As filed with the Securities and Exchange Commission on October 7, 2003
An Exhibit List can be found on page II-2.
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WPCS INTERNATIONAL INCORPORATED
(Name of small business issuer in its charter)
Delaware 4899 98-0204758
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
140 South Village Avenue, Suite 20
Exton, PA 19341
(610) 903-0400
(Address and telephone number of principal executive offices \
and principal place of business)
Andrew Hidalgo, Chief Executive Officer
140 South Village Avenue, Suite 20
Exton, PA 19341
(610) 903-0400
(Name, address and telephone number of agent for service)
Copies to:
Marc J. Ross, Esq.
Thomas A. Rose, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
Approximate date of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
======================================================= ================= ==================== ===================== ==============
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities Amount to be Offering Price Per Aggregate Offering Registration
to be Registered Registered Security(1) Price Fee
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of common stock, $.0001 par value ("Common
Stock") 8,657,406 $1.475 $12,769,674 $1,033.07
Shares of Common Stock issuable upon exercise of
warrants 5,109,400 $1.475 $7,536,365 $609.69
Total 13,766,806 $1.475 $20,306,039 $1,642.76
======================================================= ================= ==================== ===================== ==============
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of
1933, using the average of the high and low price as reported on the
Over-The-Counter Bulletin Board on October 6, 2003.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Preliminary Prospectus Subject To Completion, Dated October [ ], 2003
The information in this prospectus is not complete and may be changed.
WPCS International Incorporated
13,766,806 Shares of
Common Stock
This prospectus relates to the resale by the selling stockholders of
13,766,806 shares of our common stock, based on current market prices. The
selling stockholders may sell common stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions. Please see the "Selling Stockholders" section in this
prospectus for a complete description of all of the selling stockholders.
We will not receive any proceeds from the sale of shares by the selling
stockholders. However, we will receive proceeds upon the exercise of any
warrants or options that may be exercised by the selling stockholders, if any.
We will pay the expenses of registering these shares.
Our common stock is listed on the Over-The-Counter Bulletin Board under the
symbol "WPCS." The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on October 6, 2003, was $1.45.
Investing in these securities involves significant risks.
See "Risk Factors" beginning on page 3.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is ______________, 2003.
PROSPECTUS SUMMARY
Our Business
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.
Connecting a company's network is critical in achieving the timely flow of
information. Today, a company's network expands beyond its existing headquarters
to remote offices and remote users. The networking applications are larger and
the demand for high-speed connectivity to move data back and forth is growing
dramatically. Until recently, a company's only alternative in obtaining
high-speed connectivity was to contact the telephone company and have a
high-speed landline service installed so that connectivity could be achieved
between its locations. The issue today is that these high-speed landlines take
too much time to install, are not available in all locations, do not solve
remote application usage and are costly to use on a monthly basis.
WPCS International Incorporated 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.
WPCS also provides network security, trains end users and provides on-going
technical support to insure a successful installation.
Our principal offices are located at 140 South Village Avenue, Suite 20,
Exton, PA 19341, and our telephone number is (610) 903-0400. We are a Delaware
corporation.
The Offering
Common stock offered by selling stockholders 13,766,806 shares, of which 8,657,406 are
currently issued and outstanding and
5,109,400 are issuable upon exercise of
outstanding warrants. This number
represents approximately 54.5% of our
common stock to be outstanding after the
offering.
Common stock to be outstanding after the offering 25,245,090 shares
Use of proceeds........................................................... We will not receive any proceeds from the
sale of the common stock. However, we will
receive the sale price of any common stock
we sell to the selling stockholders upon
exercise of the warrants.
Over-The-Counter Bulletin Board Symbol.................................... WPCS
2
RISK FACTORS
This investment has a high degree of risk. Before you invest you should
carefully consider the risks and uncertainties described below and the other
information in this prospectus. If any of the following risks actually occur,
our business, operating results and financial condition could be harmed and the
value of our stock could go down. This means you could lose all or a part of
your investment.
Risks Related To Our Business
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 cause a reduction in
demand for our services.
Recently, the wireless equipment vendors have increased the services they
offer for their technology. This activity and the potential continuing trend
towards offering services may lead to a greater ability among equipment vendors
to provide a comprehensive range of wireless services, and may simplify
integration and installation, which could lead to a reduction in demand for our
services. Moreover, by offering certain services to end users, equipment vendors
could reduce the number of our current or potential customers and increase the
bargaining power of our remaining customers, which may 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;
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;
3
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.
Failure to keep pace with the latest technological changes could result in
decreased revenues.
The market for our services is characterized by rapid change and
technological improvements. Failure to respond in a timely and cost-effective
way to these technological developments could result in serious harm to our
business and operating results. We have derived, and we expect to continue to
derive, a substantial portion of our revenues from creating wireless networks
that are based upon today's leading technologies and that are capable of
adapting to future technologies. As a result, our success will depend, in part,
on our ability to develop and market service offerings that respond in a timely
manner to the technological advances of our customers, evolving industry
standards and changing client preferences.
Failure to properly manage projects may result in costs or claims.
Our engagements often involve large scale, highly complex projects. 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.
Potential future acquisitions could be difficult to integrate, disrupt our
business, dilute stockholder value and adversely affect our operating results.
Since November 1, 2002, we have acquired three companies and we intend to
further expand our operations through acquisitions over time. This may require
significant management time and financial resources because we may need to
integrate widely dispersed operations with distinct corporate cultures. Our
failure to manage future acquisitions successfully could seriously harm our
operating results. Also, acquisition costs could cause our quarterly operating
results to vary significantly. Furthermore, our stockholders would be diluted if
we financed the acquisitions by incurring convertible debt or issuing
securities. To the extent we acquire an international operation; we will face
additional risks, including:
4
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.
We have no current agreements, arrangements or plans with regards to any future
acquisitions.
Our principal officers and directors own a controlling interest in our voting
stock and investors will not have any voice in our management.
Our officers and directors, in the aggregate, beneficially own
approximately 42.4% of our outstanding common stock. As a result, these
stockholders, acting together, will have the ability to control substantially
all matters submitted to our stockholders for approval, including:
- election of our board of directors;
- removal of any of our directors;
- amendment of our certificate of incorporation or bylaws; and
- adoption of measures that could delay or prevent a change in
control or impede a merger, takeover or other business
combination involving us.
As a result of their ownership and positions, our directors and executive
officers collectively are able to influence all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. In addition, sales of significant amounts of shares held
by our directors and executive officers, or the prospect of these sales, could
adversely affect the market price of our common stock. Management's stock
ownership may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
We have a history of operating losses and may never become profitable
We incurred a net loss 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.
We may have to curtail our business if we cannot find adequate funding.
Our ability to grow depends significantly on our ability to expand our
operations through internal growth and by acquiring other companies or assets
that require significant capital resources. We may need to seek additional
capital from public or private equity or debt sources to fund our growth and
operating plans and respond to other contingencies such as:
o shortfalls in anticipated revenues or increases in expenses;
o the development of new services; or
o the expansion of our operations, including the recruitment of
additional personnel.
5
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.
Risks Relating to our Common Stock
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in our Securities is Limited, Which Makes Transactions in our
Stock Cumbersome and May Reduce the Value of an Investment in our Stock.
Since our common stock is not listed or quoted on any exchange or on
Nasdaq, and no other exemptions currently apply, trading in our common stock on
the Over-The-Counter Bulletin Board is subject to the "penny stock" rules of the
SEC. These rules require, among other things, that any broker engaging in a
transaction in our securities provide its customers with a risk disclosure
document, disclosure of market quotations, if any, disclosure of the
compensation of the broker and its salespersons in the transaction, and monthly
account statements showing the market values of our securities held in the
customer's accounts. The brokers must provide bid and offer quotations and
compensation information before making any purchase or sale of a penny stock and
also provide this information in the customer's confirmation. Generally, brokers
may be less willing to execute transactions in securities subject to the "penny
stock" rules. This may make it more difficult for investors to dispose of our
common stock and cause a decline in the market value of our stock.
6
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders of our company. There
will be no proceeds to us from the sale of shares of common stock in this
offering. However, in the event that our outstanding warrants are exercised, we
may receive proceeds of up to $4,498,710. Any such proceeds will be used for
working capital purposes. There can be no assurance that any of such warrants
will be exercised.
7
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently traded on the OTC Electronic Bulletin Board
under the symbol "WPCS."
The following table sets forth the range of high and low closing bid
quotations for our common stock for each quarter of the last two fiscal years,
as reported on the Bulletin Board. The quotations represent inter-dealer prices
without retail markup, markdown or commission, and may not necessarily represent
actual transactions.
PERIOD HIGH LOW
Year Ended April 30, 2002:
First Quarter.............. 2.25 0.45
Second Quarter............. 0.54 0.18
Third Quarter.............. 0.50 0.15
Fourth Quarter............. 0.15 0.07
Year Ended April 30, 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
Year Ended April 30, 2004:
First Quarter.............. 1.88 0.39
Second Quarter(1).......... 1.65 1.02
(1) As of October 6, 2003
On October 6, 2003, the closing sale price for our common shares, as
reported by the Bulletin Board, was $1.45 per share.
As of October 6, 2003, there were 20,135,690 shares of common stock
outstanding and there were approximately 94 registered holders of our common
stock.
8
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.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However, there
may be events in the future that we are not able to accurately predict or over
which we have no control. The risk factors listed in this section, as well as
any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. You should
be aware that the occurrence of the events described in these risk factors could
have an adverse effect on our business, results of operations and financial
condition.
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. We define 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.
Significant Transactions and Events
On May 17, 2002, pursuant to the agreement and plan of merger, Phoenix Star
Ventures Inc., a publicly held corporation, acquired WPCS Holdings Inc., a
Delaware corporation by issuing 5,500,000 shares of its common stock to
shareholders of WPCS Holdings in exchange of all the outstanding shares of WPCS
Holdings. The shareholders of WPCS Holdings, after the acquisition, owned the
majority of the combined company. Accordingly, the combination has been
accounted for as a reverse acquisition, whereby, for accounting purposes, WPCS
Holdings is the accounting acquirer and Phoenix Star Ventures is the accounting
acquiree. Concurrently with the acquisition, Phoenix Star Ventures, the parent
company, changed its name to WPCS International Incorporated.
On November 13, 2002, we entered into an agreement and completed a merger
with Invisinet Acquisitions Inc., a wholly owned subsidiary of WPCS, and
Invisinet, Inc., an unrelated Delaware corporation. Pursuant to the terms of the
Agreement and Plan of Merger, Invisinet Acquisitions acquired 100% of the common
stock of Invisinet, by issuing 1,000,000 shares of WPCS' common stock with a
fair value of $1,750,000, based on the value of WPCS' common stock as of a few
days prior to that date. Based on the net assets acquired of Invisinet, we
recognized goodwill of approximately $1,627,000. Subsequently, Invisinet
Acquisitions was merged into Invisinet with Invisinet being the surviving
company. Invisinet is in the same business as WPCS, providing fixed wireless
technology solutions to its customers.
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. The aggregate consideration paid by WPCS for the entire equity interest in
Walker Comm was approximately $5,113,000. 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 Comm were exchanged for aggregate merger
consideration consisting of $500,000 in cash and our common stock with a value
of approximately $4,574,000, or 2,486,000 shares valued at $1.84 per share.
Based on the net assets acquired of Walker Comm, we recognized goodwill of
approximately $3,762,000. Subsequently on that date, Walker Comm
10
Merger was merged with and into Walker Comm, with Walker Comm being the
surviving corporation. Walker Comm then became our wholly owned subsidiary.
On August 22, 2003, through our wholly owned subsidiary Clayborn
Contracting Acquisition Corp., we acquired all of the outstanding common stock
of Clayborn Contracting Group, Inc., an Auburn, California diversified project
services firm that designs and installs smart highway systems and substations
for state and local municipalities in California. In addition, Clayborn
Contracting Group has performed structured cabling, underground and utility
work. Recently, Clayborn Contracting Group has expanded its services to include
wireless supervisory control and data acquisition design and deployment for
water treatment facilities. As a result of and at the effective time of the
merger, all of the issued and outstanding shares of common stock of Clayborn
Contracting Group were exchanged for aggregate merger consideration consisting
of $900,000 in cash and 826,446 shares of our common stock. An additional
$1,100,000 is payable by delivery to the Clayborn Contracting Group shareholders
of 50% of the post tax profits of Clayborn Contracting Group, payable in
quarterly distributions, which would increase the purchase price. Subsequently
on that date, Clayborn Contracting Acquisition was merged with and into Clayborn
Contracting Group, with Clayborn Contracting Group being the surviving
corporation. Clayborn Contracting Group then became our wholly owned subsidiary.
Results of Operations
We started our operations in December of 2001. We did not record any
significant sales and operations for the year ended April 30, 2002 or the three
months ended July 31, 2002. Therefore, for the purpose of discussion of results
of operations, limited comparison is made to operations for those periods. We
have two reportable segments, Walker Comm and WPCS. WPCS includes WPCS
Incorporated and Invisinet. Walker Comm includes Walker Comm and Clayborn
Contracting Group. Walker Comm is a full service contractor specializing in the
engineering and installation of fiber optics, voice and data cabling,
audio/visual systems, and networking. Clayborn Contracting Group is a
diversified project services firm that has designed and installed smart highway
systems and substations for state and local municipalities in California. WPCS
specializes in WiFi deployment for indoor wireless connectivity, mobile wireless
connectivity and fixed wireless deployment.
Fiscal Year ended April 30, 2003 Compared to period November 15, 2001 (date of
inception) to April 30, 2002
Sales
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 we made in November 2002 of Invisinet and December 2002 of Walker
Comm. These acquisitions accounted for $4,720,000 or 94% of the increase in
revenues over the prior year.
Gross Profits
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 Comm, cost of sales consists of direct costs on
contract, including materials, labor, and other overhead costs. Our 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
11
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 Comm 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. We 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 Comm and Invisinet. The
amortization expense for the year ended April 30, 2003 was $41,000. We acquired
customer lists from Walker Comm and Invisinet which are being amortized over a
period of five years from the date of their acquisition.
Net loss
We incurred a net loss of approximately $381,000 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 Comm and Invisinet during the third quarter of our
fiscal year 2003 resulting in increase in selling, general and administrative
expenses.
Three Months Ended July 31, 2003 Compared to Three Months Ended July 31, 2002
Sales
Net sales for the three months ended July 31, 2003 were approximately
$3,096,000, as compared to $393,000 in the three months ended July 31, 2002. The
increase in sales during the quarter ended July 31, 2003, compared to the same
period in 2002 is a result of the acquisitions of Invisinet and Walker Comm,
which accounted for $3,049,000 of the total sales for the quarter.
Total revenue from the Walker Comm segment for the three months ended July
31, 2003 was approximately $2,476,000, or approximately 80% of total revenue.
WPCS segment revenue for the three months ended July 31, 2003 was approximately
$621,000 or 20% of total revenue for the quarter.
Gross Profits
In the case of the WPCS segment, cost of sales consists of component and
material costs and direct labor cost payments to third party sub-contractors for
its installation. For the Walker Comm segment, cost of sales consists of direct
costs on contract, including materials, labor, and other overhead costs. Our
gross profit margin varies from job to job. For the three months ended July 31,
2003, our gross profits were approximately $1,067,000, reflecting a gross profit
margin of 34.5%. For the three months ended July 31, 2002, gross profit was
approximately $89,000, resulting in a gross profit margin was 22.9%. The
increase in our gross profit margin is due to the increase in project service
business relative to the product revenues, as a result of the acquisitions of
Invisinet and Walker Comm.
The Walker Comm segment gross profit for the three months ended July 31,
2003 was approximately $882,000, reflecting a gross profit margin of 35.6%. WPCS
segment gross profit for the three months ended July 31, 2003 was approximately
$185,000, resulting in a gross profit margin of 29.8%.
12
Selling expenses
Selling expenses include expenses incurred for marketing and promotional
activities. For the three months ended July 31, 2003, and 2002, total selling
expenses were $16,000 and $5,000, 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 three months ended July 31, 2003, total general and administrative
expenses were $1,069,000, or 34.5% of total sales. Included in general and
administrative expenses are $354,000 for salaries, commissions, and payroll
taxes and $197,000 in professional fees. Walker Comm employs union employees for
whom it paid $227,000 in union benefits. Insurance costs were $129,000 and rent
for office facilities was $48,000. Other general and administrative expenses
totaled $114,000.
For the three months ended July 31, 2002, general and administrative
expenses were $184,000 or 46.8% of sales. Included in the general and
administrative expenses are $64,000 for salaries, commissions and payroll taxes
and $96,000 in professional fees. Rent for our office facilities amounted to
$8,000. Other general and administrative expenses totaled $16,000.
Net loss
We incurred a net loss of approximately $123,000 for the three months ended
July 31, 2003. The net loss for the quarter ended July 31, 2003 included a
non-cash charge of approximately $130,000 for the excess of fair value of stock
options granted to certain consultants over their exercise price, to purchase
1,350,000 shares of our common stock. In accordance with SFAS No. 123, stock
options granted to non-employees are required to be expensed based on the fair
value of the equity instruments or fair value of the consideration received. The
net loss also included income tax expense of $41,000 to provide for state income
taxes and certain book-to-tax income permanent differences.
We incurred a net loss attributable to common shareholders of approximately
$274,000 for the three months ended July 31, 2002, which included a non-cash
charge of $173,000 for imputed dividends on preferred stock.
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 Gary
Walker, one of our Directors, $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 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.
Our investing activities utilized approximately $165,000, which consisted
of $500,000 paid for the acquisition of Walker Comm to its shareholders, $54,000
paid as acquisition costs for acquiring Invisinet and Walker Comm, offset by
approximately $178,000 received in cash on acquisition of these businesses. We
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.
13
Our 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 Phoenix Star Ventures on reverse
acquisition, $100,000 received as a loan from Gary Walker, one of our Directors,
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.
At July 31, 2003, we had working capital of $2,158,000, which consisted of
current assets of approximately $5,303,000 and current liabilities of
$3,145,000. Current assets included $929,000 in cash, $4,017,000 in accounts
receivable and costs and estimated earnings in excess of billings on uncompleted
contracts, $90,000 in inventories, $197,000 in prepaid expenses, and $70,000 in
deferred tax assets. Current liabilities included $2,552,000 in accounts
payable, accrued expenses and billings in excess of costs and estimated earnings
on uncompleted contracts, $100,000 payable to Gary Walker, one of our directors,
$208,000 payable to shareholders of WPCS, $143,000 income taxes payable,
$129,000 in current portion of deferred income taxes, and $13,000 in other
current liabilities.
We utilized $124,000 in cash from operating activities during the three
months ended July 31, 2003. This was mainly comprised of a $123,000 net loss for
the quarter, offset by $100,000 in net non-cash charges, a $672,000 net increase
in accounts receivable, $538,000 increase in costs and estimated earnings in
excess of billings on uncompleted contracts, $133,000 decrease in accounts
payable and accrued expenses, $1,191,000 increase in billings in excess of costs
and estimated earnings on uncompleted contracts, $119,000 increase in income
taxes payable and a $67,000 net increase in other current assets and
liabilities.
Our financing activities generated cash of $887,000 during the three months
ended July 31, 2003. This was comprised primarily of net proceeds of $898,000
received from the sale of our common stock in a private placement. On June 25,
2003, (and amended July 24, 2003), we offered in a private placement memorandum,
up to 100 units for sale to accredited investors at a price of $25,000 per unit.
The private placement was on a "best efforts" basis of a minimum offering of
$1,000,000 and a maximum offering of $2,500,000. Each unit consisted of (i)
44,444 shares of our common stock, and (ii) warrants to purchase 44,444 shares
of our common stock, exercisable for a period of three years at an exercise
price of $0.90 per share. The warrants may be redeemed in whole or in part at
our option, if the closing price of our common stock is at least $1.25 per share
on average for 10 consecutive trading days, ending not earlier than 30 days
before the warrants are called for redemption. Through September 5, 2003, we
sold the remaining 60 units in connection with the private placement, and
received additional proceeds of $1,347,500, net of placement agent's commission
from the private placement. In connection with the private placement, the
placement agent was issued warrants to purchases 665,000 shares of our common
stock at an exercise price of $0.75 per share.
On August 22, 2003, we entered into an agreement and completed a merger
with Clayborn Contracting Group, Inc., a California corporation. We acquired all
of the issued and outstanding shares of Clayborn Contracting Group in exchange
for $900,000 cash consideration and of 826,446 newly issued shares of our common
stock with a fair value of approximately $868,000 based on the average value of
our common stock as of a few days before and after the merger terms were agreed
to and announced. An additional $1,100,000 is payable by the delivery to the
Clayborn Contracting Group shareholders of 50% of the post tax profits of
Clayborn Contracting Group, payable in quarterly distributions, which would
increase the purchase price. Based on the historical net assets acquired from
Clayborn Contracting Group of approximately $1,007,000, we preliminarily expect
to recognize goodwill of approximately $760,000. Upon completion of a formal
purchase price allocation there may be a decrease in the amount assigned to
goodwill and a corresponding increase in tangible or intangible assets. The
acquisition of Clayborn Contracting Group will provide us additional wireless
opportunities, expansion of the current customer base, and access to additional
project engineers.
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
investment balances 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, Walker Comm and
Clayborn Contracting Group
14
without using much cash, by issuing our common stock. The sale of
additional equity or convertible debt securities may result in additional
dilution to our shareholders.
15
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. Our 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, we view certain of these policies as critical. Policies
determined to be critical are those policies that have the most significant
impact on our consolidated financial statements and require management to use a
greater degree of judgment and estimates. Actual results may differ from those
estimates.
We believe that given current facts and circumstances, it is unlikely that
applying any other reasonable judgments or estimate methodologies would cause a
material effect on our consolidated results of operations, financial position or
liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and 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.
Accounts receivable
Accounts receivable are due within contractual payment terms and are stated
at amounts due from customers net of an allowance for doubtful accounts. Credit
is extended based on evaluation of a customer's financial condition. Accounts
outstanding longer than the contractual payment terms are considered past due.
We determine its allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, our previous loss
history, the customer's current ability to pay its obligation to us, and the
condition of the general economy and the industry as a whole. We write off
accounts receivable when they become uncollectible, and payment subsequently
received on such receivables are credited to the allowance for doubtful
accounts.
Goodwill and other Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that their carrying value may not be recoverable from the
estimated future cash flows expected to result from their use and eventual
disposition. Our long-lived assets subject to this evaluation include property
and equipment and amortizable intangible assets. We assess the impairment of
goodwill annually 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.
16
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
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
We record 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. We include pass-through revenue
and costs on cost-plus contracts, which are customer-
17
reimbursable materials, equipment and subcontractor costs, when we
determine that we are responsible for the engineering specification, procurement
and management of such cost components on behalf of the customer.
We have numerous contracts that are in various stages of completion. Such
contracts require estimates to determine the appropriate cost and revenue
recognition. We have a history of making reasonably dependable estimates of the
extent of progress towards completion, contract revenues and contract costs.
However, current estimates may be revised as additional information becomes
available. If estimates of costs to complete long-term contracts indicate a
loss, provision is made currently for the total loss anticipated. 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 our 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. We have adopted SFAS No. 144 for the year beginning May 1, 2002. The
adoption of SFAS 144 did not have a material effect on our 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 our
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. We have 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 our 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 our consolidated financial position, results of operations or cash
flows.
18
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. We have not
adopted FIN No.46 for the year ended April 30, 2003. We do not expect FIN 46 to
have a material effect on our consolidated financial position, results of
operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of our first
quarter for fiscal 2004. We do not expect the adoption of this statement to have
a material impact on our consolidated financial position, results of operations
or cash flows.
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements that
reflect Management's current views with respect to future events and financial
performance. Those statements include statements regarding the intent, belief or
current expectations of WPCS and members of our management team as well as the
assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made
by us in this report and in our other reports filed with the Securities and
Exchange Commission. Important factors currently known to Management could cause
actual results to differ materially from those in forward-looking statements. We
undertake no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
in the future operating results over time. We believe that its assumptions are
based upon reasonable data derived from and known about its business and
operations and the business and operations of WPCS. No assurances are made that
actual results of operations or the results of our future activities will not
differ materially from our assumptions.
19
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.
On May 17, 2002, pursuant to an agreement and plan of merger, Phoenix Star
Ventures Inc., a publicly held Delaware corporation, through its wholly owned
subsidiary WPCS Acquisition Corp., acquired WPCS Holdings Inc., a Delaware
corporation by issuing 5,500,000 shares of its common stock to shareholders of
WPCS Holdings, Inc. in exchange of all the outstanding shares of WPCS Holdings,
Inc. Concurrently with the acquisition, Phoenix Star Ventures Inc. changed its
name to WPCS International Incorporated.
On November 13, 2002, we entered into an agreement and completed a merger
with Invisinet Acquisitions Inc., our wholly owned subsidiary, and Invisinet,
Inc., 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, Inc. 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., 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 Comm, Inc. were
exchanged for aggregate merger consideration consisting of $500,000 in cash and
2,486,000 of our Common Shares. Subsequently on that date, Walker Comm Merger
Corp. was merged with and into Walker Comm, Inc., with Walker Comm, Inc. being
the surviving corporation. Walker Comm, Inc. then became our wholly owned
subsidiary.
On August 22, 2003, through our wholly owned subsidiary Clayborn
Contracting Acquisition Corp., we acquired all of the outstanding common stock
of Clayborn Contracting Group, Inc., an Auburn, CA diversified project services
firm that designs and installs smart highway systems and substations for state
and local municipalities in California. In addition, Clayborn Contracting Group,
Inc. has performed structured cabling, underground and utility work. Recently,
Clayborn Contracting Group, Inc. has expanded its services to include wireless
SCADA design and deployment for water treatment facilities. As a result of and
at the effective time of the merger, all of the issued and outstanding shares of
common stock of Clayborn Contracting Group, Inc. were exchanged for aggregate
merger consideration consisting of $900,000 in cash and 826,446 shares of of our
common stock. An additional $1,100,000 is payable by delivery to the Clayborn
Contracting Group shareholders of 50% of the post tax profits of Clayborn
Contracting Group, payable in quarterly distributions, which would increase the
purchase price. Subsequently on that date, Contracting Contracting Acquisition
Corp. was merged with and into Clayborn Contracting Group, Inc., with Clayborn
Contracting Group, Inc. being the surviving corporation. Clayborn Contracting
Group, Inc. then became our wholly owned subsidiary.
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 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.
20
We were 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. We
offer 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. We provide specialty communication
systems, wireless fidelity (WiFi) deployment and fixed wireless deployment to
corporations, government entities and educational institutions both domestically
and internationally.
We define 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 us 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
We also provide 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 September 18, 2003, we had a backlog
of approximately $18.5 million on 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 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.
21
Internal Growth Strategy
We generate revenue opportunities through bid responses, end user
referrals, contracting assignments from technology providers and subcontracting
assignments from general infrastructure providers. We maintain strong
relationships with these sources. We also, through our subsidiaries, are listed
on the Federal GSA Schedule for government contracts. We gain national
recognition through press releases, testimonials and our website. We have also
gained recognition in our unique deployment of wireless solutions for vertical
applications.
Acquisition Strategy
The primary goal is to build us into a recognized leader in specialty
communication systems, wireless fidelity (WiFi) deployment and fixed wireless
deployment. To meet this challenge, we are planning to make acquisitions of
companies familiar with the deployment of these 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, we have no plans, arrangement or
agreements for any acquisitions.
Management Strategy
In anticipation of internal growth and future acquisitions, we will
organize resources to manage our development effectively. Our 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.
Our 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 September 15, 2003, we employed 110 full time employees, of which 82
are project engineers, 13 are project managers, ten are in administration and
five are executives. Certain of the project engineers are represented by the
International Brotherhood of Electrical Workers. We also have non-union
employees. We believe our relations with all of our employees are good.
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 and 2003, we assumed
the operating leases of additional office space in the following locations:
Location Lease Expiration Date Minimum Annual Rental
Fairfield, California (a) February 28, 2011 $56,000
Rocklin, California January 31, 2004 $17,000
Livermore, California October 31, 2003 $20,000
Denville, New Jersey month-to-month $11,000 (b)
Auburn, California month-to-month $44,000 (b)
22
(a) The lease for our Fairfield, California location is with trusts, of which,
certain of our officers and shareholders are the trustees.
(b) The leases for our Denville, New Jersey and Auburn, California locations
are month to month leases, therefore the minimum annual rental price assumes we
rent the properties for the entire year.
We believe that our existing facilities are suitable and adequate to meet our
current business requirements.
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm our business. We are currently
not aware of any such legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse affect on our business,
financial condition or operating results.
23
MANAGEMENT
Directors And Executive Officers
Our directors, executive officers and key executives, and their ages as of the
date hereof, are as follows.
NAME AGE POSITION
--------------------------------- ------------ ---------------------------------------------------
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
--------------------------------- ------------ ---------------------------------------------------
Set forth below is a biographical description of each director and senior
executive officer of WPCS based on information supplied by each of them.
Andrew Hidalgo, Chairman and Chief Executive Officer
Mr. Hidalgo became our Chairman of the Board and Chief Executive Officer in
June 2002. He is responsible for our 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 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
February 1989 until July 2000, Mr. von Schaumburg worked for eight years as a
Business Development Manager for AT&T and three years as a divisional CFO for
Lucent Technologies. Mr. von Schaumburg holds a B.S. in Finance from St.
Bonaventure University and an M.B.A. from Fairleigh Dickinson University.
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
24
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.
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.
Director and Executive Compensation
We do 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and
directors and persons who own more than 10% of a registered class of our equity
securities to file reports of their ownership thereof and changes in that
ownership with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc.
25
Executive officers, directors and greater than 10% stockholders are
required by SEC regulations to furnish us with copies of all such reports they
file.
Based solely upon a review of Forms 3, 4 and 5, and amendments thereto,
furnished to us during fiscal year 2003, we are not aware of any director,
officer or beneficial owner of more than ten percent of our Common stock that,
during fiscal year 2003, failed to file on a timely basis reports required by
Section 16(a) of the Securities Exchange Act of 1934.
26
EXECUTIVE COMPENSATION
The following table sets for the certain summary information concerning the
compensation paid for services rendered in all capacities to us and our
subsidiaries for the years ended April 30, 2003, 2002 and 2001 to WPCS' Chief
Executive Officer:
- ------------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
-------------------------------- ----------------------------------------------------
AWARDS PAYOUTS
------------------------- --------------------------
Securities
Underlying All
Other Annual Restricted Stock Options/SAR's LTIP Other
Name Position Year Salary($) Bonus($) Compensation ($) Award(s)($) (#)(1) Payouts($) Compensation($)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Andrew
Hidalgo CEO 2003 $141,000 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Stephen C.
JacksoP President 2002 $ 36,000 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
2001 $ 15,085 - $21,085 - 100,000 (2) - -
- ------------------------------------------------------------------------------------------------------------------------------------
(1) The number of securities under options granted reflects the number of WPCS
shares that may be purchased upon the exercise of such options.
(2) For the year ended April 30, 2001, in connection with the sale of its
subsidiary, we entered into a Consulting Agreement with Stephen Jackson under
which we paid Mr. Jackson $6,000 during the two month period ending April 30,
2001. We also granted Mr. Jackson an option to purchase 100,000 shares of our
common stock at a price of $0.30 per share at any time prior to April 30, 2002.
Employment Agreements
Andrew Hidalgo
On August 2, 2002, we entered into a three-year employment contract with a
shareholder who is our Chairman and Chief Executive Officer. Upon each one year
anniversary of the agreement, the agreement will automatically renew for another
three years from the anniversary date. The base salary under the agreement is
$150,000 per annum plus benefits.
E.J. von Schaumburg
On November 13, 2002, we entered into a two-year employment contract with
an option to renew for an additional year, with the President of Invisinet, who
is also one of our Executive Vice Presidents. The base salary under the
agreement is $120,000 per annum, plus benefits.
Donald Walker
On December 30, 2002, we entered into a four-year employment contract with
an option to renew for an additional year, with the President of Walker, who is
also one of our Executive Vice Presidents. The base salary under the agreement
is $140,000 per annum, plus benefits.
Gary Walker
On December 30, 2002, we 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 one of our Directors. The base salary under the agreement is
$140,000 per annum, plus benefits.
27
Joseph Heater
On July 15, 2003, we 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.
Except for the foregoing terms, we have not entered into other employment
or consulting agreements with any of the Named Executive Officers.
Employee Stock Incentive Plan
The 2002 Stock Option Plan was adopted by the board of directors in
September 2002 and increased from 500,000 to 5,000,000 options on March 3, 2003,
and approval by the shareholders is pending. The Plan provides for the issuance
of up to 5,000,000 options.
Option Grants to the Named Executive Officers and Directors as of October 6,
2003:
Name of Beneficial Owner Title Options
- --------------------------------------------------------------------------------
Donald Walker Executive Vice President 200,000
E.J. von Schaumburg Executive Vice President 300,000
Joseph Heater Chief Financial Officer 250,000
Neil Hebenton Director 25,000
Gary Walker Director 200,000
William Whitehead Director 75,000
===============
1,050,000
===============
Under the plan, options may be granted which are intended to qualify as
incentive stock options, or ISOs, under Section 422 of the Internal Revenue Code
of 1986, as amended, or which are not intended to qualify as incentive stock
options thereunder, or Non-ISOs. The 2002 Stock Option Plan and the right of
participants to make purchases thereunder are intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended. The 2002 Stock Option Plan is not a qualified deferred
compensation plan under Section 401(a) of the Internal Revenue Code and is not
subject to the provisions of the Employee Retirement Income Security Act of
1974.
Purpose
The primary purpose of the 2002 Stock Option Plan is to attract and retain
the best available personnel for us in order to promote the success of our
business and to facilitate the ownership of our stock by employees. The ability
of a company to offer a generous stock option program has now become a standard
feature in the industry in which we operates.
Administration
The 2002 Stock Option Plan is administered by our board of directors, as
the board of directors may be composed from time to time. All questions of
interpretation of the 2002 Stock Option Plan are determined by the board, and
its decisions are final and binding upon all participants. Any determination by
a majority of the members of the board of directors at any meeting, or by
written consent in lieu of a meeting, shall be deemed to have been made by the
whole board of directors.
Notwithstanding the foregoing, the board of directors may at any time,
or from time to time, appoint a committee of at least two members of the board
of directors, and delegate to the committee the authority of the board
28
of directors to administer the plan. Upon such appointment and delegation,
the committee shall have all the powers, privileges and duties of the board of
directors, and shall be substituted for the board of directors, in the
administration of the plan, subject to certain limitations.
Members of the board of directors who are eligible employees are permitted
to participate in the 2002 Stock Option Plan, provided that any such eligible
member may not vote on any matter affecting the administration of the 2002 Stock
Option Plan or the grant of any option pursuant to it, or serve on a committee
appointed to administer the 2002 Stock Option Plan. In the event that any member
of the board of directors is at any time not a "disinterested person", as
defined in Rule 16b-3(c)(3)(i) promulgated pursuant to the Securities Exchange
Act of 1934, the plan shall not be administered by the board of directors, and
may only by administered by a committee, all the members of which are
disinterested persons, as so defined.
Eligibility
Under the 2002 Stock Option Plan, options may be granted to key employees,
officers, directors or consultants of ours, as provided in the 2002 Stock Option
Plan.
Terms Of Options
The term of each option granted under the plan shall be contained in a
stock option agreement between us and the optionee and such terms shall be
determined by the board of directors consistent with the provisions of the plan,
including the following:
(a) Purchase Price. The purchase price of the common shares subject to each
ISO shall not be less than the fair market value, or in the case of the grant of
an ISO to a principal stockholder, not less that 110% of fair market value of
such common shares at the time such option is granted. The purchase price of the
common shares subject to each Non-ISO shall be determined at the time such
option is granted, but in no case less than 85% of the fair market value of such
common shares at the time such option is granted.
(b) Vesting. The dates on which each option (or portion thereof) shall be
exercisable and the conditions precedent to such exercise, if any, shall be
fixed by the board of directors, in its discretion, at the time such option is
granted.
(c) Expiration. The expiration of each option shall be fixed by the board
of directors, in its discretion, at the time such option is granted; however,
unless otherwise determined by the board of directors at the time such option is
granted, an option shall be exercisable for ten (10) years after the date on
which it was granted (the "Grant Date"). Each option shall be subject to earlier
termination as expressly provided in the 2002 Stock Option Plan or as determined
by the board of directors, in its discretion, at the time such option is
granted.
(d) Transferability. No option shall be transferable, except by will or the
laws of descent and distribution, and any option may be exercised during the
lifetime of the optionee only by him. No option granted under the plan shall be
subject to execution, attachment or other process.
(e) Option Adjustments. The aggregate number and class of shares as to
which options may be granted under the plan, the number and class shares covered
by each outstanding option and the exercise price per share thereof (but not the
total price), and all such options, shall each be proportionately adjusted for
any increase decrease in the number of issued common shares resulting from
split-up spin-off or consolidation of shares or any like capital adjustment or
the payment of any stock dividend.
Except as otherwise provided in the 2002 Stock Option Plan, any option
granted hereunder shall terminate in the event of a merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation of
us. However, the optionee shall have the right immediately prior to any such
transaction to exercise his option in whole or in part notwithstanding any
otherwise applicable vesting requirements.
(f) Termination, Modification and Amendment. The 2002 Stock Option Plan
(but not options previously granted under the plan) shall terminate ten (10)
years from the earlier of the date of its adoption by the board of
29
directors or the date on which the plan is approved by the affirmative vote
of the holders of a majority of the outstanding shares of our capital stock
entitled to vote thereon, and no option shall be granted after termination of
the plan. Subject to certain restrictions, the plan may at any time be
terminated and from time to time be modified or amended by the affirmative vote
of the holders of a majority of the outstanding shares of our capital stock
present, or represented, and entitled to vote at a meeting duly held in
accordance with the applicable laws of the State of Delaware.
Stock Appreciation Rights
The 2002 Stock Option Plan also permits the granting of one or more stock
appreciation rights to eligible participants. Such stock appreciation rights may
be granted either independent of or in tandem with options granted to the same
participant. Stock appreciation rights granted in tandem with options may be
granted simultaneously with, or, in the case of Non-ISOs, subsequent to, the
grant to the participant of the related options; provided, however, that: (i)
any option shall expire and not be exercisable upon the exercise of any stock
appreciation right with respect to the same share, (ii) any stock appreciation
right shall expire and not be exercisable upon the exercise of any option with
respect to the same share, and (iii) an option and a stock appreciation right
covering the same share of common stock may not be exercised simultaneously.
Upon exercise of a stock appreciation right with respect to a share of common
stock, the participant shall be entitled to receive an amount equal to the
excess, if any, of (A) the fair market value of a share of common stock on the
date of exercise over (B) the exercise price of such stock appreciation right.
Federal Income Tax Aspects Of The 2002 Stock Option Plan
The following is a brief summary of the effect of federal income taxation
upon the participants and us with respect to the purchase of shares under the
2002 Stock Option Plan. This summary does not purport to be complete and does
not address the federal income tax consequences to taxpayers with special tax
status. In addition, this summary does not discuss the provisions of the income
tax laws of any municipality, state or foreign country in which the participant
may reside, and does not discuss estate, gift or other tax consequences other
than income tax consequences. We advise each participant to consult his or her
own tax advisor regarding the tax consequences of participation in the 1999
option plan and for reference to applicable provisions of the code.
The 2002 Stock Option Plan and the right of participants to make purchases
thereunder are intended to qualify under the provisions of Sections 421, 422 and
423 of the Code. Under these provisions, no income will be recognized by a
participant prior to disposition of shares acquired under the 2002 Stock Option
Plan.
If the shares are sold or otherwise disposed of (including by way of gift)
more than two years after the first day of the offering period during which
shares were purchased (the "Offering Date"), a participant will recognize as
ordinary income at the time of such disposition the lesser of (a) the excess of
the fair market value of the shares at the time of such disposition over the
purchase price of the shares or (b) 15% of the fair market value of the shares
on the first day of the offering period. Any further gain or loss upon such
disposition will be treated as long-term capital gain or loss. If the shares are
sold for a sale price less than the purchase price, there is no ordinary income
and the participant has a capital loss for the difference.
If the shares are sold or otherwise disposed of (including by way of gift)
before the expiration of the two-year holding period described above, the excess
of the fair market value of the shares on the purchase date over the purchase
price will be treated as ordinary income to the participant. This excess will
constitute ordinary income in the year of sale or other disposition even if no
gain is realized on the sale or a gift of the shares is made. The balance of any
gain or loss will be treated as capital gain or loss and will be treated as
long-term capital gain or loss if the shares have been held more than one year.
In the case of a participant who is subject to Section 16(b) of the
Securities Exchange Act of 1934, the purchase date for purposes of calculating
such participant's compensation income and beginning of the capital gain holding
period may be deferred for up to six months under certain circumstances. Such
individuals should consult with their personal tax advisors prior to buying or
selling shares under the 2002 Stock Option Plan.
30
The ordinary income reported under the rules described above, added to the
actual purchase price of the shares, determines the tax basis of the shares for
the purpose of determining capital gain or loss on a sale or exchange of the
shares.
We are entitled to a deduction for amounts taxed as ordinary income to a
participant only to the extent that ordinary income must be reported upon
disposition of shares by the participant before the expiration of the two-year
holding period described above.
Restrictions On Resale
Certain officers and directors may be deemed to be our "affiliates" as that
term is defined under the Securities Act. The Common stock acquired under the
2002 Stock Option Plan by an affiliate may be reoffered or resold only pursuant
to an effective registration statement or pursuant to Rule 144 under the
Securities Act or another exemption from the registration requirements of the
Securities Act.
As of April 30, 2003, there were no unexercised options held by the Named
Executive Officers.
Aggregated Option Exercises in Last Fiscal Year And Fiscal Year-end Option
Values
There were no option exercises in the last fiscal year.
31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 13, 2002, we acquired all of the outstanding shares of
Invisinet from its shareholders in exchange for an aggregate of 1,000,000 newly
issued shares of our common stock. An additional 150,000 shares of our common
stock were to be issued to a shareholder, provided Invisinet achieved certain
financial targets over a two year period beginning on the first anniversary date
of the merger. On May 27, 2003, we and the shareholder mutually agreed to cancel
the issuance of bonus shares and in exchange, issued options to purchase 300,000
shares of our common stock.
On December 30, 2002, we acquired all of the outstanding shares of Walker
Comm in exchange for an aggregate of 2,486,000 newly issued shares of our common
stock and $500,000 cash consideration. An additional $500,000 is payable
contingent upon Walker Comm achieving certain net profits, to be paid in
quarterly distributions equal to 75% of net income, which would increase the
purchase price. At April 30, 2003, $58,207 was payable to the Walker Comm
shareholders against this earn-out provision.
We owe $100,000 to Gary Walker, one of our directors. This loan bears
interest at 5.75% and is due on or before February 12, 2004.
In connection with the acquisition of Walker Comm, we assumed a lease with
trusts, of which, certain of our officers are the trustees, for a building and
land located in Fairfield, California, which is occupied by our Walker Comm
subsidiary. The lease calls for monthly rental payments of $4,642, with annual
increases, calculated using the San Francisco-Oakland-San Jose Consolidated
Metropolitan Statistical Area Consumer Price Index.
32
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of October 6, 2003 (i) by each person who is
known by us to beneficially own more than 5% of our common stock; (ii) by each
of our officers and directors; and (iii) by all of our officers and directors as
a group.
Percent Percent
Name and Address of Beneficial Shares of of Class Prior to of Class After
Owner** Common Stock Offering Offering ***
- --------------------------------------------------------------------------------------------------------
Andrew Hidalgo 5,380,000 26.7% 21.3%
Donald Walker 1,300,478 (1) 6.4% 5.1%
E.J. von Schaumburg 182,250 (1) * *
Joseph Heater 34,722 (1) * *
Norm Dumbroff 850,000 (2) 4.2% 3.4%
Neil Hebenton 13,542 (1) * *
Gary Walker 1,014,092 (1) 5.0% 4.0%
William Whitehead 47,583 (1) * *
All officers, directors and key 8,822,667 (1) 43.2% 34.6%
executives (8 Persons)
* Less than 1%
** c/o WPCS International Incorporated, 140 South Village Avenue, Suite 20,
Exton, PA 19341.
*** Percentage based upon 25,245,090 shares of common stock.
Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of October 6, 2003 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Percentages are
based on a total of 20,135,690 shares of common stock outstanding on October 6,
2003, and the shares issuable upon the exercise of options and warrants
exercisable on or within 60 days of October 6, 2003, as described below.
(1) Includes the following number of shares of common stock which may be
acquired by certain executive officers and directors through the exercise of
stock options which were exercisable as of October 6, 2003 or become exercisable
within 60 days of that date: Donald Walker , 83,333 shares; E.J. von Schaumburg,
31,250 shares; Joseph Heater, 34,722 shares; Neil Hebenton, 13,542 shares; Gary
Walker, 83,333 shares; William Whitehead, 39,583 shares; and all directors and
officers as a group, 285,764 shares.
33
(2) J. Johnson LLC is a Delaware corporation controlled by Norm Dumbroff, one of
our directors. J. Johnson LLC owned 85% of Invisinet, Inc. (Invisinet). On
November 13, 2002, we acquired all of the outstanding shares of Invisinet, and
were exchanged for 1,000,000 shares of our common stock. In connection with this
acquisition, J. Johnson LLC was issued 850,000 shares of our common stock.
34
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our articles of incorporation,
with amendments, all of which have been filed as exhibits to our registration
statement of which this prospectus is a part.
Common Shares
We are authorized to issue up to 30,000,000 shares of Common Stock, par
value $.0001. As of October 6, 2003, there were 20,135,690 shares of common
stock issued and outstanding and 5,000,000 shares reserved for issuance pursuant
to our stock option plans. The holders of common stock are entitled to one vote
for each share held of record on all matters to be voted on by the shareholders.
The holders of common stock are entitled to receive dividends ratably, when, as
and if declared by the board of directors, out of funds legally available. In
the event of a liquidation, dissolution or winding-up of us, the holders of
common stock are entitled to share equally and ratably in all assets remaining
available for distribution after payment of liabilities and after provision is
made for each class of stock, if any, having preference over the common stock.
The holders of shares of common stock, as such, have no conversion, preemptive,
or other subscription rights and there are no redemption provisions applicable
to the common stock. All of the outstanding shares of common stock are validly
issued, fully-paid and nonassessable.
Preferred Shares
We are authorized to issue up to 5,000,000 shares of preferred stock, par
value $.0001. The shares of preferred stock may be issued in series, and shall
have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions providing for the issuance
of such stock adopted from time to time by the board of directors. The board of
directors is expressly vested with the authority to determine and fix in the
resolution or resolutions providing for the issuances of preferred stock the
voting powers, designations, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series to the full extent now
or hereafter permitted by the laws of the State of Delaware.
Series B Convertible Preferred Stock
On May 15, 2002, our Board of Directors adopted and created a series of
preferred stock consisting of 1,000 shares designated as Series B Convertible
Preferred Stock. Each share of Series B Convertible Preferred Stock has a
liquidation preference of $1,000 and does not accrue any dividends. The Series B
Convertible Preferred Stock is convertible into our common stock, at the option
of the holder, at any time after the 30th calendar day we receive payment in
full. Each share of Series B Convertible 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. As of the
date hereof, there are no issued and outstanding shares of Series B Convertible
Preferred Stock.
Series C Convertible Preferred Stock
On November 10, 2002, our Board of Directors adopted and created a series
of preferred stock consisting of 1,000 shares designated as Series C Convertible
Preferred Stock. The Series C Convertible Preferred Stock is convertible into
our common stock, at the option of the holder, at any time after the day we
receive payment in full. Each share of Series C Convertible Preferred Stock is
convertible into 800 shares of our common stock. Each share of Series C
Convertible Preferred Stock has a liquidation preference of $1,000 and does not
accrue any dividends.
On August 13, 2003, all 1,000 Series C Preferred shares were converted into
1,786,000 shares of our common stock.
35
Warrants and Options
As of October 6, 2003, we had outstanding warrants and options to acquire
approximately 8,097,400 shares of common stock, exercisable at prices ranging
between $0.45 and $1.66.
In connection with the sale of 100 units in a private placement during July
and August 2003, each unit had 44,444 warrants, with each warrant representing
the right to purchase one share of our common stock at an exercise price of $.90
per share until June 24, 2006. The exercise price and the number of shares
issuable upon exercise of the warrants will be adjusted upon the occurrence of
certain events, including the issuance of common stock as a dividend on shares
of common stock, subdivisions, reclassifications or combinations of the common
shares or similar events. The warrants do not contain provisions protecting
against dilution resulting from the sale of additional shares of common shares
for less than the exercise price of the warrants or the current market price of
our securities and do not entitle warrant holders to any voting or other rights
as a shareholder until such warrants are exercised and common shares are issued.
Warrants may be redeemed in whole or in part at our option, upon 30 days'
notice, at a redemption price equal to $.01 per share of common stock issuable
upon exercise of the warrants, if the closing price of the common shares 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.
Additionally, in connection with the sale of the 100 units, we issued the
placement agent three-year warrants to purchases 665,000 shares of our common
stock at an exercise price of $0.75 per share.
Transfer Agent
Interwest Transfer Co., Inc. 1981 E. 4800 South, Suite 100, Salt Lake City
Utah 84117, is the transfer agent and registrar for our securities.
36
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective pledgees, donees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The selling stockholders may use any one
or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling stockholders defaults on
a margin loan, the broker may, from time to time, offer and sell the pledged
shares.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective pledgees, donees, transferees
or other successors in interest, may also sell the shares directly to market
makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the selling stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be "underwriters" as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares, including fees and disbursements of counsel to the selling
stockholders, but excluding brokerage commissions or underwriter discounts.
The selling stockholders, alternatively, may sell all or any part of the
shares offered in this prospectus through an underwriter. No selling stockholder
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
37
The selling stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. All
of these limitations may affect the marketability of the shares.
We have agreed to indemnify the selling stockholders, or their transferees
or assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material arrangement
with a broker-dealer for the resale of the common stock, then we would be
required to amend the registration statement of which this prospectus is a part,
and file a prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
PENNY 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.
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 price information for the penny
stock held in the account and information on the limited market in penny stocks.
38
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholder. We will not receive any proceeds
from the resale of the common stock by the selling stockholder. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholder, none of the selling stockholder will
continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
Beneficial Ownership Beneficial Ownership
Prior to Offering(1) After Offering(1)
Name of Selling Security Holder Shares Percentage(2) Shares Offered(3) Shares Percentage(2)
- ----------------------------------------- ---------------- ----------------- ------------------------ ----------------- ------------
Asirwatham, Ronald T. 222,220 1.1% 222,220 (4) 0 *
Ballinger, Arthur J. 101,332 * 101,332 (4) 0 *
Barron Partners, LP 2,848,150 14.1% 2,848,150 (4) 0 *
Benil Finance, Ltd. 355,552 1.8% 355,552 (4) 0 *
Blue Green T., LLC 177,776 * 177,776 (4) 0 *
Brandenburg, Steven 22,222 * 22,222 (4) 0 *
Brookshire Securities Corporation 665,000 3.3% 665,000 (5) 0 *
Coar, Robert M. 22,222 * 22,222 (4) 0 *
David G. Gove and Sharon K. Gove 0 *
Revocable Trust, dated July 7, 1995 826,446 4.1% 826,446
Dean Jr., Philip 88,888 * 88,888 (4) 0 *
Di Benedetto, LP 159,998 * 159,998 (4) 0 *
Doss & Company, Inc. 88,888 * 88,888 (4) 0 *
Doss, John R. 355,552 1.7% 355,552 (4) 0 *
Ettenger, Robert Lee 44,444 * 44,444 (4) 0 *
Gaur, Jai P. 88,888 * 88,888 (4) 0 *
Grebb, Gerald H. 26,666 * 26,666 (4) 0 *
Hankins, J. Ronald 44,444 * 44,444 (4) 0 *
Hempleman, Philip J. 355,552 1.7% 355,552 (4) 0 *
Hermes, Roger 49,778 * 49,778 (4) 0 *
J. Johnson LLC 850,000 4.2% 850,000 0 *
Kaufman, LP 195,554 * 195,554 (4) 0 *
Konover, Richard M. 17,778 * 17,778 (4) 0 *
Kwatra, Sonia 17,778 * 17,778 (4) 0 *
Manchio, Rosemarie 150,220 * 150,220 (4) 0 *
Mantey, Jeffrey 22,222 * 22,222 (4) 0 *
McClung, Michael 177,776 * 177,776 (4) 0 *
Molinsky, Maria 355,552 1.7% 355,552 (4) 0 *
Neal, Wesley L. 14,222 * 14,222 (4) 0 *
Oake, Christopher & Christina 22,222 * 22,222 (4) 0 *
Patton, Robert M. 355,552 1.7% 355,552 (4) 0 *
Reinfeld, George 88,888 * 88,888 (4) 0 *
Robertson, Leola 36,266 * 36,266 (4) 0 *
Russell, Douglas 88,888 * 88,888 (4) 0 *
Sabrin, Murray 88,888 * 88,888 (4) 0 *
Sanchez, Tanya D. 238,656 1.2% 238,656 0 *
Seguso, Robert 799,992 4.0% 799,992 (4) 0 *
Spackeen, Scott 177,776 * 177,776 (4) 0 *
39
Sprague, Roy W. & Gertrude M. 44,444 * 44,444 (4) 0 *
Stephens, Thomas S. 97,776 * 97,776 (4) 0 *
Stone, Michael 533,328 2.6% 533,328 (4) 0 *
Vassallo, Ronald & Susanne 44,444 * 44,444 (4) 0 *
von Schaumburg, E.J. 182,250 (6) * 150,000 32,250 (6) *
Walker, Donald C. 1,300,478 (6) 6.4% 1,217,145 83,333 (6) *
Walker, Gary R. 1,014,092 (6) 5.0% 930,759 83,333 (6) *
Wilson Jr., F. Bradford 284,442 1.4% 284,442 (4) 0 *
Wilson Jr., F. Bradford TTEE 88,888 * 88,888 (4) 0 *
Zalcberg, Irwin & Sari 133,332 * 133,332 (4) 0 *
* Less than 1%
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of October 6, 2003 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Percentage prior to offering is based on 20,135,690 shares of common
stock outstanding; percentage after offering is based on 25,245,090 shares of
common stock outstanding .
(3) Includes 5,109,400 shares of common stock underlying warrants.
(4) Of which 50% of such number of shares are issuable upon exercise of
currently exercisable options.
(5) All 665,000 shares are issuable upon exercise of currently exercisable
warrants.
(6) Includes the following number of shares of common stock which may be
aquired by the exercise of stock options which were exercisable as of October 6,
2003 or become exercisable within 60 days of that date: Donald Walker, 83,333
shares; E.J. von Schaumburg, 31,250 shares; and Gary Walker, 83,333 shares.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed upon for us by Sichenzia Ross Friedman Ference LLP, New York, New York.
EXPERTS
The consolidated financial statements as of and for the year ended April
30, 2003, included in this prospectus, have been included herein in reliance on
the report of J.H. Cohn LLP, independent public accountants, given on the
authority of that firm as experts in accounting and auditing.
Leonard Friedman, Certified Public Accountant, has audited, as set
forth in his report thereon appearing elsewhere herein, our financial statements
at April 30, 2002. The financial statements referred to above are included in
this prospectus with reliance upon the auditor's opinion based on his
expertise in accounting and auditing.
We dismissed our independent public accountant, Leonard Friedman, effective
as of August 19, 2002. Our 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, we dismissed N.I. Cameron, Inc., Chartered Accountants
("N.I. Cameron"), as our independent public accountants, effective as of that
date. Our Board of Directors approved such decision.
40
N.I. Cameron's opinion in its reports on our financial statements for the
years ended April 30, 2001 and April 30, 2002 (prior to our merger with WPCS
Holdings, Inc.), each expressed substantial doubt with respect to our 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 our financial statements
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, we and WPCS Holdings engaged J.H. Cohn LLP, as our
independent public accountants. Neither us nor WPCS Holdings 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 our 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).
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the Securities
Act of 1933, as amended, relating to the shares of common stock being offered by
this prospectus, and reference is made to such registration statement. This
prospectus constitutes the prospectus of WPCS International Incorporated, filed
as part of the registration statement, and it does not contain all information
in the registration statement, as certain portions have been omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, which requires us to file reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected at public reference facilities
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549.
Copies of such material can be obtained from the Public Reference Section of the
SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
41
WPCS INTERNATIONAL INCORPORATED
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The Financial Statements required by Item 304 of Regulation S-B are stated in
U.S. dollars and are prepared in accordance with U.S. Generally Accepted
Accounting Principles.
Fiscal Year Ended April 30, 2003
Reports of Independent Public Accountants F-1
Consolidated Balance Sheet at April 30, 2003 F-3
Consolidated Statements of Operations for the year ended April 30, 2003 and for the period from F-5
November 15, 2001 (date of inception) to April 30, 2002
Consolidated Statements of Shareholders' Equity for the year ended April 30, 2003 and for the period F-6
from November 15, 2001( date of inception) to April 30, 2002
Consolidated Statements of Cash Flows for the year ended April 30, 2003 and for the period from F-7
November 15, 2001 (date of inception) to April 30, 2002
Notes to Consolidated Financial Statements F-9
Quarter Ended July 31, 2003
Condensed Consolidated Balance Sheets at July 31, 2003 (unaudited) and April 30, 2003 F-29
Condensed Consolidated Statements of Operations for the three months ended July 31, 2003 and 2002
(unaudited) F-31
Condensed Consolidated Statement of Shareholders' Equity for the three months ended July 31, 2003
(unaudited) F-32
Condensed Consolidated Statements of Cash Flows for the three months ended July 31, 2003 and 2002
(unaudited) F-33
Notes to Condensed Consolidated Financial Statements F-35
42
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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-1
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-2
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-3
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-4
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-5
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-6
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) income
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) (20,895)
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-7
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-8
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-9
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-10
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-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)
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-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)
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-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)
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-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 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-15
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-16
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-17
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-18
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-19
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-20
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 for 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-21
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, and the period ended April 30,
2002, 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 4,350
Increase in valuation allowance 122,000 -
--------------- ---------------
Totals $ 19,550 $ 4,350
=============== ===============
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)
Customer lists- long term (215,000)
----------
Total (656,000)
----------
Net deferred tax liabilities $(586,000)
==========
F-22
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-23
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-24
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 placement 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-25
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 before income taxes $ (223,211) $ (61,185) (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-26
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-27
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 acquisition of Clayborn will provide the Company
additional wireless opportunities, expansion of it's customer base, and access
to additional 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.
On August 13, 2003, all 1000 Series C Preferred shares were converted into
1,786,000 shares of the Company's common stock.
F-28
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, April 30,
ASSETS 2003 2003
-------------------- -----------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 929,084 $ 167,547
Accounts receivable, net of allowance of $10,679 and
$11,779 at July 31, 2003 and April 30, 2003, respectively 3,070,588 2,397,236
Costs and estimated earnings in excess of billings on
uncompleted contracts 946,658 408,194
Inventory 90,352 77,775
Prepaid expenses 196,473 143,113
Deferred tax assets 70,000 70,000
-------------------- -----------------
Total current assets 5,303,155 3,263,865
PROPERTY AND EQUIPMENT, NET 612,470 647,951
CUSTOMER LISTS, NET 472,000 499,000
GOODWILL 5,538,882 5,388,882
OTHER ASSETS 22,771 21,528
-------------------- -----------------
Totals $ 11,949,278 $ 9,821,226
==================== =================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-29
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
July 31, April 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2003
----------------- -----------------
(UNAUDITED)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,145,131 $ 1,278,443
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,407,155 215,819
Current maturities of capital lease obligations 2,294 2,294
Current maturities of equipment loans payable 10,327 21,268
Note payable, officer 100,000 100,000
Due to shareholders 208,207 58,207
Income taxes payable 143,000 23,700
Deferred income taxes, current portion 129,000 129,000
----------------- -----------------
Total current liabilities 3,145,114 1,828,731
Capital lease obligations, net of current maturities 4,056 4,608
Deferred income taxes, net of current portion 434,000 527,000
----------------- -----------------
Total Liabilities 3,583,170 2,360,339
----------------- -----------------
COMMITMENTS
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 July 31, 2003,
liquidation preference $1,000,000 - -
Common Stock - $0.0001 par value,
30,000,000 shares authorized, 14,856,604 and
13,078,844 shares issued and outstanding at July 31, 2003 and April
30, 2003, respectively 1,486 1,308
Additional paid- in capital 9,030,426 8,002,639
Accumulated deficit (665,804) (543,060)
----------------- -----------------
Total shareholders' equity 8,366,108 7,460,887
----------------- -----------------
Totals $ 11,949,278 $ 9,821,226
================= =================
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-30
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
July 31,
2003 2002
----------------- -----------------
SALES $ 3,096,483 $ 393,124
COST OF SALES 2,029,246 303,177
----------------- -----------------
GROSS PROFIT 1,067,237 89,947
----------------- -----------------
OPERATING EXPENSES:
Selling expenses 16,236 5,275
General and administrative expenses, including
$129,965 of non-cash compensation expense
for the three months ended July 31, 2003 1,069,063 183,789
Depreciation and amortization 63,682 1,543
----------------- -----------------
Total 1,148,981 190,607
----------------- -----------------
LOSS BEFORE PROVISION FOR INCOME TAXES (81,744) (100,660)
Provision for income taxes (41,000) -
----------------- -----------------
NET LOSS (122,744) (100,660)
Imputed dividends accreted on
Convertible Series B Preferred stock - (173,000)
----------------- -----------------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS $ (122,744) $ (273,660)
================= =================
Basic net loss per common share $ (0.01) $ (0.03)
================= =================
Basic weighted average number of
common shares outstanding 13,252,755 8,400,632
================= =================
The accompanying notes are an integral part of these condensed
consolidated financial statements
F-31
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JULY 31, 2003
(UNAUDITED)
ADDITIONAL ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN DEFICIT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EQUITY
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE MAY 1, 2003 1,000 $ - 13,078,844 $ 1,308 $8,002,639 $ (543,060) $7,460,887
Issuance of common stock through
private placement - - 1,777,760 178 897,822 - 898,000
Fair value of stock options granted to
nonemployees - - - - 129,965 - 129,965
NET LOSS - - - - - (122,744) (122,744)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 2003 1,000 $ - 14,856,604 $ 1,486 $9,030,426 $ (665,804) $8,366,108
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-32
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(UNAUDITED)
Three Months Ended
July 31,
2003 2002
-------------- --------------
OPERATING ACTIVITIES:
Net loss $ (122,744) $ (100,660)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 63,682 1,543
Provision for doubtful accounts (1,100) -
Fair value of stock options granted to non-employees 129,965 -
Deferred income taxes (93,000) -
Changes in operating assets and liabilities:
Accounts receivable (672,252) (205,541)
Costs and estimated earnings in excess of billings on
uncompleted contracts (538,464) -
Inventory (12,577) (3,266)
Prepaid expenses (53,360) (117,500)
Other assets (1,243) -
Accounts payable and accrued expenses (133,312) 99,499
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,191,336 -
Income taxes payable 119,300 -
-------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (123,769) (325,925)
-------------- --------------
INVESTING ACTIVITIES:
Acquisition of property and equipment (1,201) -
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (1,201) -
-------------- --------------
FINANCING ACTIVITIES:
Cash received in reverse acquisition - 3,257
Proceeds from sale of preferred stock - 455,000
Proceeds from issuance of common stock 898,000 -
Repayment of notes payable-bank - (9,115)
Repayment of equipment loans payable (10,941) -
Payments of capital lease obligations (552) (500)
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 886,507 448,642
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 761,537 122,717
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 167,547 15,554
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 929,084 $ 138,271
============== ==============
The accompanying notes are an integral part of these condensed
consolidated financial statements
F-33
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-continued
(UNAUDITED)
Three Months Ended
July 31,
2003 2002
---------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 1,778 $ 220
========== ==========
Income taxes $ 22,077 $ 190
========== ==========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
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
========== ==========
Earn-out consideration unpaid relating to an acquisition $ 150,000 $ -
========== ==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-34
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") for interim financial statements and do not include all of
the information and footnote disclosures required by accounting principles
generally accepted in the United States of America. Accordingly, the unaudited
condensed financial statements should be read in conjunction with our audited
consolidated financial statements and notes thereto for the fiscal year ended
April 30, 2003. The accompanying unaudited condensed consolidated financial
statements reflect all adjustments (consisting of normal recurring accruals),
which are, in the opinion of the management, considered necessary for a fair
presentation of financial position, results of operations, and cash flows for
the interim periods. Operating results for the three month period ended July 31,
2003 are not necessarily indicative of the results that may be expected for the
fiscal year ending April 30, 2004.
The accompanying unaudited condensed 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 three months
ended July 31, 2002, the statements 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, 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 condensed 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.
F-35
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION-(Continued)
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 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.
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES
A summary of selected accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
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
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. On an ongoing basis, the Company
expects to perform its annual impairment test during the fourth quarter absent
any interim impairment indicators.
F-36
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 July 31,
2003, the Company had 1,000 shares of Series C Convertible Preferred Stock with
potential conversion into 1,786,000 shares of the Company's common stock, and
2,638,000 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.
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.
F-37
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS Costs and
estimated earnings on uncompleted contracts consist of the following at
July 31, 2003:
Costs incurred on uncompleted contracts $ 5,625,623
Estimated contract profit 1,644,097
---------------
7,269,720
Less: billings to date 7,730,217
---------------
$ (460,497)
===============
Costs and estimated earnings in excess of billings $ 946,658
Billings in excess of costs and estimated earnings
on uncompleted contracts (1,407,155)
---------------
$ (460,497)
===============
NOTE 4 - RELATED PARTY TRANSACTIONS
In connection with the acquisition of Walker, an additional $500,000 is payable
to the Walker shareholders, provided Walker achieves certain net profits, to be
paid in quarterly distributions equal to 75% of net income. For the three months
ended July 31, 2003, an additional $150,000 was payable to the Walker
shareholders against this earn-out provision, accordingly, the goodwill was
increased by $150,000. At July 31, 2003, the total payable to the Walker
shareholders under this earn-out provision was $208,207.
In connection with the acquisition of Walker, the Company assumed a ten-year
lease with trusts, of which, certain officers of the Company are the trustees,
for a building and land located in Fairfield, California, which is occupied by
its Walker subsidiary. For the three months ended July 31, 2003, $14,000 was
paid as rent for this lease.
NOTE 5 - 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
July 31, 2003, there were 2,362,000 shares available for grant under the 2002
Plan. No options were granted as of July 31, 2002.
The Company applies the intrinsic value method in accounting for its stock-based
compensation plan 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.
F-38
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - STOCK OPTION PLAN ( Continued)
The Company has elected the disclosure only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation- Transition and Disclosure, an amendment to of FASB Statement 123".
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
three months ended July 31, 2003 would have been as follows:
Net loss attributable to common shareholders
As reported $ (122,744)
Pro forma $ (192,990)
Net loss per share attributable to common shareholders
As reported $ (0.01)
Pro forma $ (0.01)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes Option pricing model with the following assumptions for the three
months ended July 31, 2003: Risk-free interest rate of 2%, dividend yield of 0%,
expected life of 5 years and volatility of 71.6%.
NOTE 6 - SHAREHOLDERS' EQUITY
On June 25, 2003, (and amended on 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 was 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 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. Through July 31, 2003, the Company sold 40
Units and received proceeds of $898,000, net of placement agents commission from
the Offering and issued 1,777,760 shares.
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 and recorded $129,965 of expense for the three
months ended July 31, 2003.
F-39
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 - SEGMENT REPORTING
The Company's reportable segments are determined based upon the nature of the
products and services, 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.
Segment results for the three months ending July 31, 2003 are as follows:
CORPORATE WPCS WALKER TOTAL
Sales $ - $ 620,589 $ 2,475,894 $ 3,096,483
Net (loss) income before income taxes $ (215,890) $ (14,401) 148,547 (81,744)
Goodwill $ 1,627,044 $ 3,911,838 $ 5,538,882
Total assets $ 955,898 $ 3,694,575 $ 7,298,805 $ 11,949,278
NOTE 8 - SUBSEQUENT EVENTS
On August 13, 2003, all 1,000 Series C Preferred shares were converted into
1,786,000 shares of the Company's common stock.
On August 22, 2003, the Company entered into an agreement and completed a merger
with Clayborn Contracting Group, Inc, a California corporation ("Clayborn"). The
Company acquired all of the issued and outstanding shares of Clayborn in
exchange for $900,000 cash consideration and 826,446 newly issued shares of the
Company's common stock with a fair value of approximately $868,000 based on the
average value of the Company's common stock as of a few days before and after
the merger terms were agreed to and announced. An additional $1,100,000 is
payable by the delivery to the Clayborn shareholders of 50% of the post tax
profits of Clayborn, payable in quarterly distributions, which would increase
the purchase price. Based on the historical net assets acquired from Clayborn of
approximately $1,007,000, the Company preliminarily expects to recognize
goodwill of approximately $760,000. Upon completion of a formal purchase price
allocation there may be a decrease in the amount assigned to goodwill and a
corresponding increase in tangible or intangible assets. The acquisition of
Clayborn will provide the Company additional wireless opportunities, expansion
of the current customer base, and access to additional project engineers.
F-40
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8 - SUBSEQUENT EVENTS( Continued)
Through September 5, 2003, the Company sold the remaining 60 Units in connection
with the Offering, received additional proceeds of $1,347,500, net of placement
agents commission from the Offering and issued 2,666,640 shares of its common
stock.
F-41
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from the
information contained in this prospectus. This document may only be used where
it is legal to sell the securities. The information in this document may only
be accurate on the date of this document.
13,766,806 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
Prospectus Summary 2
Risk Factors 3
Use of Proceeds 7
Market for Common Equity and Related
Stockholder Matters 8 WPCS International Incorporated
Dividend Policy 9
Management's Discussion and Analysis 10
Business 19
Management 24
Executive Compensation 27
Certain Relationships and Related Transactions 32
Security Ownership of Certain Beneficial
Owners and Management 33
Description of Securities 35
Plan of Distribution 37
Selling Stockholders 39 ________________
Legal Matters 40
Experts 40 PROSPECTUS
Available Information 41 ________________
Index to Financial Statements 42
________, 2003
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Our Articles of Incorporation limit, to the maximum extent permitted by
Delaware law, the personal liability of directors for monetary damages for
breach of their fiduciary duties as a director. Our Bylaws provided that we
shall indemnify our officers and directors and may indemnify our employees and
other agents to the fullest extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party to
an action by reason of that fact that he or she was a director, officer employee
or agent of the corporation or was serving at the request of the corporation
against expenses actually and reasonably incurred by him or her in connection
with such action if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and with respect to any criminal action, had no reasonable cause to
believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been advised that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
Nature of Expense Amount
----------------
SEC Registration fee $ 1,642.76
Accounting fees and expenses *10,000.00
Legal fees and expenses *35,000.00
Printing and related expenses *10,000.00
----------------
TOTAL *$56,642.76
================
* Estimated.
II-1
Item 26. Recent Sales of Unregistered Securities.
Except as set forth below, there were no sales of unregistered
securities by WPCS during the past three (3) years:
On May 17, 2002, we issued 5,500,000 shares of our common stock in
exchange for all of the issued and outstanding shares of WPCS Holdings, Inc. The
shares were issued to one accredited investor in a transaction exempt under Rule
506 of Regulation D promulgated under Section 4(2) of the Securities Act of
1933, as amended.
Between May 24, 2002 and June 11, 2002, we sold 455 shares of Series B
Preferred Stock through a private placement and received proceeds of $455,000.
Additionally, we issued 64 shares of Series B Preferred Stock to one of our
shareholders as payment for advances from shareholder and accounts payable
totaling $64,000. Each share of Series B Convertible Preferred Stock was
convertible at a basis of $1,000 per share at a conversion price equal to 75% of
the average market price of our common stock for ten days prior to the date of
conversion. On December 13, 2002, all Series B Preferred Stock was converted to
567,212 shares of the Company's common stock. The shares were issued to three
accredited investors in a transaction exempt under Section 4(2) of the
Securities Act of 1933, as amended.
On November 13, 2002, we issued 1,000,000 shares of our common stock in
exchange for all of the issued and outstanding shares of Invisnet, Inc. The
shares were issued to two accredited investors in a transaction exempt under
Section 4(2) of the Securities Act of 1933, as amended.
On December 6, 2002, we issued 1,000 shares of Series C Preferred Stock
in a private placement and received proceeds of $1,000,000. Each share of Series
C Convertible Preferred Stock is convertible into 800 shares of our common
stock, subject to certain reset provisions. On August 13, 2003, all Series C
Preferred Stock was converted to 1,786,000 shares of the Company's common stock.
The shares were issued to three accredited investors in a transaction exempt
under Section 4(2) of the Securities Act of 1933, as amended.
On December 30, 2002, we issued 2,486,000 shares of our common stock in
exchange for all of the issued and outstanding shares of Walker Comm, Inc. The
shares were issued to three accredited investors in a transaction exempt under
Section 4(2) of the Securities Act of 1933, as amended.
During July, August and September 2003, we sold an aggregate of 100
units to 40 accredited investors in a private placement for aggregate proceeds
of $2,500,000. Each Unit consists of (i) 44,444 shares of our common stock, and
(ii) warrants to purchase 44,444 shares of common stock, exercisable for a
period of three years at an exercise price of $0.90 per share. The shares were
issued in a transaction exempt under Rule 506 of Regulation D promulgated under
Section 4(2) of the Securities Act of 1933, as amended.
On August 22, 2003, we issued 826,446 shares of our common stock in
exchange for all of the issued and outstanding shares of Clayborn Contracting
Group, Inc. The shares were issued to one accredited investor in a transaction
exempt under Rule 506 of Regulation D promulgated under Section 4(2) of the
Securities Act of 1933, as amended.
Item 27. Exhibits.
The following exhibits are included as part of this Form SB-2.
References to "us" in this Exhibit List mean WPCS International Incorporated, a
Delaware corporation.
II-2
Exhibit No. Description
3.1 Certificate of Incorporation of Internet International Communications Ltd.,
incorporated by reference to Exhibit 3.1 of wowtown.com, Inc.'s Form SB-2,
filed June 8, 2000.
3.2 Bylaws of Internet International Communications Ltd., incorporated by
reference to Exhibit 3.2 of wowtown.com, Inc.'s Form SB-2, filed June 8,
2000.
4.1 Certificate of Designation of Series A Preferred Stock, incorporated by
reference to Exhibit 4.1 of wowtown.com, Inc.'s Form SB-2, filed June 8,
2000.
4.2 Certificate of Designation of Series B Preferred Stock, incorporated by
reference to Exhibit 4.2 of WPCS International Incorporated's Annual Report
on Form 10-KSB, filed July 29, 2002.
4.3 Certificate of Designation of Series C Preferred Stock, incorporated by
reference to Exhibit 4.3 of WPCS International Incorporated's Annual Report
on Form 10-KSB, filed August 14, 2003.
4.4 2002 Employee Stock Option Plan, incorporated by reference to Exhibit 4.4
of WPCS International Incorporated's Annual Report on Form 10-KSB, filed
August 14, 2003.
4.5 Form of 2003 Warrant, incorporated by reference to Exhibit 4.5 of WPCS
International Incorporated's Annual Report on Form 10-KSB, filed August 14,
2003.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed herewith).
10.1 Andrew Hidalgo Employment Agreement, incorporated by reference to Exhibit
10.1 of WPCS International Incorporated's Annual Report on Form 10-KSB,
filed August 14, 2003.
10.2 E.J. von Schaumburg Employment Agreement, incorporated by reference to
Exhibit 10.2 of WPCS International Incorporated's Annual Report on Form
10-KSB, filed August 14, 2003.
10.3 Donald Walker Employment Agreement, incorporated by reference to Exhibit
10.3 of WPCS International Incorporated's Annual Report on Form 10-KSB,
filed August 14, 2003.
10.4 Gary Walker Employment Agreement, incorporated by reference to Exhibit 10.4
of WPCS International Incorporated's Annual Report on Form 10-KSB, filed
August 14, 2003.
10.5 Joseph Heater Employment Agreement, incorporated by reference to Exhibit
10.5 of WPCS International Incorporated's Annual Report on Form 10-KSB,
filed August 14, 2003.
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, incorporated by
reference to Exhibit 1 of WPCS International Incorporated's Current Report
on Form 8-K/A, filed June 12, 2002.
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, incorporated by
reference to Exhibit 3 of WPCS International Incorporated's Current Report
on Form 8-K, filed November 27, 2002.
10.8 Amendment to Invisinet Bonus Agreement, dated as of May 27, 2003,
incorporated by reference to Exhibit 10.8 of WPCS International
Incorporated's Annual Report on Form 10-KSB, filed August 14, 2003.
II-3
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,
incorporated by reference to Exhibit 3 of WPCS International Incorporated's
Current Report on Form 8-K, filed January 14, 2003.
10.10 Agreement and Plan of Merger by and among WPCS International Incorporated,
Clayborn Contracting Acquisition Corp., Clayborn Contracting Group, Inc.,
David G. Gove and Sharon Gove made as of the 22nd day of August, 2003,
incorporated by reference to Exhibit 3 of WPCS International Incorporated's
Current Report on Form 8-K, filed August 29, 2003.
23.1 Consent of J. H. Cohn LLP (filed herewith).
23.2 Consent of Leonard Friedman (filed herewith)
23.3 Consent of legal counsel (see Exhibit 5).
Item 28. Undertakings.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of the
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) under the Securities Act if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement, and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has
II-4
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Exton,
State of Pennsylvania, on October 7, 2003.
WPCS INTERNATIONAL INCORPORATED
By: /s/Andrew Hidalgo
--------------------
Andrew Hidalgo, Chairman, Chief Executive Officer and Director
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of WPCS International
Incorporated, a Delaware corporation, do hereby constitute and appoint Andrew
Hidalgo the lawful attorney in-fact and agent with full power and authority to
do any and all acts and things and to execute any and all instruments which said
attorney and agent, determine may be necessary or advisable or required to
enable said corporation to comply with the Securities Act of 1933, as amended,
and any rules or regulations or requirements of the Securities and Exchange
Commission in connection with this Registration Statement. Without limiting the
generality of the foregoing power and authority, the powers granted include the
power and authority to sign the names of the undersigned officers and directors
in the capacities indicated below to this Registration Statement, and to any and
all instruments or documents filed as part of or in conjunction with this
Registration Statement or amendments or supplements thereof, and each of the
undersigned hereby ratifies and confirms that said attorney and agent, shall do
or cause to be done by virtue thereof. This Power of Attorney may be signed in
several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power
of Attorney and pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities on October 7, 2003.
Signature Title
/s/ Andrew Hidalgo Chairman, Chief Executive Officer
- ------------------ and Director
Andrew Hidalgo
/s/ Joseph Heater Chief Financial Officer
- ------------------
Joseph Heater
Director
- ------------------
Norm Dumbroff
/s/ Neil Hebenton Director
- ------------------
Neil Hebenton
/s/ Gary Walker Director
- ------------------
Gary Walker
/s/ William Whitehead Director
- ------------------
William Whitehead
II-6