable are due within contractual payment terms and are stated
at amounts due from customers net of an allowance for doubtful accounts. Credit
is extended based on evaluation of a customer's financial condition. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes off accounts receivable when they become
uncollectible, and payment subsequently received on such receivables are
credited to the allowance for doubtful accounts.
Goodwill and other Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that their carrying value may not be recoverable from the
estimated future cash flows expected to result from their use and eventual
disposition. Our long-lived assets subject to this evaluation include property
and equipment and amortizable intangible assets. We assess the impairment of
goodwill annually in our fourth fiscal quarter and whenever events or changes in
circumstances indicate that it is more likely than not that an impairment loss
has been incurred. Intangible assets other than goodwill are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value may not be fully recoverable. We are required to make judgments
and assumptions in identifying those events or changes in circumstances that may
trigger impairment. Some of the factors we consider include:
o Significant decrease in the market value of an asset
o Significant changes in the extent or manner for which the asset
is being used or in its physical condition
o A significant change, delay or departure in our business strategy
related to the asset
o Significant negative changes in the business climate, industry or
economic conditions
o Current period operating losses or negative cash flow combined
with a history of similar losses or a forecast that indicates
continuing losses associated with the use of an asset
In view of the generally weak current economic climate, we are periodically
evaluating whether an impairment of our amortizable intangible assets and other
long-lived assets has occurred. Our evaluation includes an analysis of estimated
future undiscounted net cash flows expected to be generated by the assets over
their remaining estimated useful lives. If the estimated future undiscounted net
cash flows are insufficient to recover the carrying value of the assets over the
remaining estimated useful lives, we will record an impairment loss in the
amount by which the carrying value of the assets exceeds the fair value. We
determine fair value based on discounted cash flows using a discount rate
commensurate with the risk inherent in our current business model. If, as a
result of our analysis, we determine that our amortizable intangible assets or
other long-lived assets have been impaired, we will recognize an impairment loss
in the period in which the impairment is determined. Any such impairment charge
could be significant and could have a material adverse effect on our financial
position and results of operations. Major factors that influence our cash flow
analysis are our estimates for future revenue and expenses associated with the
use of the asset. Different estimates could have a significant impact on the
results of our evaluation.
We performed our annual review for goodwill impairment in the fourth
quarter of fiscal 2003 and tested for goodwill impairment in each reporting unit
that contains goodwill. Our tests found that no impairment existed. Our
impairment review is based on comparing the fair value to the carrying value of
17
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 our Invisinet business unit, which
are operating segments within our fixed wireless reportable segment, and our
Walker Comm structured cabling reporting unit, which is a reportable 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
Wireless sales
Revenue consists of the sale of wireless products and services associated
with their deployment. Product sales are recognized when installed and service
revenues are recognized when services are provided.
Contracts
The Company records profits on contracts on a percentage-of-completion
basis on the cost to cost method. Contracts in process are valued at cost plus
accrued profits less earned revenues and progress payments on uncompleted
contracts. Contracts are generally considered substantially complete when
engineering is completed and/or site construction is completed. The Company
includes pass-through revenue and costs on cost-plus contracts, which are
customer-reimbursable materials, equipment and subcontractor costs, when the
Company determines that it is responsible for the engineering specification,
procurement and management of such cost components on behalf of the customer.
The Company has numerous contracts that are in various stages of
completion. Such contracts require estimates to determine the appropriate cost
and revenue recognition. The Company has a history of making reasonably
dependable estimates of the extent of progress towards completion, contract
18
revenues and contract costs. However, current estimates may be revised as
additional information becomes available. If estimates of costs to complete
long-term contracts indicate a loss, provision is made currently for the total
loss anticipated. The elapsed time from award of a contract to completion of
performance may be up to two years.
Recently issued accounting pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations," which is effective for
years beginning after June 15, 2002. SFAS No. 143 addresses legal obligations
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. The standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. Any associated asset retirement
costs are to be capitalized as part of the carrying amount of the long-lived
asset and expensed over the life of the asset. The impact of the adoption of
SFAS No. 143 is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 clarifies accounting and
reporting for assets held for sale, scheduled for abandonment or other disposal,
and recognition of impairment loss related to the carrying value of long-lived
assets. The Company has adopted SFAS No. 144 for the year beginning May 1, 2002.
The adoption of SFAS 144 did not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No.146 nullifies Emerging Issues Task
Force Issue No. 94-3 and requires that a liability for a cost associated with
and exit or disposal activity be recognized when the liability is incurred. This
statement also establishes that fair value is the objective for initial
measurement of the liability. SFAS No.146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The impact of the
adoption of SFAS No. 146 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No.123." SFAS No.148 amends SFAS No.123,"Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No.25 and the related SFAS No. 123. The adoption of SFAS 148 did not
have a material effect on the Company's consolidated financial position, results
of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No.45, ("FIN No. 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No.45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN No. 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN No.45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of
19
5
interim or annual periods ending December 15, 2002. The adoption of the
disclosure requirements of FIN No. 45 did not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In January 2003, the FASB issued FASB Interpretation No.46 ("FIN No. 46")
"Consolidation of Variable Interest Entities." In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables real estate or
other property. A variable interest entity may be essentially passive or it may
engage in activities on behalf of another company. Until now, a company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN No.46 changes
that by requiring a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. FIN No. 46's consolidation requirements apply
immediately to variable interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year on interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company has
not adopted FIN No.46 for the year ended April 30, 2003. The Company does not
expect FIN 46 to have a material effect on its consolidated financial position,
results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of our first
quarter for fiscal 2004. The Company does not expect the adoption of this
statement to have a material impact on its consolidated financial position,
results of operations or cash flows.
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements that
reflect Management's current views with respect to future events and financial
performance. Those statements include statements regarding the intent, belief or
current expectations of the Company and members of its management team as well
as the assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission. Important factors currently known to
Management could cause actual results to differ materially from those in
forward-looking statements. The Company undertakes no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes in the future operating results over time.
The Company believes that its assumptions are based upon reasonable data derived
from and known about its business and operations and the business and operations
of the Company. No assurances are made that actual results of operations or the
results of the Company's future activities will not differ materially from its
assumptions.
20
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
INDEX TO FINANCIAL STATEMENTS
Page
Reports of Independent Public Accountants F-2 - F-3
Consolidated Balance Sheet as of April 30, 2003 F-4 - F-5
Consolidated Statements of Operations for the year
ended April 30, 2003 and for the period November 15, 2001 (date of inception) to April
30, 2002 F-6
Consolidated Statement of Shareholders' Equity for the year ended
April 30, 2003 and for the period November 15, 2001 (date of inception) to April 30,
2002 F-7
Consolidated Statements of Cash Flows for the year ended
April 30, 2003 and for the period November 15, 2001 (date of inception) to April 30,
2002 F-8 -F- 9
Notes to Consolidated Financial Statements F-10 - F- 29
The Board of Directors and Shareholders of
WPCS International Incorporated
We have audited the accompanying consolidated balance sheet of WPCS
International Incorporated and Subsidiaries as of April 30, 2003, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 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, 2003, and the consolidated results
of their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
/ s / J.H. COHN LLP
Roseland, New Jersey
August 13, 2003
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
WPCS Holdings, Inc.
I have audited the accompanying consolidated statement of operations, changes in
shareholders' equity and cash flows for the period November 15, 2001 (date of
inception) to April 30, 2002, of WPCS Holdings, Inc. These financial statements
are the responsibility of the Company's management. My responsibility is to
express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable basis for
my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
WPCS Holdings, Inc. for the year ended April 30, 2002, in conformity with
accounting principles generally accepted in the United States of America.
/S/ Leonard Friedman
East Meadow, New York
July 1, 2002
F-3
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED BALANCE SHEET
APRIL 30, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 167,547
Accounts receivable, net of allowance of $11,779 2,397,236
Costs and estimated earnings in excess of billings on
uncompleted contracts 408,194
Inventory 77,775
Prepaid expenses 143,113
Deferred tax assets 70,000
-------------
Total current assets 3,263,865
PROPERTY AND EQUIPMENT 647,951
CUSTOMER LISTS, net of accumulated
amortization of $41,000 499,000
GOODWILL 5,388,882
OTHER ASSETS 21,528
-------------
Totals $ 9,821,226
-------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED BALANCE SHEET
APRIL 30, 2003
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,278,443
Billings in excess of costs and estimated earnings on
uncompleted contracts 215,819
Current maturities of capital lease obligations 2,294
Current maturities of equipment loans payable 21,268
Note Payable, officer 100,000
Due to shareholders 58,207
Income taxes payable 23,700
Deferred income taxes, current portion 129,000
--------------
Total current liabilities 1,828,731
Capital lease obligations, net of current maturities 4,608
Deferred income taxes, net of current portion 527,000
--------------
Total Liabilities 2,360,339
--------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock - $0.0001 par value, 5,000,000 shares authorized
Series C Convertible Preferred Stock, 1,000 shares designated, 1,000 shares
issued and outstanding at April 30, 2003,
liquidation preference $1,000,000 -
Common Stock - $0.0001 par value,
30,000,000 shares authorized, 13,078,844 shares issued and outstanding
at April 30, 2003 1,308
Additional paid- in capital 8,002,639
Accumulated deficit (543,060)
--------------
Total shareholders' equity 7,460,887
--------------
Totals $ 9,821,226
==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period
November 15, 2001
Year Ended (date of inception) to
April 30, April 30,
2003 2002
---------------------- ----------------------
SALES $ 5,422,858 $ 402,289
COST OF SALES 3,768,495 267,032
---------------------- ----------------------
GROSS PROFIT 1,654,363 135,257
---------------------- ----------------------
OPERATING EXPENSES:
Selling expenses 27,741 4,857
General and administrative expenses 1,833,086 112,246
Provision for doubtful accounts 38,779 -
Depreciation and amortization 116,501 2,570
---------------------- ----------------------
Total 2,016,107 119,673
---------------------- ----------------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (361,744) 15,584
Provision for income taxes (19,550) (4,350)
---------------------- ----------------------
NET LOSS (INCOME) (381,294) 11,234
Imputed dividends accreted on
Convertible Series B Preferred stock (173,000) -
---------------------- ----------------------
NET (LOSS) INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ (554,294) $ 11,234
====================== ======================
Basic net (loss) income per common share $(0.05) $(0.00)
====================== ======================
Basic weighted average number of
common shares outstanding 10,376,685 5,500,000
====================== ======================
The accompanying notes are an integral part of these consolidated financial
statements
F-6
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED APRIL 30, 2003 AND FOR THE PERIOD NOVEMBER 15, 2001 (DATE OF INCEPTION) TO APRIL 30, 2002
ADDITIONAL TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ------- ------- ------- -----------
Issuance of common stock
(date of inception, November 15, 2001) - $ - 5,500,000 $550 $ 4,450 $ - $ 5,000
Net income - - - - - 11,234 11,234
--------- -------- ---------- -------- --------- --------- ---------
BALANCE APRIL 30, 2002 - - 5,500,000 550 4,450 11,234 16,234
Effects of reverse acquisition 250 1 1,025,632 103 (80,919) - (80,815)
Return and retirement of common stock in
connection with reverse acquisition - (500,000) (50) 50 - -
Sale of Series B Preferred stock sold
through private placement 455 - - - 455,000 - 455,000
Series B Preferred stock issued in
consideration for payment of advances from
stockholder and accounts payable 64 - - - 64,000 - 64,000
Conversion of Series A Preferred stock to
common stock (250) (1) 3,000,000 300 (299) - -
Imputed Series B Preferred stock dividend
attributable to beneficial conversion
feature - - - - 173,000 (173,000) -
Sale of Series C Preferred stock sold
through private placement 1,000 - - - 1,000,000 - 1,000,000
Issuance of common stock for
acquisition of Invisinet, Inc. - - 1,000,000 100 1,749,900 - 1,750,000
Issuance of common stock for
acquisition of Walker Comm, Inc. - - 2,486,000 249 4,574,000 - 4,574,249
Conversion of Series B Preferred stock to
common stock (519) - 567,212 56 (56) - -
Stock options granted to an officer in
connection with the acquisition of
Invisinet, Inc. 63,513 - 63,513
NET LOSS - - - - - (381,294) (381,294)
--------- -------- ---------- -------- --------- --------- -----------
BALANCE, APRIL 30, 2003 1,000 $ - 13,078,844 $ 1,308 $ 8,002,639 $(543,060) $7,460,887
========= ======== ========== ========= =========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period
November 15, 2001
Year Ended (date of inception) to
April 30, April 30,
2003 2002
------------- -------------
OPERATING ACTIVITIES:
Net (loss) income $ (381,294) $ 11,234
Adjustments to reconcile net loss
to net cash (used in) provided by operating activities:
Depreciation and amortization 116,501 2,570
Provision for doubtful accounts 38,779 -
Gain on disposition of fixed assets (2,085) -
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (676,341) (91,183)
Costs and estimated earnings in excess of billings
on uncompleted contracts (10,087) -
Inventory 2,428 (7,974)
Prepaid expenses (99,789) -
Other Assets (75) (2,242)
Accounts payable and accrued expenses 182,614 93,866
Billings in excess of costs and estimated earnings
on uncompleted contracts (155,539) -
Income taxes payable 19,550 5,403
------------- -------------
NET CASH (USED IN)/PROVIDED BY OPERATING
ACTIVITIES (965,338) 11,674
------------- -------------
INVESTING ACTIVITIES:
Proceeds from disposition of fixed assets 41,607 -
Acquisition of property and equipment (3,065) -
Proceeds from repayment of note receivable 172,514
Acquisition of businesses, net of cash acquired (375,993) -
------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (164,937) (20,895)
------------- -------------
FINANCING ACTIVITIES:
Cash received in reverse acquisition 3,257 -
Proceeds from advances from officers 100,000 20.743
Proceeds from sale of preferred stock 1,455,000 -
Proceeds from issuance of common stock - 5,000
Repayment of loans payable, shareholder (20,743)
Repayment of note payable, bank (200,000) -
Repayment of equipment loans payable (53,169) -
Repayments of capital lease obligations (2,077) (968)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,282,268 24,775
------------- -------------
F-8
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the period
November 15, 2001
Year Ended (date of inception) to
April 30, April 30,
2003 2002
NET INCREASE IN CASH AND CASH
EQUIVALENTS 151,993 15,554
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 15,554 -
============= =============
CASH AND CASH EQUIVALENTS, END OF
PERIOD $ 167,547 $15,554
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 8,131 $ 640
============ =============
Income taxes $ 1,380 $ 200
============ =============
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital lease $ 9,468 -
============
Issuance of 64 shares of Series B preferred stock
as payment of advances from shareholder and
accounts payable $ 64,000 -
============
Imputed Series B preferred stock dividend attributable
to a beneficial conversion feature $ 173,000 -
============
Issuance of common stock for net non-cash assets
received in acquisitions $ 6,324,249 -
============
Conversion of Series A Preferred stock into common
stock $ 300 -
============
Conversion of Series B Preferred stock into common stock $ 56 -
============
Stock options issued` relating to an acquisition $ 63,513
============
Earn-out consideration unpaid relating to an acquisition $ 58,207
============
The accompanying notes are an integral part of these consolidated financial statements
F-9
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
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
Acquisition Corp. (which changed its name to WPCS Incorporated) ("Subsidiary"),
Invisinet Inc. ("Invisinet") from November 13, 2002 (date of acquisition) and
Walker Comm Inc. ("Walker") from December 30, 2002 (date of acquisition),
collectively the "Company". For the period November 15, 2001 (date of inception)
to April 30, 2002, the statement of operations, shareholders' equity and cash
flows are that of WPCS Holdings, Inc. ("Holdings"), the accounting acquirer of
the business of Phoenix Star Ventures, Inc. ("PSVI") as explained below.
The Company is a project engineering company that focuses on the implementation
requirements of specialty communication systems, wireless fidelity ("WiFi")
deployment and fixed wireless deployment. It provides complete wireless
solutions including best of breed wireless products, engineering services and
deployment. The Company defines wireless deployment as the internal and external
design and installation of a fixed wireless solution to support voice/data/video
transmission between two or more points without the utilization of landline
infrastructure. The Company generates its revenues from product sales and
services. There are multiple products associated with the deployment of a fixed
wireless solution including radios, repeaters, amplifiers, antennas, cabling and
specialty components. There are also important services such as spectrum
analysis, site surveys, site design, tower construction, mounting and alignment.
WPCS is the successor-consolidated entity formed by the merger, on May 17, 2002,
of PSVI, Subsidiary, a newly formed, wholly owned subsidiary of PSVI and
Holdings, a Delaware corporation.
On May 17, 2002, PSVI a publicly held "shell company", became the legal acquirer
of Holdings by issuing 5,500,000 shares of its common stock to the shareholders
of Holdings in exchange for all of the outstanding common shares of Holdings.
The former shareholders of Holdings, immediately after the business combination,
owned the majority of the combined companies. Accordingly, the business
combination has been accounted for as a reverse acquisition, whereby, for
accounting purposes, Holdings is the accounting acquirer and PSVI is the
accounting acquiree. The consolidated financial statements of the Company
include the accounts of PSVI since its acquisition. The cost of the acquisition
approximated the fair value of the net assets of PSVI that were acquired, and
accordingly, assets, liabilities and the outstanding preferred stocks of PSVI
were initially recorded at historical carrying values.
On May 24, 2002, PSVI's principal shareholder returned 500,000 shares of its
common stock to the Company, without compensation. Subsequently, these common
shares were retired and cancelled.
On November 13, 2002, the Company acquired all of the outstanding shares of
Invisinet from its shareholders in exchange for an aggregate of 1,000,000 newly
issued shares of the Company's common stock. An additional 150,000 shares of the
Company's common stock were to be issued to a shareholder, provided Invisinet
achieved certain financial targets over a two year period beginning on the first
anniversary date of the merger. On May 27, 2003, the Company and the shareholder
mutually agreed to cancel the issuance of these shares and in exchange, issued
options to purchase 300,000 shares of the Company's common stock.
F-10
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION (continued)
On December 30, 2002, the Company acquired all of the outstanding shares of
Walker in exchange for an aggregate of 2,486,000 newly issued shares of the
Company's common stock and $500,000 cash consideration. An additional $500,000
is payable contingent upon Walker achieving certain net profits, to be paid in
quarterly distributions equal to 75% of net income, which would increase the
purchase price.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
Principles of consolidation
All significant intercompany transactions and balances have been eliminated in
these consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly-liquid investments with an
original maturity of three months or less.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
reduces credit risk by placing its temporary cash and investments with major
financial institutions with high credit ratings. At times, such amounts may
exceed Federally insured limits. The Company reduces credit risk related to
accounts receivable by routinely assessing the financial strength of its
customers and maintaining an appropriate allowance for doubtful accounts based
on its history of write-offs, current economic conditions and an evaluation of
the credit risk related to specific customers.
Accounts Receivable
Accounts receivable are due within contractual payment terms and are stated at
amounts due from customers net of an allowance for doubtful accounts. Credit is
extended based on evaluation of a customer's financial condition. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes off accounts receivable when they become
uncollectible, and payment subsequently received on such receivables are
credited to the allowance for doubtful accounts. Included in the accounts
receivable is retainage receivable of $106,995 which is expected to be collected
within one year.
F-11
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventory
Inventory consists of parts and supplies and is stated using the weighted
average cost method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided for, using straight-line methods, in amounts sufficient to relate the
cost of depreciable assets to operations over their estimated service lives.
Repairs and maintenance are charged to operations as incurred.
Goodwill
Effective May 1, 2002, the Company adopted Statement of Financial Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. In accordance with the
guidelines of this accounting standard, goodwill and indefinite-lived intangible
assets are no longer amortized but are assessed for impairment on at least an
annual basis. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment.
SFAS No. 142 requires that goodwill be tested for impairment upon adoption and
at least annually thereafter, utilizing a two-step methodology. The initial step
requires the Company to determine the fair value of the business acquired
(reporting unit)and compare it to the carrying value, including goodwill, of
such business (reporting unit). If the fair value exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying value of the
reporting unit exceeds its fair value, the goodwill of the unit may be impaired.
The amount, if any, of the impairment is then measured in the second step.
The Company completed the initial step of impairment testing which indicated
that no goodwill impairment existed as of April 30, 2003. The Company determined
the fair value of the businesses acquired for purposes of this test primarily by
using a discounted cash flow valuation technique. Significant estimates used in
the valuation include estimates of future cash flows, both future short-term and
long-term growth rates, and estimated cost of capital for purposes of arriving
at a discount factor. Based on comparing this discounted cash flow model to the
carrying value of the reporting units, no impairment was recognized in the
consolidated statement of operations for the year ended April 30, 2003. On an
ongoing basis, the Company expects to perform its annual impairment test during
the fourth quarter absent any interim impairment indicators.
F-12
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue recognition
Wireless sales
Revenue consists of the sale of wireless products and services associated with
their deployment. Product sales are recognized when installed and service
revenues are recognized when services are provided.
Contracts
The Company records profits on contracts on a percentage-of-completion basis on
the cost to cost method. Contracts in process are valued at cost plus accrued
profits less earned revenues and progress payments on uncompleted contracts.
Contracts are generally considered substantially complete when engineering is
completed and/or site construction is completed. The Company includes in
operations pass-through revenue and costs on cost-plus contracts, which are
customer-reimbursable materials, equipment and subcontractor costs, when the
Company determines that it is responsible for the engineering specification,
procurement and management of such cost components on behalf of the customer.
The Company has numerous contracts that are in various stages of completion.
Such contracts require estimates to determine the appropriate cost and revenue
recognition. The Company has a history of making reasonably dependable estimates
of the extent of progress towards completion, contract revenues and contract
costs. However, current estimates may be revised as additional information
becomes available. If estimates of costs to complete long-term contracts
indicate a loss, provision is made currently for the total loss anticipated. The
elapsed time from award of a contract to completion of performance may be up to
two years.
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.
F-13
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (loss) Per Share
Earnings (Loss) per common share is computed pursuant to SFAS No. 128, "Earnings
Per Share" ("EPS"). Basic income (loss) per share is computed as net income
(loss) available to common shareholders divided by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common stock issuable through stock options,
restrictive stock awards, warrants and other convertible securities. At April
30, 2003, the Company had 1,000 shares of Series C Convertible Preferred Stock
with potential conversion into 1,786,000 common shares of the Company as
described in NOTE 12 and 77,000 stock options grants outstanding. Diluted EPS is
not presented since the effect of the assumed exercise of options and the
assumed conversion of the Series C convertible preferred stock would be
antidilitive. At April 30, 2002, no potentially dilutive securities were
outstanding.
Stock-Based Compensation Plans
The Company maintains a stock option plan, as more fully described in Note 11 to
the consolidated financial statements, which is accounted for using the
"intrinsic value" method pursuant to the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, and, accordingly, when the exercise price of an employee stock
option granted by the Company is equal to or greater than the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. Therefore, the Company has elected the disclosure only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation."
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. The most significant estimates relate to the calculation of percentage
of completion on uncompleted contracts, allowance for doubtful accounts,
valuation of inventory and life of customer lists. Actual results could differ
from those estimates.
Recently issued accounting pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which is effective for years
beginning after June 15, 2002. SFAS No. 143 addresses legal obligations
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. The standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. Any associated asset retirement
costs are to be capitalized as part of the carrying amount of the long-lived
asset and expensed over the life of the asset. The impact of the adoption of
SFAS No. 143 is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
F-14
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently issued accounting pronouncements (continued)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 clarifies accounting and reporting for
assets held for sale, scheduled for abandonment or other disposal, and
recognition of impairment loss related to the carrying value of long-lived
assets. The Company has adopted SFAS No. 144 for the year beginning May 1, 2002.
The adoption of SFAS 144 did not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No.146 nullifies Emerging Issues Task Force
Issue No. 94-3 and requires that a liability for a cost associated with and exit
or disposal activity be recognized when the liability is incurred. This
statement also establishes that fair value is the objective for initial
measurement of the liability. SFAS No.146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The impact of the
adoption of SFAS No. 146 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No.123." SFAS No.148 amends SFAS No.123,"Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock- based
employee compensation. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No.25 for the year ending April 30, 2003. The adoption of SFAS 148 did
not have a material effect on the Company's consolidated financial position,
results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No.45, ("FIN No. 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No.45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN No. 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN No.45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending December 15, 2002. The
adoption of the disclosure requirements of FIN No. 45 did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
F-15
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently issued accounting pronouncements (continued)
In January 2003, the FASB issued FASB Interpretation No.46 ("FIN No. 46")
"Consolidation of Variable Interest Entities." In general, a variable interest
entity is a corporation, partnership, trust, or any other legalstructure used
for business purposes that either (a) does not have equity investors with voting
rights or (b)has equity investors that do not provide sufficient financial
resources for the entity to support its activities.A variable interest entity
often holds financial assets, including loans or receivables real estate or
other property. A variable interest entity may be essentially passive or it may
engage in activities on behalf of another company. Until now, a company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN No.46 changes
that by requiring a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. FIN No. 46's consolidation requirements apply
immediately to variable interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year on interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company has
not adopted FIN No.46 for the year ended April 30, 2003. The Company does not
expect FIN 46 to have a material effect on its consolidated financial position,
results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of our first
quarter for fiscal 2004. The Company does not expect the adoption of this
statement to have a material impact on its consolidated financial position,
results of operations or cash flows.
NOTE 3 - ACQUISITIONS
Invisinet, Inc.
On November 13, 2002, the Company, through its newly formed, wholly-owned
subsidiary, acquired all of the outstanding shares of Invisinet. Subsequently on
that date, the subsidiary was merged with and into Invisinet, with Invisinet
being the surviving corporation. Invisinet then became a wholly owned subsidiary
of WPCS.
The acquisition of Invisinet broadens the Company's customer base and expands
its technical resources. WPCS concentrates its business in fixed wireless
solutions, whereas Invisinet offers wireless fidelity (WiFi) deployment to its
customers.
F-16
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (continued)
Invisinet (continued)
The aggregate consideration paid by WPCS for Invisinet was approximately
$1,828,000. As a result of and at the effective time of the merger, all of the
issued and outstanding shares of common stock of Invisinet were exchanged for
aggregate merger consideration consisting of 1,000,000 shares of common stock of
WPCS with a value of approximately $1,750,000, based on $1.75 per share, the
average stock price a few days before after the announcement of the merger, and
an additional $15,000 in acquisition costs.
In addition, as an inducement to enter into the merger agreement, the Company
agreed to issue a shareholder of Invisinet, who is also the Executive Vice
President of the Company, up to 150,000 shares of the Company's common stock,
provided Invisinet achieved certain financial targets over a two year period
beginning on the first anniversary date of the merger. On May 27, 2003, the
Company and the shareholder mutually agreed to cancel the issuance of these
shares and in exchange, issued options to purchase 300,000 shares of the
Company's common stock at an exercise price of $0.45 per share expiring in May
2008. These options were valued at $63,513 and accordingly, the Company
increased goodwill and additional paid-in capital for the same amount at April
30, 2003.
The acquisition of Invisinet was accounted for under the purchase method of
accounting in accordance with SFAS No. 141, "Business Combinations". Under the
purchase method of accounting, assets acquired and liabilities assumed are
recorded at their estimated fair values. Goodwill and (or) other intangible
assets are recorded to the extent that the merger consideration, including
certain acquisition and closing costs, exceeds the fair value of the net
identifiable assets acquired at the date of the merger.
The Company obtained an independent valuation of certain assets including its
property and equipment, list of major customers, and internally determined the
fair value of its other assets and liabilities. The initial purchase price
allocation has been adjusted as a result of the independent valuation report
with customer lists being valued at $150,000 resulting in a decrease in goodwill
by that amount. Accordingly a deferred tax liability of $54,000 was recorded
since the amortization of the customer list is not available as a tax deduction
to the Company. The aggregate changes resulted in goodwill being decreased to
$1,627,044 as of the acquisition date.
F-17
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (continued)
Invisinet (continued)
The purchase price allocation has been calculated as follows:
Assets purchased
Cash $ 132,672
Accounts receivable 111,815
Note receivable 172,514
Inventory 5,228
Fixed assets 3,760
Other assets 1,445
Customer list 150,000
Goodwill 1,627,044
------------
2,204,478
Liabilities assumed
Accounts payable (321,965)
Deferred tax liability (54,000)
------------
(375,965)
Purchase price $ 1,828,513
============
Customer lists are being amortized over a period of 5 years. The Company
recorded amortization expense of $15,000 for the year ended April 30, 2003. Any
future goodwill impairments are not deductible for income tax purposes.
Walker Comm, Inc.
On December 30, 2002, the Company, through its newly formed, wholly-owned
subsidiary, acquired all of the outstanding common stock of Walker. Subsequently
on that date, the subsidiary was merged with and into Walker, with Walker being
the surviving corporation. Walker then became a wholly-owned subsidiary of WPCS.
The acquisition of Walker gives the Company the ability to provide both
structured cabling and wireless solutions to its customers along with
strengthening its project management capabilities.
The aggregate consideration paid by WPCS for Walker was $5,171,455 subject to
further adjustment as explained below. As a result of and at the effective time
of the merger, all of the outstanding shares of common stock, par value $1.00
per share, of Walker were exchanged for aggregate merger consideration
consisting of $500,000 in cash and the common stock of WPCS with a value of
$4,574,248, or 2,486,000 shares valued at $1.84 per share based on an average
price a few days before and after the merger was announced and acquisition costs
of $39,000. An additional $500,000 is payable, provided Walker achieves certain
net profits, to be paid in quarterly distributions equal to 75% of net income.
At April 30, 2003, $58,207 was payable to the Walker shareholders against this
earn-out provision. Accordingly, the goodwill was increased by $58,207.
F-18
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (continued)
Walker Comm (continued)
The acquisition of Walker was accounted for under the purchase method of
accounting in accordance with Statement of Financial Accounting Standards No.
141, Business Combinations ("SFAS 141"). Under the purchase method of
accounting, assets acquired and liabilities assumed are recorded at their
estimated fair values. Goodwill and (or) other intangible assets are recorded to
the extent that the merger consideration, including certain acquisition and
closing costs, exceeds the fair value of the net identifiable assets acquired at
the date of the merger.
The Company obtained an independent valuation of certain assets including
property and equipment, inventory, list of major customers, contract backlog and
internally determined the fair value of its other assets and liabilities. The
initial purchase price allocation has been adjusted as a result of the
independent valuation report relating to inventory, property and equipment and
list of major customers. As a result of the changes in purchase price
allocation, property and equipment has increased by $292,734, inventory has
increased by $67,000, and customer lists by $390,000 resulting in a decrease in
goodwill of $749,734. Accordingly, a deferred tax liability of $299,000 was
recorded since depreciation and amortization on the step up in the basis of
these assets are not deductible for income tax purposes. In addition, the
Company has recorded a deferred tax asset of $70,000 for future tax deductible
items. Additionally, Walker, which prior to the acquisition, used the cash basis
of accounting for income taxes, changed its tax accounting method to accrual
basis starting from the date of acquisition, thus resulting in a deferred tax
liability of $303,000. The Company recorded these deferred tax assets and
liabilities and increased the goodwill by a net amount of $532,000. The
aggregate changes resulted in goodwill being decreased to $3,761,838 as of the
acquisition date.
The purchase price allocation has been calculated as follows:
Assets purchased
Cash $ 45,335
Accounts receivable 1,556,677
Costs and estimated earnings in excess of billings on
uncompleted contracts 398,107
Inventory 67,000
Fixed assets 727,876
Other assets 61,090
Customer lists 390,000
Deferred tax asset 70,000
Goodwill 3,761,838
-----------
7,077,923
F-19
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (continued)
Walker Comm (continued)
Liabilities assumed
Accounts payable (658,673)
Note payable - Bank (200,000)
Billings in excess of costs and estimated earnings on
uncompleted contracts (371,358)
Equipment loans payable (74,437)
Deferred income taxes (602,000)
---------------
(1,906,468)
Purchase price $ 5,171,455
===============
Based on the independent valuation report, customer lists are being amortized
over a period of 5 years. The Company recorded amortization expense of $26,000
for the year ended April 30, 2003. Any future goodwill impairments are not
deductible for income tax purposes.
The following unaudited pro forma financial information presents the combined
results of operations of WPCS, Invisinet and Walker, as if the acquisitions had
occurred as of May 1, 2002, after giving effect to certain adjustments,
including the issuance of WPCS common stock as part of the purchase price. Pro
forma financial information for the year ended April 30, 2002 has not been
presented as its presentation will produce distorting results since WPCS started
operations on November 15, 2001. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had WPCS,
Invisinet and Walker been a single entity during such periods.
Year ended April 30, 2003:
Revenues $ 10,680,000
Net loss attributable to common shareholders $ (1,760,000)
Weighted-average number of shares used in calculation of basic
loss per share 12,571,474
Basic loss per share $(0.14)
F-20
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the following:
at April 30, 2003
Costs incurred on uncompleted contracts $ 4,077,019
Estimated contract profit 937,464
------------
5,014,483
Less: billings to date 4,822,108
------------
$ 192,375
============
Costs and estimated earnings in excess of billings $ 408,194
Billings in excess of costs and estimated earnings
on uncompleted contracts (215,819)
-------------
$ 192,375
=============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at April 30, 2003:
Estimated Amount
useful life
(years)
Furniture and fixtures 5 - 7 $ 33,606
Automobiles 5 - 7 303,568
Machinery and equipment 5 193,860
Leasehold improvements 3 - 10 167,190
----------
698,224
Less accumulated depreciation and amortization 50,273
----------
$ 647,951
==========
Depreciation expense for property and equipment for the year ended April 30,
2003 and for the period ended April 30, 2002 was approximately $75,500 and
$2,600, respectively.
Property and equipment under capital leases totaled approximately $10,000 and
accumulated depreciation on such property and equipment aggregated approximately
$2,800 at April 30, 2003.
F-21
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LINE OF CREDIT
The Company had a $200,000 line of credit with a bank, which matured on March
26, 2003. The line of credit provided for an interest rate of 3.4% and was
collateralized by a $200,000 certificate of deposit, At the maturity date, the
loan was paid back by the certificate of deposit.
NOTE 7- DUE TO OFFICER
The Company owes $100,000 to an officer. This loan bears interest at 5.75% and
is due on or before February 12, 2004.
NOTE 8 - RELATED PARTY TRANSACTIONS
In connection with the acquisition of Walker, the Company assumed a ten-year
lease with trusts, of which, certain officers of the Company are the trustees,
for a building and land located in Fairfield, California, which is occupied by
its Walker subsidiary. The lease requires for initial monthly rental payments of
$6,934, with annual increases, calculated using the San Francisco-Oakland-San
Jose Consolidated Metropolitan Statistical Area Consumer Price Index. For the
period December 30, 2002 (date of acquisition) through April 30, 2003, $29,000
was paid as rent for this lease.
NOTE 9 - RETIREMENT PLANS
Walker participates in an employee savings plan under Section 401(k) of the
Internal Revenue Code pursuant to which eligible employees may elect to defer a
portion of their annual salary by contributing to the plan. Contributions by
Walker are made at the discretion of the Board of Directors. There were no
contributions made for the year ended April 30, 2003 and none for 2002, since
Walker's results of operations are not included in these financial statements.
The Company also contributes to multi-employer pension plans which provide
benefits to union employees covered by collective bargaining agreements. General
and administrative expenses include approximately $239,000 for such costs and
none for 2002, since Walker's results of operations are not included in these
financial statements.
NOTE 10 - INCOME TAXES
The provision or income taxes for the year ended at April 30, 2003 and
period ended April 30, 2002 is summarized as follows:
2003 2002
Current ---------- ----------
Federal $ - $ -
State 19,550 4,350
Deferred
Federal - -
State - -
---------- ----------
Totals $ 19,550 $ 4,350
========== ==========
F-22
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (continued)
The actual provisions for income taxes reflected in the consolidated statements
of operations for the year ended April 30, 2003 differ from the amounts computed
at the federal statutory tax rates. The principal differences between the
statutory income tax expense and the effective provision for income taxes are
summarized as follows:
2003 2002
--------------- ---------------
Expected tax benefit at statutory rate (34%) $ (122,000) $ -
State and local taxes, net of federal tax benefit 19,550 4350
Increase in valuation allowances for net operating losses 122,000 -
--------------- ---------------
Totals $ 19,550 $ 4350
=============== ===============
The tax effects of temporary differences which give rise to deferred tax assets
and liabilities at April 30, 2003 is summarized as follows:
Net operating loss carryforward 54,000
Deferred tax assets
Allowance for doubtful accounts $ 26,000
Federal benefit of deferred state tax liabilities 44,000
Valuation allowance (54,000)
----------
Net deferred tax assets - current 70,000
----------
Deferred tax liabilities
Sec 481(a) adjustment for cash to accrual basis of accounting
- current (100,000)
- long term (201,000)
Non-deductible amortization of purchase price
Inventory - current (29,000)
Fixed assets- long term
(111,000)
(215,000)
Customer lists- long term
Total (656,000)
----------
Net deferred tax liabilities $(586,000)
==========
F-23
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (continued)
The Company has net operating loss carryforwards for Federal tax purposes
approximating $72,000, expiring through 2023. The Company has net operating loss
carryforward for State tax purposes approximating $328,000 expiring through
2010. Due to the uncertainty of recognizing a tax benefit on these losses, the
Company has provided a valuation allowance against these deferred tax assets.
NOTE 11 - STOCK OPTION PLAN
The Company established a nonqualified stock option plan pursuant to which
options to acquire a maximum of 5,000,000 shares of the Company's common stock
were reserved for grant (the "2002 Plan"). Under the terms of the 2002 Plan, the
options, which expire five years after grant, are exercisable at prices equal to
the fair market value of the stock at the date of the grant and become
exercisable in accordance with terms established at the time of the grant. At
April 30, 2003, there were 4,923,000 shares available for grant under the 2002
Plan.
The following is a summary of activity with respect to stock options granted
under the 2002 Plan:
Weighted-average
Shares Price per share price per share
----------------- ----------------- -----------------
May 1, 2002 - - -
Granted 77,000 $1.35 to $1.66 $1.45
-----------------
Balance outstanding at April 30, 2003 77,000
=================
The following table summarizes the stock options outstanding and exercisable at
April 30, 2003:
Options outstanding Options exercisable
Weighted-
average
Shares remaining Exercise
Exercise Prices Under option life in years Shares price
--------------- ------------- ------------- -------- -------
$1.35 50,000 4.42 4,166 $1.35
$1.37 2,000 4.58 500 $1.37
$1.66 25,000 4.92 6,250 $1.66
---------- ----------
Total 77,000 10,916
---------- ---------
The weighted-average fair value on the grant date was $0.87 for options granted
during the year ended April 30, 2003. Prior to May 1, 2002, the company granted
no options.
F-24
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLAN (continued)
The Company applies the intrinsic value method in accounting for its stock-based
compensation plan. Had the Company measured compensation under the fair value
based method for stock options granted, the Company's net loss attributable to
common shareholders and net loss per share attributable to common shareholders
for the year ended April 30, 2003 would have been as follows:
Net loss attributable to common shareholders
As reported $ (554,294)
Pro forma $ (564,286)
Net loss per share attributable to common shareholders
As reported $ (0.05)
Pro forma $ (0.05)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes Option pricing model with the following assumptions for fiscal
2003: Risk-free interest rate of 2%, dividend yield of 0%, expected life of 5
years and volatility of 71.6%.
NOTE 12 - SHAREHOLDERS' EQUITY
Preferred Stock
Series B Convertible Preferred Stock
On May 15, 2002, the Board of Directors of the Company adopted and created a
series of preferred stock consisting of 1,000 shares designated as Series B
Convertible Preferred Stock ("Series B Preferred Stock"). Each share of Series B
Preferred Stock has a liquidation preference of $1,000 and does not accrue any
dividends. The Series B Preferred Stock is convertible into the Company's common
stock, at the option of the holder, at any time after the 30th calendar day the
Company receives payment in full. Each share of preferred stock is convertible
at a basis of $1,000 per share at a conversion price equal to 75% of the average
market price of the common stock for ten days prior to the date of conversion.
Among other provisions, the number of shares issuable upon conversion may not be
less than 1,000 shares or greater than 4,000 shares of common stock.
Between May 24, 2002 and June 11, 2002, the Company sold 455 shares of Series B
Preferred Stock through a private placement and received proceeds of $455,000.
Additionally, the Company issued 64 shares to a shareholder of the Company as
payment for advances from shareholder and accounts payable totaling $64,000.
Based on the conversion price of 75% of market value, the Company recorded a
beneficial conversion feature of $173,000 for the 519 Series B Preferred Stock
issued as an imputed preferred stock dividend.
F-25
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SHAREHOLDERS' EQUITY (continued)
Preferred Stock (continued)
On December 13, 2002, all Series B Preferred Stock was converted to 567,212
shares of the Company's common stock.
Series C Convertible Preferred Stock
On November 10, 2002, the Board of Directors of the Company adopted and created
a series of preferred stock consisting of 1,000 shares designated as Series C
Convertible Preferred Stock (" Series C Preferred Stock"). The Series C
Preferred Stock is convertible into the Company's common stock, at the option of
the holder, at any time after the day the Company receives payment in full. Each
share of Series C Preferred Stock is convertible into 800 shares of the
Company's common stock. Each share of Series C Preferred Stock has a liquidation
preference of $1,000 and does not accrue any dividends.
In addition, the Company may repurchase the outstanding Series C Preferred Stock
within one year following the date on which the Company issues and receives
payment in full, at a price of $1,200 per share.
On December 6, 2002, the Company issued 1,000 shares of Series C Preferred Stock
in a private placement and received proceeds of $1,000,000. At April 30, 2003,
the Company has not repurchased any of this Series C Preferred Stock.
As an inducement for the subscribers to purchase the Series C Preferred Stock, a
majority shareholder who is the Company's Chairman and Chief Executive Officer
agreed to: (1) refrain from selling any of the Company's common stock held by
him until November 13, 2003, and (2) to return to treasury up to 2,690,000
shares of the Company's common stock held by him if certain financial covenants
were not by the Company for the fiscal year ended April 30, 2003. The Company
complied with all such financial covenants at April 30, 2003 and none of the
shares were returned to treasury.
In the event the Company issues shares of its common stock during the two
calendar years following the Issuance Date in a private placement for cash
consideration of less than $1.25 per share, each share of Series C Preferred
Stock is convertible into the number of shares of common stock equal to $1,000
divided by the price per share at which the Company issued common stock in the
private placement. On June 25, 2003, as described in Note 15, the Company
offered shares of its common stock in a private palcement at $.56 per share.
Accordingly, the series C Preferred stock is convertible into 1,786,000 common
shares of the Company.
Common Stock
On December 1, 2001, the Company issued 5,500,000 common shares to its sole
shareholder and received proceeds of $5,000.
On May 23, 2002, all of the 250 shares of Series A preferred stock, which had
been issued by PSVI prior to the reverse acquisition, were converted into
3,000,000 shares of the Company's common stock.
F-26
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SEGMENT REPORTING
The Company's reportable segments are determined based upon the nature of the
products, the external customers and customer industries and the sales and
distribution methods used to market the products.
The Company has two reportable segments: WPCS and Walker. WPCS includes WPCS
Incorporated and Invisinet, which provides wireless solutions. Walker is in the
business of structured cabling.
The Company evaluates performance based upon profit or loss from operations.
Segment reporting commenced after the Company acquired Walker in December 2002.
Prior to that date, the Company operated as only one segment.
For the year ended April 30, 2003, results are presented as segments for its
Invisinet and Walker subsidiaries from the date of their acquisition by the
Company during November 2002 and December 2002, respectively.
CORPORATE WPCS WALKER Total
-------------------- -------------------- -------------------- --------------------
For the year ended April 30, 2003
Revenue $ - $ 1,850,300 $ 3,572,558 $ 5,422,858
Net (loss) income before income taxes $ (223,211) $ (61,815) (77,348) (361,744)
Goodwill $ 1,627,044 $ 3,761,838 $ 5,388,882
Total assets $ 136,963 $ 2,753,206 $ 6,931,057 $ 9,821,226
Depreciation and amortization $ - $ 21,543 $ 94,958 $ 116,501
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
On August 2, 2002, the Company entered into a three-year employment contract
with a shareholder who is the Chairman and Chief Executive Officer of the
Company. Upon each one year anniversary of the agreement, the agreement will
automatically renew for another three years from the anniversary date. The base
salary under the agreement is $150,000 per annum plus benefits.
F-27
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES (continued)
Employment Agreements (continued)
On November 13, 2002, the Company entered into a two-year employment contract
with an option to renew for an additional year, with the President of Invisinet,
who is also an Executive Vice President of the Company. The base salary under
the agreement is $120,000 per annum, plus benefits.
On December 30, 2002, the Company entered into a four-year employment contract
with an option to renew for an additional year, with the President of Walker,
who is also an Executive Vice President of the Company. The base salary under
the agreement is $140,000 per annum, plus benefits.
On December 30, 2002, the Company entered into a four-year employment contract
with an option to renew for an additional year, with the Chief Operating Officer
of Walker, who is also a Director of the Company. The base salary under the
agreement is $140,000 per annum, plus benefits.
On July 15, 2003, the Company entered into a three-year employment agreement
with the Chief Financial Officer of the Company. The base salary under the
agreement is $120,000, per annum, plus benefits.
Litigation
The Company from time to time is subject to certain legal proceedings and claims
which have arisen in the ordinary course of its business. These actions when
ultimately concluded will not, in the opinion of management, have a material
adverse effect upon the financial position, results of operations or cash flows
of the Company.
Lease Commitments
The Company leases its office (see Note 8) facilities pursuant to non-cancelable
operating leases expiring through February 2011. The minimum rental commitments
under these non-cancelable leases, at April 30, 2003 are summarized as follows:
Year ending April 30,
2004 $ 154,000
2005 107,000
2006 94,000
2007 97,000
2008 100,000
Thereafter 299,000
------------
Total minimum lease payments $ 851,000
=============
Rent expense for all operating leases was approximately $100,000 and $10,000 in
2003 and 2002, respectively.
F-28
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - SUBSEQUENT EVENTS
On May 1, 2003 and May 27, 2003, the Company granted options to purchase
1,350,000 shares of its common stock to certain consultants. The options have
exercise prices ranging from $0.45 to $1.50. Of this, 50,000 options expire on
May 1, 2005 and the remaining 1,300,000 options expire on May 27, 2004. The
Company has valued these options at approximately $129,000 and will charge the
general and administrative expenses for the year ended April 30, 2004.
On June 24, 2003, the Company announced that it had entered into a letter of
intent to acquire Clayborn Contracting Group in a cash and stock transaction
valued at approximately $3 million. The proposed terms of the acquisition
include:
o the payment of $900,000 at closing;
o the issuance at closing of such number of shares of our common
stock as equals $1,000,000, based on the market price of the
stock at the time of closing; and
o $1,100,000, payable by the delivery to the Clayborn shareholders
of 50% of the post tax net income of Clayborn, payable on a
quarterly basis.
A definitive agreement with respect to acquisition has not been executed to date
and there can be no assurance that such acquisition will be completed on the
foregoing terms, or at all. The aquistion of Clayborn will
provide the Company additional wireless opportunities, expansion of it's
customer base, and accesss to addtional project engineers.
On June 25, 2003, (and amended July 24, 2003), the Company offered in a private
placement, up to 100 units (the Units) for sale to accredited investors at a
price of $25,000 per Unit (the Offering). The Offering is on a "best efforts"
basis of a minimum offering of $1,000,000 and a maximum offering of $2,500,000.
Each Unit consists of (i) 44,444 shares of the Company's common stock, and (ii)
warrants to purchase 44,444 shares of common stock, exercisable for a period of
three years at an exercise price of $0.90 per share (the Warrants). The Warrants
may be redeemed in whole or in part at the option of the Company, if the closing
price of the Company's common stock is at least $1.25 per share on average for
10 consecutive trading days, ending not earlier than 30 days before the Warrants
are called for redemption. In connection with the offering, the placement agent
was issued warrants to purchases 665,000 shares of the Company's common stock,
exercisable for a period of three years, at an exercise price of $0.75 per
share. As of July 31, 2003, the Company sold 40 units and received proceeds of
$898,000, net of offering expenses agents commission from the Offering.
On August 13, 2003, all 1000 Series C Preferred shares were converted into
1,786,000 shares of the Company's common stock.
F-29
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
WPCS dismissed its independent public accountant, Leonard Friedman,
effective as of August 19, 2002. WPCS's Board of Directors approved such
decision. Leonard Friedman's report for the period November 15, 2001 (date of
inception) to April 30, 2002, did not contain any adverse opinion or disclaimer
of opinion, nor was it qualified or modified as to uncertainty, audit scope or
accounting principles. Furthermore, during such period from November 15,
2001(date of incorporation) through April 30, 2002, and the subsequent interim
period preceding August 19, 2002, there were no disagreements with Leonard
Friedman within the meaning of Instruction 4 to Item 304 of Regulation S-B under
the Securities Exchange Act of 1934 on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Leonard Friedman, would
have caused him to make reference in connection with his opinion to the subject
matter of the disagreement in connection with any report he might have issued.
On August 19, 2002, the Company, dismissed N.I. Cameron, Inc., Chartered
Accountants ("N.I. Cameron"), as the Company's independent public accountants,
effective as of that date. The Company's Board of Directors approved such
decision.
N.I. Cameron's opinion in its reports on the Company's financial statements
for the years ended April 30, 2001 and April 30, 2002 (prior to the Company's
merger with WPCS Holdings, Inc.), each expressed substantial doubt with respect
to the Company's ability, at that time, to continue as a going concern. During
the year ended April 30, 2002, and the period from June 9, 1999 (date of
incorporation) to April 30, 2001, N.I. Cameron did not issue any other report on
the financial statements of the Company which contained any adverse opinion or
disclaimer of opinion, or was qualified or modified as to uncertainty, audit
scope or accounting principles. Furthermore, during such period from June 9,
1999 (date of incorporation) through April 30, 2002, and the subsequent interim
period preceding August 19, 2002, there were no disagreements with N.I. Cameron
within the meaning of Instruction 4 to Item 304 of Regulation S-B under the
Securities Exchange Act of 1934 on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of N.I. Cameron, would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement in connection with any report they might have issued.
On August 19, 2002, the Company and WPCS engaged J.H. Cohn LLP, as their
independent public accountants. Neither the Company nor WPCS previously
consulted with J.H. Cohn regarding any matter, including but not limited to:
o the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial
statements; or
o any matter that was either the subject matter of a disagreement
(as defined in Item 304(a)(1)(iv) of Regulation S-B and the
related instructions) or a reportable event (as defined in Item
304(a)(1)(v) of Regulation S-B).
21
ITEM 9 - DIRECTORS AND OFFICERS OF THE REGISTRANT
The following persons are our executive officers and directors as of
the date hereof:
NAME AGE OFFICES HELD
- ---- --- ------------
Andrew Hidalgo 47 Chairman, Chief Executive Officer and Director
Donald Walker 40 Executive Vice President
E.J. von Schaumburg 36 Executive Vice President
Joseph Heater 40 Chief Financial Officer
Norm Dumbroff 42 Director
Neil Hebenton 47 Director
Gary Walker 48 Director
William Whitehead 47 Director
Andrew Hidalgo, Chairman and Chief Executive Officer
Mr. Hidalgo became Chairman of the Board and Chief Executive Officer of the
Company in June 2002. He is responsible for the Company's operations and
direction. From September 2000 until June 2002, Mr. Hidalgo was President of
Wireless Professional Communication Services, Inc. From November 1999 to
September 2000, Mr. Hidalgo was Chairman and Chief Executive Officer of CommSpan
Incorporated. From December 1997 to September 1999, Mr. Hidalgo was Senior Vice
President at Applied Digital Solutions, a communications infrastructure company,
where he was responsible for implementing a strategic direction involving
acquisitions, business integration and sales development while managing overall
operations for the company's five core business divisions and 25 subsidiary
companies. Prior to that, Mr. Hidalgo held various positions in operations,
sales and marketing with the 3M Company, Schlumberger and General Electric. He
attended Fairfield University in Fairfield, Connecticut where he majored in
Marketing and Finance.
Donald Walker, Executive Vice President
Mr. Walker has been Executive Vice President, Project Services Division
since December 2002. Mr. Walker was the founder of Walker Comm, Inc. and its
Chief Executive Officer from November 1996 until it's acquisition by WPCS in
December 2002. He has over twenty-one years of project management experience and
is a Registered Communications Distribution Designer (RCDD). In addition, Mr.
Walker is a committee member with the National Electrical Contractors
Association (NECA). Mr. Walker began his project engineer career at General
Dynamics where he developed his engineering skills while managing large projects
and coordinating technical staff.
E.J. von Schaumburg, Executive Vice President
Mr. von Schaumburg joined WPCS in November 2002. He is responsible for the
strategic development of WPCS including major accounts and corporate marketing.
From July 2000 until November 2002, Mr. Von Schaumburg was President of
Invisinet, Inc. He is a twelve-year veteran of the wireless industry and
founding member of the Wireless Ethernet Compatibility Alliance (WECA). From
Februaru 1989 until July 2000, Mr. von Schaumburg worked for eight years as a
Business Development Manager for AT&T and three years as a
22
divisional CFO for Lucent Technologies. Mr. von Schaumburg holds a B.S. in
Finance from St. Bonaventure University and an M.B.A. from Fairleigh Dickinson
University.
Joseph A. 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 and integration, and managed service
solutions. Prior to that, from March 1995 to November 1998, Mr. Heater was
Director of Financial Planning and Assistant Corporate Controller for Airgas,
Inc. ( NYSE: ARG). Mr. Heater holds a B.S. from the University of Nebraska and
an M.B.A. from Villanova University.
Directors:
Norm Dumbroff
Mr. Dumbroff became a Director of WPCS in 2002. He has been the Chief
Executive Officer of Wav Incorporated since April 1990, a distributor of
wireless products in North America. Prior to Wav Incorporated, Mr. Dumbroff was
an engineer for Hughes Aircraft. He holds a B.S. degree in Computer Science from
Albright College.
Neil Hebenton
Mr. Hebenton became a director of WPCS in October 2002. Since 1996, he has
been the Managing Director for the U.K. based FW Pharma Systems, a multi-million
dollar application software company serving the pharmaceutical and biotechnology
sectors. Mr. Hebenton has held a variety of operational, scientific and
marketing positions in Europe with Bull Information Systems (BULP-Paris,
Frankfurt, Zurich) and Phillips Information Systems. He received his B.S. in
Mathematics from the University of Edinburgh, Scotland.
Gary Walker
Mr. Walker has been a director of WPCS since December 2002. He is currently
the president of the Walker Comm subsidiary for WPCS International, a position
he has held since November 1996. Prior to his involvement at Walker Comm, Mr.
Walker had a distinguished career with the U.S. Navy and also held an elected
political position in Fairfield, California. He holds a B.A. in Business
Management from St. Mary's College in Moraga, California.
William Whitehead
Mr. Whitehead became a director of WPCS in October 2002. Since October
1998, he has been the Chief Financial Officer for Neutronis 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.
23
Board of Directors
All of our directors hold office until the next annual meeting of
stockholders and the election and qualification of their successors. Our
executive officers are elected annually by the Board of Directors to hold office
until the first meeting of the Board following the next annual meeting of
stockholders and until their successors are chosen and qualified.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation received by the
Company's Chief Executive Officer for the fiscal years ended April 30, 2003 and
2002. None of the former officers or current executive officers received
compensation in excess of $100,000 during such fiscal years.
--------------------------------------- ------------ --------------------
Name and Principal Position Fiscal Year Salary
--------------------------------------- ------------ --------------------
--------------------------------------- ------------ --------------------
Andrew Hidalgo 2003 $141,000
Chairman and Chief Executive Officer
--------------------------------------- ------------ --------------------
--------------------------------------- ------------ --------------------
Stephen C. Jackson 2002 $36,000
President, Secretary and Treasurer
--------------------------------------- ------------ --------------------
No other compensation was received by the above named officers during the fiscal
years ended April 30, 2003 and 2002, respectively.
EMPLOYMENT AGREEMENTS
Contract with Andrew Hidalgo
On August 2, 2002, the Company entered into a three-year employment contract
with a shareholder who is the Chairman and Chief Executive Officer of the
Company. Upon each one year anniversary of the agreement, the agreement will
automatically renew for another three years from the anniversary date. The base
salary under the agreement is $150,000 per annum plus benefits.
Contract with E.J. von Schaumburg
On November 13, 2002, the Company entered into a two-year employment contract
with an option to renew for an additional year, with the President of Invisinet,
who is also an Executive Vice President of the Company. The base salary under
the agreement is $120,000 per annum, plus benefits.
Contract with Donald Walker
On December 30, 2002, the Company entered into a four-year employment contract
with an option to renew for an additional year, with the President of Walker,
who is also an Executive Vice President of the Company. The base salary under
the agreement is $140,000 per annum, plus benefits.
24
Contract with Gary Walker
On December 30, 2002, the Company entered into a four-year employment contract
with an option to renew for an additional year, with the Chief Operating Officer
of Walker, who is also a Director of the Company. The base salary under the
agreement is $140,000 per annum, plus benefits.
Contract with Joseph Heater
On July 15, 2003, the Company entered into a three-year employment contract with
Joseph Heater, to act as Chief Financial Officer. The base salary under the
agreement is $120,000 per annum, plus benefits.
DIRECTOR COMPENSATION
The Company does not pay directors fees or other cash compensation for services
rendered as a director. We reimburse our directors for expenses incurred in
connection with attending Board meetings.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information about the shares of the Company's
common Stock that may be issued upon the exercise of options under the 2002
Stock Option Plan which were approved by the Board of Directors.
(c)
(a) Number of securities
Number of securities to (b) remaining available
be issued upon Weighted-average for future issuance
exercise of exercise price of under equity compensation plans
outstanding options, outstanding options, excluding securities reflected
Plan Category warrants and rights warrants and rights in column (a))(1)
- --------------------------- --------------------------- --------------------------- ---------------------------
Equity
compensation plans
approved by
security holders (1)
Equity
compensation plans
not approved by
security holders 77,000 $ 1.46 4,923,000
- --------------------------- --------------------------- --------------------------- ---------------------------
Total 77,000 $ 4,923,000
(1) The Company established a nonqualified stock option plan pursuant to which
options to acquire a maximum of 5,000,000 shares of the Company's common stock
were reserved for grant.
Code of Ethics
WPCS adopted a Code of Ethics for its officers, directors and employees. A
copy of the Code of Ethics is attached hereto as an exhibit.
25
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information, according to
information supplied to the Company regarding the number and percentage of the
Company's common stock beneficially owned by (i) each person who is beneficial
owner of more than 5% of the common stock; (ii) by each director; (iii) by each
executive officer named in the Summary Compensation Table; and (iv) by all
directors and executive officers as a group. Unless otherwise indicated, the
stockholders listed possess sole voting and investment power with respect to the
shares listed.
------------------------- ------------------------------- ------------------------ --------------
Title of Class Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
(1)
------------------------- ------------------------------- ------------------------ --------------
------------------------- ------------------------------- ------------------------ --------------
Common stock Andrew Hidalgo 5,380,000 41.1%
608 Perimeter Drive
Downingtown, PA 19335
------------------------- ------------------------------- ------------------------ --------------
------------------------- ------------------------------- ------------------------ --------------
Common stock Donald Walker 1,217,145 9.3%
521 Railroad Avenue
Fairfield, CA 94533
------------------------- ------------------------------- ------------------------ --------------
------------------------- ------------------------------- ------------------------ --------------
Common stock Gary Walker 930,759 7.1%
521 Railroad Avenue
Fairfield, CA 94533
------------------------- ------------------------------- ------------------------ --------------
------------------------- ------------------------------- ------------------------ --------------
Common stock J. Johnson LLC (2) 850,000 6.5%
245 West Roosevelt Road
West Chicago, IL 60185
------------------------- ------------------------------- ------------------------ --------------
------------------------- ------------------------------- ------------------------ --------------
Common Stock William Whitehead 8,000 *
609 Portland Drive
Downingtown, PA 19335
------------------------- ------------------------------- ------------------------ --------------
------------------------- ------------------------------- ------------------------ --------------
Common Stock All directors and executive 8,536,904 65.3%
officers as a group (8
persons)
------------------------- ------------------------------- ------------------------ --------------
* Less than 1% of the outstanding common stock
(1) None of these security holders has right to acquire any amount of common
stock of the Company within sixty (60) days from options, warrants, rights, or
similar obligations.
(2) J. Johnson LLC is a Delaware corporation controlled by Norm Dumbroff, a
director of the Company. J. Johnson LLC owned 85% of Invisinet, Inc.
(Invisinet). On November 13, 2002, the Company acquired all of the outstanding
shares of Invisinet, and were exchanged for 1,000,000 shares of commons stock of
the Company. In connection with this acquisition, J. Johnson LLC was issued
850,000 shares of the Company's common stock.
26
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 13, 2002, the Company acquired all of the outstanding shares of
Invisinet from its shareholders in exchange for an aggregate of 1,000,000 newly
issued shares of the Company's common stock. An additional 150,000 shares of the
Company's common stock were to be issued to a shareholder, provided Invisinet
achieved certain financial targets over a two year period beginning on the first
anniversary date of the merger. On May 27, 2003, the Company and the shareholder
mutually agreed to cancel the issuance of bonus shares and in exchange, issued
options to purchase 300,000 shares of the Company's common stock.
On December 30, 2002, the Company acquired all of the outstanding shares of
Walker in exchange for an aggregate of 2,486,000 newly issued shares of the
Company's common stock and $500,000 cash consideration. An additional $500,000
is payable contingent upon Walker achieving certain net profits, to be paid in
quarterly distributions equal to 75% of net income, which would increase the
purchase price. At April 30, 2003, $58,207 was payable to the Walker
shareholders against this earn-out provision.
The Company owes $100,000 to an officer. This loan bears interest at 5.75%
and is due on or before February 12, 2004.
In connection with the acquisition of Walker, the Company assumed a lease
with trusts, of which, certain officers of the Company are the trustees, for a
building and land located in Fairfield, California, which is occupied by its
Walker subsidiary. The lease calls for initial monthly rental payments of
$6,934, with annual increases, calculated using the San Francisco-Oakland-San
Jose Consolidated Metropolitan Statistical Area Consumer Price Index.
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
Exhibits:
Number Exhibit
3.1 Certificate of Incorporation, with amendments (1)
3.2 By-Laws (1)
4.1 Certificate of Designation - Series A Preferred Stock (1)
4.2 Certificate of Designation - Series B Preferred Stock (2)
4.3 Certificate of Designation - Series C Preferred Stock
4.4 2002 Employee Stock Option Plan
4.5 Form of 2003 Warrant
10.1 Andrew Hidalgo Employment Agreement
10.2 E.J. von Schaumburg Employment Agreement
10.3 Donald Walker Employment Agreement
10.4 Gary Walker Employment Agreement
10.5 Joseph Heater Employment Agreement
10.6 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 (3)
27
10.7 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 (4)
10.8 Amendment to Invisinet Bonus Agreement, dated as of May 27, 2003
10.9 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 (5)
14 Code of Ethics
31 Certifications required by Rule 13a-15(e) and 15d-15(e)
32. Section 1350 Certifications
- ---------------------------------
1. Incorporated by reference from the Company's registration statement on Form
SB-2 (Commission File # 333-38802).
2. Incorporated by reference to the Company
Annual Report on Form 10-KSB for the year ended April 30, 2002.
3. Incorporated
by reference to the Company Current Report on Form 8-K, dated as of May 24,
2002.
4. Incorporated by reference to the Company Current Report on Form 8-K,
dated as of November 13, 2002.
5. Incorporated by reference to the Company
Current Report on Form 8-K, dated as of December 30, 2002.
Reports on Form 8-K:
None.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosures. The Company maintains disclosure
controls and procedures designed to provide reasonable assurance
that information required to be disclosed in the reports filed
with the SEC is recorded, processed, summarized and reported
within the time periods specified in the rules of the SEC. As of
April 30, 2003, an evaluation, was completed under the
supervision and participation of management, including the Chief
Executive Officer and Chief Financial Officer, of the design and
operation of this disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely
alerting them to material information relating to the company
(including the Company's consolidated subsidiaries) required to
be included in the periodic SEC filings.
(b) Changes in internal controls. There were no significant changes
in internal controls or other factors that could significantly
affect the Company's internal controls subsequent to the date of
our evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees. The aggregate fees billed by our auditors, for professional services
rendered for the audit of the Company's annual financial statements for the two
years ended April 30, 2003 and for the reviews of
28
the financial statements included in the Company's Quarterly Reports on Form
10-QSB during that fiscal year were $28,860, and $2,254, respectively.
Audit Related Fees. The Company incurred fees to auditors of $21,918 for audit
related fees during the two fiscal years ended April 30, 2003.
All Other Fees. The aggregate fees billed by auditors for services rendered to
the Company, other than the services covered in "Audit Fees" and for the fiscal
year ended April 30, 2003 were $1,170, which fees primarily related to the
Company's tax returns.
The Audit Committee has considered whether the provision of non-audit services
is compatible with maintaining the principal accountant's independence.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WPCS INTERNATIONAL INCORPORATED
/s/ ANDREW HIDALGO
Andrew Hidalgo,
Chief Executive Officer
(principal executive officer)
/s/ JOSEPH HEATER
Joseph Heater,
Chief Financial Officer
(principal accounting officer)
Date: August 13, 2003
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities as on August 13, 2003.
/s/ ANDREW HIDALGO
Andrew Hidalgo,
Chairman of the Board
-------------------------------------
Norm Dumbroff,
Director
-------------------------------------
Neil Hebenton,
Director
/s/ GARY WALKER
Gary Walker,
Director
/s/ WILLIAM WHITEHEAD
William Whitehead,
Director
30