As filed with the Securities and Exchange Commission on April 30, 2004
An Exhibit List can be found on page II-2.
Registration No. 333-109522
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Amendment No. 3
to
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 8,456,906 $1.475 $12,473,936 $1,009.14
Stock")
Shares of Common Stock issuable upon exercise of
warrants 5,109,400 $1.475 $7,536,365 $609.69
Total 13,566,306 $1.475 $20,010,302 $1,618.83 (2)
======================================================= ================= ==================== ===================== ==============
(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.
(2) $1,642.76 previously paid.
-------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Preliminary Prospectus Subject To Completion, Dated April 30, 2004
The information in this prospectus is not complete and may be changed.
WPCS International Incorporated
13,566,306 Shares of
Common Stock
This prospectus relates to the resale by the selling stockholders of
13,566,306 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 April 28, 2004, was $1.19.
-------------------------
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 ______________, 2004.
PROSPECTUS SUMMARY
Our Business
WPCS International Incorporated is a project engineering company that
focuses on the implementation requirements of specialty communication systems,
including wireless fidelity (WiFi) deployment and fixed wireless systems. We
provide a range of specialty communication services including project
management, site design, structured cabling, product integration, network
security, and technical support. These projects may require the integration of
multiple communication components and engineering services in order to complete
the customer's requirements for the deployment of a specialty communication
system, a WiFi or fixed wireless system. We have two reportable segments,
specialty communication systems and wireless infrastructure services.
Specialty communication services include project management,
installation and network integration of voice, data, video and security systems,
including fiber optic cabling and outside plant trenching. The specialty
communication systems segment represents approximately 80% of total revenue.
We define wireless infrastructure services as the internal and external
design and installation of a wireless solution to support data, voice or video
transmission between two or more points without the utilization of landline
infrastructure. Wireless infrastructure services include site survey and design,
spectrum analysis, product integration, mounting and alignment, and structured
cabling. We also provide network security, training and technical support. The
wireless infrastructure segment represents approximately 20% of total revenue.
We service major corporations, government agencies and educational
institutions, both domestically and internationally.
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.
We started our operations in December 2001. We did not record
significant revenue for the period from November 15, 2001 (date of inception) to
April 30, 2002. The operations for this period was conducted prior to the
acquisitions of Invisinet, Inc, Walker Comm, Inc. and Clayborn Contracting
Group, Inc. Therefore, for the purposes of discussing our results of operations,
limited comparisons are made between the operations for these periods. We have
incurred net losses since our inception. As of January 31, 2004, we have an
accumulated deficit of $977,387.
The Offering
Common stock offered by selling......................................... 13,566,306 shares, of which 8,456,906 are
currently issued and outstanding and
5,109,400 are issuable upon exercise of
outstanding warrants. This number
represents approximately 52.3% of our
common stock to be outstanding after the
offering.
Common stock to be outstanding after the offering........................ 25,959,376 shares, which assumes the
exercise of all shares underlying
outstanding warrants being registered in
this offering.
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
Brookshire Securities Corporation will be deemed to be an underwriter
of the shares of stock which it is offering.
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 as a result of these risks.
Risks Related To Our Business
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 and a net loss of $434,327 for the nine months ended January 31,
2004. There can be no assurance that we will achieve or sustain profitability or
positive cash flow from operating activities in the future. If we cannot achieve
operating profitability or positive cash flow from operating activities, we may
not be able to meet our working capital requirements. If we are unable to meet
our working capital requirements, we are likely to reduce or cease all or part
of our operations.
We may be unable to obtain the additional capital required to grow our business.
We may have to curtail our business if we cannot find adequate funding.
Our ability to grow depends significantly on our ability to expand our
operations through internal growth and by acquiring other companies or assets
that require significant capital resources. We may need to seek additional
capital from public or private equity or debt sources to fund our growth and
operating plans and respond to other contingencies such as:
o shortfalls in anticipated revenues or increases in expenses;
o the development of new services; or
o the expansion of our operations, including the recruitment of
additional personnel.
We cannot be certain that we will be able to raise additional capital in the
future on terms acceptable to us or at all. If alternative sources of financing
are insufficient or unavailable, we may be required to modify our growth and
operating plans in accordance with the extent of available financing.
Our success is dependent on growth in the deployment of wireless networks, and
to the extent that such growth slows down, our business may be harmed.
The wireless industry has historically experienced a dramatic rate of
growth both in the United States and internationally. Recently, however, many
end users have been re-evaluating their network deployment plans in response to
downturns in the capital markets, changing perceptions regarding industry
growth, the adoption of new wireless technologies, increased price competition
and a general economic slowdown in the United States and internationally. It is
difficult to predict whether these changes will result in a downturn in the
wireless industry. If the rate of growth should slow down and end users continue
to reduce their capital investments in wireless infrastructure or fail to expand
their networks, our operating results may decline which could cause a decline in
our profits.
The uncertainty associated with rapidly changing wireless technologies
may also continue to negatively impact the rate of deployment of wireless
networks and the demand for our services. End users face significant challenges
in assessing their bandwidth demands and in acceptance of rapidly changing
enhanced wireless capabilities. If end users continue to perceive that the rate
of acceptance of next generation wireless products will grow more slowly than
previously expected, they may, as a result, continue to slow their deployment of
next generation wireless technologies. Any significant slowdown will reduce the
demand for our services and would result in negative net growth, net losses, and
potentially a reduction in our business operations.
4
The increase of services offered by equipment vendors could cause a reduction in
demand for our services.
Recently, the wireless equipment vendors have increased the services
they offer for their technology. This activity and the potential continuing
trend towards offering services may lead to a greater ability among equipment
vendors to provide a comprehensive range of wireless services, and may simplify
integration and installation, which could lead to a reduction in demand for our
services. Moreover, by offering certain services to end users, equipment vendors
could reduce the number of our current or potential customers and increase the
bargaining power of our remaining customers, which may result in a decline in
our net revenue and profits.
Our quarterly results fluctuate and may cause our stock price to decline.
Our quarterly operating results have fluctuated in the past and will
likely fluctuate in the future. As a result, we believe that period to period
comparisons of our results of operations are not a good indication of our future
performance. A number of factors, many of which are outside of our control, are
likely to cause these fluctuations.
The factors outside of our control include:
o Wireless market conditions and economic conditions generally;
o Timing and volume of customers' specialty communication projects;
o The timing and size of wireless deployments by end users.
o Fluctuations in demand for our services;
o Changes in our mix of customers' projects and business activities;
o The length of sales cycles;
o Adverse weather conditions, particularly during the winter season, could
effect our ability to render specialty communication services in certain
regions of the United States;
o The ability of certain customers to sustain capital resources to pay
their trade accounts receivable balances;
o Reductions in the prices of services offered by our competitors; and
o Costs of integrating technologies or businesses that we add.
The factors substantially within our control include:
o Changes in the actual and estimated costs and time to complete
fixed-price, time-certain projects that may result in revenue adjustments
for contracts where revenue is recognized under the percentage of
completion method;
o The timing of expansion into new markets, both domestically and
internationally;
o Costs incurred to support internal growth and acquisitions;
o Fluctuations in operating results caused by acquistions; and
o The timing and payments associated with possible acquisitions.
5
Because our operating results may vary significantly from quarter to
quarter, our operating results may not meet the expectations of securities
analysts and investors, and our common stock could decline significantly which
may expose us to risks of securities litigation, impair our ability to attract
and retain qualified individuals using equity incentives and make it more
difficult to complete acquisitions using equity as consideration.
Failure to keep pace with the latest technological changes could result in
decreased revenues.
The market for our services is characterized by rapid change and
technological improvements. Failure to respond in a timely and cost-effective
way to these technological developments could result in serious harm to our
business and operating results. We have derived, and we expect to continue to
derive, a substantial portion of our revenues from creating wireless networks
that are based upon today's leading technologies and that are capable of
adapting to future technologies. As a result, our success will depend, in part,
on our ability to develop and market service offerings that respond in a timely
manner to the technological advances of our customers, evolving industry
standards and changing client preferences.
Failure to properly manage projects may result in costs or claims.
Our engagements often involve large scale, highly complex projects
involving wireless networks and specialty communication systems utilizing
leading technology. The quality of our performance on such projects depends in
large part upon our ability to manage the relationship with our customers, and
to effectively manage the project and deploy appropriate resources, including
third-party contractors, and our own personnel, in a timely manner. Any defects
or errors or failure to meet clients' expectations could result in claims for
substantial damages against us. Our contracts generally limit our liability for
damages that arise from negligent acts, error, mistakes or omissions in
rendering services to our clients. However, we cannot be sure that these
contractual provisions will protect us from liability for damages in the event
we are sued. In addition, in certain instances, we guarantee customers that we
will complete a project by a scheduled date or that the network will achieve
certain performance standards. As a result, we often have to make judgments
concerning time and labor costs. If the project or network experiences a
performance problem, we may not be able to recover the additional costs we will
incur, which could exceed revenues realized from a project. Finally, if we
miscalculate the resources or time we need to complete a project with capped or
fixed fees, our operating results could seriously decline.
Potential future acquisitions could be difficult to integrate, disrupt our
business, dilute stockholder value and adversely affect our operating results.
Since November 1, 2002, we have acquired four 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. Although we currently only have operations within the United States,
if we were to acquire an international operation; we will face additional risks,
including:
o difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
o different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
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.
6
Our officers and directors, in the aggregate, beneficially own
approximately 45.3% 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.
Risks Relating to our Common Stock
There are a Large Number of Shares Being Registered for Resale and the Sale of
These Shares May Cause the Price of Our Stock to Drop.
Prior to this Offering, we had 20,849,976 shares of common stock issued
and outstanding. Of those shares, 4,576,411 were registered for resale. Upon the
effectiveness of this Offering, an additional 13,566,306 shares, including the
shares underlying the warrants will be eligible for sale in the market. As a
result, the registration of these shares may result in substantial sales of our
common stock, which could cause our stock price to drop.
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.
7
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.
8
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............. 1.73 1.02
Third Quarter ............. 1.70 0.91
Fourth Quarter (1)........ 1.44 0.90
--------------------
(1) As of April 28, 2004
On April 28, 2004, the closing sale price for our common shares, as
reported by the Bulletin Board, was $1.19 per share.
As of April 26, 2004, there were 20,849,976 shares of common stock
outstanding and there were approximately 92 registered holders of our common
stock.
9
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.
10
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. We
provide a range of specialty communication services including project
management, site design, structured cabling, product integration, network
security, and technical support. These projects may require the integration of
multiple communication components and engineering services in order to complete
the customer's requirements.
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, Inc. Invisinet is in a similar business as us, providing
fixed wireless technology services to its customers. The acquisition of
Invisinet broadens our customer base and expands our technical resources capable
of deploying wireless systems. For the nine months ended January 31, 2004, the
acquisition of Invisinet increased our revenue by approximately $1.8 million as
compared to the same period in the prior year. To complete the merger, we
acquired 100% of the common stock of Invisinet by issuing 1,000,000 shares of
our common stock with a fair value of $1,750,000, based on the average value of
our common stock as of a few days before and after the merger was announced.
Based on the net assets acquired of Invisinet, we have recognized goodwill of
approximately $1.6 million.
On December 30, 2002, we acquired all of the outstanding common stock
of Walker Comm, Inc. The acquisition of Walker gives us the ability to provide
specialty communication systems to our customers along with strengthening our
project management capabilities. For the nine months ended January 31, 2004, the
acquisition of Walker increased our revenue approximately $7.6 million as
compared to the same period in the prior year. The aggregate consideration we
paid for Walker was approximately $5,113,000. To complete the merger, all of the
issued and outstanding shares of common stock of Walker were exchanged for
aggregate merger consideration consisting of $500,000 in cash and 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 average value of our common stock as of a few days
before and after the merger was announced. Based on the net assets acquired of
Walker, we recognized goodwill of approximately $4.2 million.
11
On August 22, 2003, we acquired all of the outstanding common stock of
Clayborn Contracting Group, Inc. The acquisition of Clayborn gives us additional
expertise in engineering and deployment services for specialty communication
systems and additional wireless opportunities to pursue. For the nine months
ended January 31, 2004, the acquisition of Clayborn increased our revenue
approximately $2.8 million as compared to the same period in the prior year. The
aggregate consideration we paid for Clayborn was approximately $2,925,000. We
acquired all of the issued and outstanding shares of Clayborn in exchange for
$900,000 cash consideration and $57,000 in transaction costs, and 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 due
by September 30, 2007, payable in quarterly distributions, by payment to the
Clayborn shareholders of 50% of the quarterly post tax profits of Clayborn.
Based on the preliminary information currently available, we preliminarily
expect to recognize goodwill of approximately $2,140,000. 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 other intangible assets.
On April 2, 2004, we acquired all of the issued and outstanding common
stock of Heinz Corporation. Heinz is a St. Louis, Missouri based provider of
in-building wireless infrastructure services for both cellular and WiFi
applications including consulting, integration and installation services for
wireless infrastructure. The acquisition of Heinz gives us additional project
engineering expertise for wireless infrastructure services, broadens our
customer base, and expands our geographical presence in the Midwest. We acquired
all of the issued and outstanding shares of Heinz for $1,000,000, as follows:
(1) $700,000 of the our common stock, based on the closing price of our common
stock on March 30, 2004 of $0.98 per share, for an aggregate of 714,286 newly
issued shares of the Company's common stock and (2) $300,000 total cash
consideration, of which $100,000 was paid at closing and a $200,000 non-interest
bearing promissory note. Of the $200,000, $75,000 is payable on the first and
second anniversaries of the closing date and $50,000 is payable on the third
anniversary of the closing date. Based on the preliminary information currently
available, we expect to recognize goodwill of approximately $1,000,000. 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 other
intangible assets.
Results of Operations
Management currently considers the following events, trends and
uncertainties to be important to understand its results of operations and
financial condition:
o We started our operations in December 2001. We did not record significant
revenue for the period from November 15, 2001 (date of inception) to April
30, 2002. The operations for this period were conducted prior to the
acquisitions of three privately-held companies, Invisinet, Walker and
Clayborn.
o As a result of the acquisitions of Invisinet on November 13, 2002 and
Walker on December 30, 2002, we experienced significant growth in our
overall business and commenced operations in two segments, wireless
infrastructure services and specialty communication systems.
o With the acquisition of Clayborn in the second quarter of fiscal 2004, we
experienced additional expansion of the specialty communication segment. As
of January 31, 2004, the specialty communications segment represents
approximately 80% of total revenue, and wireless infrastructure services
represent approximately 20% of total revenue.
12
o Furthermore, we plan to evaluate additional acquisition opportunities in
2004 in an attempt to build out a national, strategically located workforce
that will allow our segments to leverage, to the extent feasible, related
internal synergies, and to take advantage of expected growth in the
wireless infrastructure and specialty communications markets.
o As of March 1, 2004, our backlog has increased to approximately $19
million, versus $14 million as of January 31, 2004. Our backlog is
comprised of the uncompleted portion of services to be performed under
job-specific contracts or purchase orders. The increase in backlog is the
result of new contracts awarded to us by our customers. We expect this
backlog to be fully recognized as revenue within the next twelve months.
o Our selling, general and administrative expenses decreased as a percentage
of revenue for the three and nine months ended January 31, 2004, as
compared to the same period in the prior year.
Fiscal Year ended April 30, 2003 Compared to period November 15, 2001 (date of
inception) to April 30, 2002
Consolidated results for the year ended April 30, 2003 were as follows.
For the period
November 15, 2001
Year ended (date of inception) to
April 30, 2003 April 30, 2002
------------------------------ -----------------------------
Revenue $ 5,422,858 100.0% $ 402,289 100.0%
Costs and expenses:
Cost of Revenue 3,768,495 69.5% 267,032 66.4%
Selling expenses 27,741 0.5% 4,857 1.2%
General and administrative expenses 1,833,086 33.8% 112,246 27.9%
Provision for doubtful accounts 38,779 0.7% - 0.0%
Depreciation and amortization 116,501 2.2% 2,570 0.6%
--------------------- -------- ------------------- ---------
Total expenses 5,784,602 106.7% 386,705 96.1%
--------------------- -------- ------------------- ---------
(Loss) income before provision for income taxes (361,744) -6.7% 15,584 3.9%
Provision for income taxes (19,550) -0.3% (4,350) -1.1%
--------------------- -------- ------------------- ---------
Net (loss) income (381,294) -7.0% 11,234 2.8%
Imputed dividends accreted on Convertible
Series B Preferred Stock (173,000) -3.2% - 0.0%
--------------------- -------- ------------------- ---------
Net income (loss) attributable to common
shareholders $ (554,294) -10.2% $ 11,234 2.8%
===================== ======== =================== =========
Revenue
We generate our revenue by providing project engineering and deployment
services for specialty communication systems, wireless fidelity (WiFi) and fixed
wireless systems. These projects may require the integration of multiple
communication components and engineering services in order to complete the
customer's requirements. We record profits on these projects 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.
Revenue was 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.
13
Total revenue from the specialty communication segment for the year
ended April 30, 2003 was approximately $3,573,000 or 66% of total revenue.
Wireless infrastructure segment revenue for the year ended April 30, 2003 was
approximately $1,850,000 or 34% of total revenue for the year.
Cost of Revenue
In the case of the wireless infrastructure segment, cost of revenue
consists of component material costs, direct labor costs and costs incurred for
third party sub-contractor services. For the specialty communication segment,
cost of sales consists of direct costs on contracts, including materials, labor,
and other overhead costs. Our cost of revenue was $3.8 million or 69.5% of
revenue for the year ended April 30, 2003, compared to $267,000 of 66.4% for the
period ended April 30, 2002. The dollar increase in our total cost of revenue is
due to the corresponding increase in revenue as a result of the acquisitions of
Invisinet and Walker. The decrease in cost of revenue as a percentage of revenue
is due to the revenue mix of the recent acquisitions.
Selling expenses
Selling expenses include expenses incurred for marketing and
promotional activities. For the year ended April 30, 2003 and for the period
ended April 30, 2002, selling expenses were approximately $28,000 and $4,900,
respectively. We expect selling expenses to increase in the near future as we
start to market our products and services in expanded markets.
General and administrative expenses
For the year ended April 30, 2003, general and administrative expenses
were $1,833,000, or 33.8% of revenue, compared to $112,000, or 27.9% of revenue
for the period ended April 30, 2002. The percentage increase for the year ended
April 30, 2003 is due to an increase in general and administrative expenses from
the acquisitions of Invisinet and Walker, and an increase in professional fees,
including investor relations, legal and accounting fees from the formation and
ramp-up of WPCS International Incorporated as a public company. However, as we
continue to manage our cost structure and leverage incremental revenue in fiscal
2004, we expect lower general and administrative expenses as a percentage of
revenue. 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 year ended April 30, 2003, total general and administrative expenses for the
specialty communication segment were $966,700 and $651,480 for the wireless
infrastructure segment.
For the period November 15, 2001 to April 30, 2002, 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.
Nine Months Ended January 31, 2004 Compared to Nine Months Ended January 31,
2003
14
Nine months ended January 31,
2004 2003
------------------------------ ------------------------------
Revenue $ 13,874,616 100.0% $2,185,739 100.0%
Costs and expenses:
Cost of Revenue 10,084,508 72.7% 1,812,515 82.9%
Selling, general and administrative expenses 3,930,352 28.3% 889,982 40.7%
Provision for doubtful accounts 35,669 0.3% 26,285 1.2%
Depreciation and amortization 254,214 1.8% 18,680 0.9%
------------------------------ ------------------------------
Total expenses 14,304,743 103.1% 2,747,462 125.7%
------------------------------ ------------------------------
Loss before provision for income taxes (430,127) -3.1% (561,723) -25.7%
Income tax provision (4,200) 0.0% - 0.0%
------------------------------ ------------------------------
Net loss (434,327) -3.1% (561,723) -25.7%
Imputed dividends accreted on Convertible
Series B Preferred Stock - 0.0% (173,000) -7.9%
----------------------------- ------------------------------
Net loss attributable to common shareholders $ (434,327) -3.1% $ (734,723) -33.6%
============================= ==============================
Revenue
Revenue for the nine months ended January 31, 2004 was approximately
$13,875,000, as compared to $2,186,000 for the nine months ended January 31,
2003. The increase in revenue during the nine month period ended January 31,
2004, compared to the same period in the prior year, is a result of the
acquisitions of Invisinet, Walker, and Clayborn, which accounted for $13,638,000
of the total revenue for the period.
Revenue from the specialty communication segment for the nine months
ended January 31, 2004 and 2003 was approximately $11,398,000 or 82% and
$1,020,000 or 47% of total revenue, respectively. Wireless infrastructure
segment revenue for the nine months ended January 31, 2004 and 2003 was
approximately $2,477,000 or 18% and $1,166,000 or 53% of total revenue for the
period, respectively.
Cost of Revenue
For the nine months ended January 31, 2004, our cost of revenue was
approximately $10,085,008, or 72.7% of revenue. For the nine months ended
January 31, 2003, cost of revenue was approximately $1,813,000, or 82.9% of
revenue. The dollar increase in cost of revenue is due to the corresponding
increase in revenues as a result of the acquisitions of Invisinet, Walker and
Clayborn. The decrease in cost of revenue as a percentage of revenue is due to
the revenue mix of the recent acquisitions.
Selling, general and administrative expenses
For the nine months ended January 31, 2004, total selling, general and
administrative expenses were $3,930,000 or 28.3% of total revenue. For the nine
months ended January 31, 2003, selling, general and administrative expenses were
$890,000, or 40.7%. The percentage decrease is due to the management of our cost
structure as we leverage our incremental revenue dollars in fiscal 2004. For the
nine months ended January 31, 2004, included in selling, general and
administrative expenses are $1,464,000 for salaries, commissions and payroll
taxes. The increase in salaries and payroll taxes is due the increase in
headcount as a result of the acquisition of Invisinet, Walker and Clayborn. In
addition, Walker employs union employees for whom it incurred $840,000 in union
benefits during the nine month period. Professional fees were $451,000, with the
increase due primarily to an increase in investor relations, accounting and
legal fees. Insurance costs were $487,000 and rent for office facilities was
$180,000. Other selling, general and administrative expenses totaled $508,000.
For the nine months ended January 31, 2004, total selling, general and
administrative expenses for the wireless infrastructure segment were $432,000,
and $2,723,000 for the specialty communication segment.
15
For the nine months ended January 31, 2003, included in the selling,
general and administrative expenses are $396,000 for salaries, commissions and
payroll taxes and $247,000 in professional fees. Rent for our office facilities
amounted to $39,000. Other selling, general and administrative expenses totaled
$208,000. For the nine months ended January 31, 2003, total selling, general and
administrative expenses for the wireless infrastructure segment were $395,000,
and $249,000 for the specialty communication segment.
For the nine months ended January 31, 2004 and 2003, the provision for
doubtful accounts was approximately $36,000 and $26,000, respectively.
For the nine months ended January 31, 2004 and 2003, depreciation and
amortization was approximately $254,000 and $19,000, respectively. The increase
in depreciation and amortization is due to an increase in property and equipment
and customer lists from the acquisition of Invisinet, Walker and Clayborn.
Net loss
We incurred a net loss of approximately $434,000 for the nine months
ended January 31, 2004. The net loss for the nine month period ended January 31,
2004 included a non-cash charge of approximately $188,000 for the grant of stock
options to certain consultants to purchase 1,230,000 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 a provision
for income taxes of $4,000, which includes income taxes expenses to provide for
state income taxes and certain book-to-tax permanent differences, offset by an
income tax benefit. The benefit resulted from the reversals of certain temporary
differences not being currently taxable as the taxable loss for the current year
was in excess of these reversals. The resulting net operating losses have been
fully reserved as the ultimate realization of these losses is uncertain.
We incurred a net loss attributable to common shareholders of approximately
$735,000 for the nine months ended January 31, 2003.
Liquidity and capital resources
At January 31, 2004, we had working capital of $1,371,000, which
consisted of current assets of approximately $5,751,000 and current liabilities
of $4,380,000. Current assets included $1,094,000 in cash, $4,260,000 in
accounts receivable and costs and estimated earnings in excess of billings on
uncompleted contracts, $72,000 in inventories, $220,000 in prepaid expenses and
$105,000 in income tax receivable. Current liabilities included $2,839,000 in
accounts payable, accrued expenses and billings in excess of costs and estimated
earnings on uncompleted contracts, $100,000 due on the line of credit,
$1,203,000 payable to shareholders of the Company, $20,000 income taxes payable,
$196,000 in current portion of deferred income taxes, and $22,000 in other
current liabilities. The increase in accounts receivable between Apirl 30, 2003
and January 31, 2004 is due primarily to recent acquisitions we made, and
secondarily by internal growth.
Operating activities provided $148,000 in cash during the nine months
ended January 31, 2004. This was mainly comprised of a $434,000 net loss, offset
by $391,000 in net non-cash charges, a $349,000 net increase in accounts
receivable, $333,000 increase in costs and estimated earnings in excess of
billings on uncompleted contracts, $256,000 increase in accounts payable and
accrued expenses, $658,000 increase in billings in excess of costs and estimated
earnings on uncompleted contracts, $4,000 decrease in income taxes payable and a
$37,000 net decrease in other current and other assets.
Our investing activities utilized $1,274,000 in cash, which consisted
of $900,000 paid for the acquisition of Clayborn and $57,000 of related
acquisition transaction costs, offset by $134,000 of cash received. We paid
$382,000 in earn-out provisions related to the Walker acquisition, and an
additional $12,000 in acquisition transaction costs. Additionally, $57,000 was
paid for property and equipment additions.
Our financing activities generated cash of $2,053,000 during the nine
months ended January 31, 2004. This was comprised primarily of net proceeds of
$2,205,000 received from the completion of the sale of our common stock in a
private placement memorandum. We offered up to 100 units (the Units) for sale to
16
accredited investors at a price of $25,000 per Unit (the Offering), or 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 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 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. We sold all 100 Units in the Offering.
In connection with the Offering, the placement agent was issued warrants to
purchase 665,000 shares of our common stock at an exercise price of $0.75 per
share. Other financing activities included borrowings on the line of credit of
$100,000, payment of advances from officers of $100,000, repayment of equipment
notes of approximately $150,000 related primarily to the acquisition of
Clayborn, and payment of capital lease obligations of approximately $2,000.
Our capital requirements depend on numerous factors, including the
market for our services, the resources we devote to developing, marketing,
selling and supporting our products and services, the timing and extent of
establishing additional markets and other factors. To address our working
capital needs and growth in our revenue and customer base, on October 29, 2003,
Walker obtained a revolving line of credit facility with a commercial bank in
the amount of $750,000. The borrowing limit is up to 70% of eligible Walker
accounts receivable. As of January 31, 2004, the borrowing base was $750,000 and
the outstanding balance was $100,000. The line of credit is collateralized by
all of Walker's accounts receivable, inventory and equipment, and bears interest
at the Wall Street Journal Prime Index Rate plus 1.5% (5.50% as of January 31,
2004). In addition, we and certain executive officers of ours have personally
guaranteed this line of credit facility. This line is subject to annual renewal
and matures on November 5, 2004. We also anticipate obtaining a working capital
line of credit for Clayborn, to assist with working capital needs as the
Clayborn business and customer base expands.
In connection with the Offering, we have the ability to redeem some or
all of the Warrants for $0.01 if 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. If we decide to redeem the warrants, we
will provide written notice to each warrant holder that the warrants will be
redeemed at a price of $0.01 per warrant on a fixed date, not less than thirty
days from mailing of the notice. Warrant holders would have until the end of
business on the day before redemption to exercise their warrants at an exercise
price of $0.90. Since we cannot redeem warrants until our stock price is trading
at $1.25, which is higher than the warrant exercise price of $0.90, if we decide
to redeem the warrants, we believe most, if not all, warrant holders will elect
to exercise their warrants. Therefore, the redemption of the Warrants would
provide us with up to approximately $4,000,000 in additional cash upon warrant
holders exercising their Warrants instead of allowing us to redeem the Warrants.
In the event that the warrant holders elect not to exercise their warrants and
our stock price is not trading at $1.25 for ten consecutive trading days, we may
not receive any cash.
At January 31, 2004, we had cash of $1,094,000, and for the nine months
ended January 31, 2004, cash provided from operations was $148,000. We have a
$750,000 revolving line of credit available, and we also expect to redeem
approximately $4 million of the Warrants from the Offering within the next
twelve months, as discussed above. Accordingly, we believe these internally
available funds, and expected financing activities, will provide us sufficient
capital to meet our short-term needs for the next twelve months. These funding
needs include working capital and capital expenditures, the remaining $116,000
earn-out to be paid related to the Walker acquisition, and the expected payment
of quarterly distributions of post tax profits to Clayborn shareholders for the
next twelve months. The total distribution to Clayborn shareholders is
$1,100,000, which is due by September 30, 2007. Our future operating results may
be affected by a number of factors including our success in bidding on future
contracts and our continued ability to manage controllable costs effectively. To
the extent we grow by future acquisitions that involve consideration other than
stock, our cash requirements may increase.
On April 2, 2004, we acquired all of the issued and outstanding common
stock of Heinz. We acquired all of the issued and outstanding shares of Heinz
for $1,000,000, as follows: (1) $700,000 of our common stock, based on the
closing price of our common stock on March 30, 2004 of $0.98 per share, for an
aggregate of 714,286 newly issued shares of the Company's common stock and (2)
$300,000 total cash consideration, of which $100,000 was paid at closing and a
$200,000 non-interest bearing promissory note. Of the $200,000, $75,000 is
payable on the first and second anniversaries of the closing date and $50,000 is
payable on the third anniversary of the closing date.
We will continue to explore opportunities to raise additional funds on
acceptable terms for a number of uses. We may not be able to obtain additional
funds on acceptable terms, or at all. Additional capital resources would be
devoted to search for, investigate and potentially acquire new companies that
have a strategic fit. In connection with a potential acquisition, we would also
expect to issue additional common stock equity or convertible debt securities,
which may result in additional dilution to our shareholders.
17
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
18
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
We generate our revenue by providing project engineering and
installation services for specialty communication systems, including wireless
fidelity (WiFi) and fixed wireless deployment. We provide a range of specialty
communication services including project management, site design, structured
cabling, product integration, network security and technical support. These
projects may require the integration of multiple communication components and
engineering services in order to complete the project.
We record profits on these projects on a percentage-of-completion basis
on the cost-to-cost method. Contracts in process are valued at cost plus accrued
profits less earned revenues and progress payments on uncompleted contracts.
Contracts are generally considered substantially complete when engineering is
completed and/or site construction is completed. We include in operations
pass-through revenue and costs on cost-plus contracts, which are
customer-reimbursable materials, equipment and subcontractor costs, when we
determine that we are responsible for the engineering specification, procurement
and management of such cost components on behalf of the customer.
19
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.
Recently issued accounting pronouncements
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.
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.
20
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.
21
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. We provide a
range of specialty communication services including project management, site
design, structured cabling, product integration, network security, and technical
support. These projects may require the integration of multiple communication
components and engineering services in order to complete the customer's
requirements for the deployment of a specialty communication system, a WiFi or
fixed wireless system.
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, Inc. ("Invisinet"). Invisinet is in a similar business as
ours, providing fixed wireless technology services to its customers. The
acquisition of Invisinet broadens our customer base and expands our technical
resources capable of deploying wireless systems. For the nine months ended
January 31, 2004, the acquisition of Invisinet increased sales by approximately
$1.8 million as compared the same period in the prior year. To complete the
merger, we acquired 100% of the common stock of Invisinet by issuing 1,000,000
shares of our common stock with a fair value of $1,750,000, based on the average
value of our common stock as of a few days before and after the merger was
announced. Based on the net assets acquired of Invisinet, we have recognized
goodwill of approximately $1.6 million.
On December 30, 2002, we acquired all of the outstanding common stock
of Walker Comm, Inc. The acquisition of Walker gives us the ability to provide
specialty communication systems to our customers along with strengthening our
project management capabilities. For the nine months ended January 31, 2004, the
acquisition of Walker increased sales approximately $7.6 million as compared to
the same period in the prior year. The aggregate consideration we paid for
Walker was approximately $5,113,000. To complete the merger, all of the issued
and outstanding shares of common stock of Walker were exchanged for aggregate
merger consideration consisting of $500,000 in cash and the common stock of ours
with a value of approximately $4,574,000, or 2,486,000 shares valued at $1.84
per share based on the average value of our common stock as of a few days before
and after the merger was announced. Based on the net assets acquired of Walker,
we recognized goodwill of approximately $4.2 million.
On August 22, 2003, we acquired all of the outstanding common stock of
Clayborn Contracting Group, Inc. The acquisition of Clayborn gives us additional
expertise in engineering and deployment services for specialty communication
systems and additional wireless opportunities to pursue. For the nine months
ended January 31, 2004, the acquisition of Clayborn increased sales
approximately $2.8 million as compared to the same period in the prior year. The
aggregate consideration paid by us for Clayborn was approximately $2,925,000. We
acquired all of the issued and outstanding shares of Clayborn in exchange for
$900,000 cash consideration and $57,000 in transaction costs, and 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 due
by September 30, 2007, payable in quarterly distributions, by payment to the
Clayborn shareholders of 50% of the quarterly post tax profits of Clayborn.
Based on the preliminary information currently available, we preliminarily
expect to recognize goodwill of approximately $2,140,000. 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 other intangible assets.
On March 19, 2004, we executed a non-binding letter of intent to
acquire all the outstanding common stock of Heinz Corporation, for $1 million in
cash and our common stock. We anticipate closing to occur on or about April 2,
2004, but currently there is no definitive merger agreement. Heinz Corporation
is a St. Louis, Missouri based provider of in-building wireless infrastructure
services for both cellular and WiFi applications. The acquisition of Heinz
Corporation is expected to give us additional engineering expertise for wireless
infrastructure services, and expand our geographical presence in the Midwest.
22
Our Business
We generate our revenue by providing project engineering and deployment
services for specialty communication systems, wireless fidelity ( WiFi) and
fixed wireless systems. The company has two reportable segments, specialty
communication systems and wireless infrastructure services.
Special Communication Systems
As a complete project engineering company, we focus on the
implementation requirements of specialty communication systems. We are a
certified design and installation company for several manufacturers offering a
wide range of products and services. Specialty communication services include
project management, installation, registered communications distribution design,
and network integration of voice, data, MATV, CATV, video and security systems,
including fiber optic cabling and outside plant trenching. Cabling systems are
designed, installed and tested to industry standards. Our installers are members
of the IBEW union, and are trained and certified in the latest technologies and
safety to adhere to general OSHA guidelines, as well as union and industry rules
and regulations pertaining to areas associated with communications. Technicians
are also trained and certified in installing copper and fiber optic networks to
support Ethernet, Token-Ring, CAT 5, CAT 6, voice and video conferencing. We can
also provide in-house CAD specialists to diagram changes or modifications to
customer specifications. The specialty communication segment represents
approximately 80% of total sales.
Wireless Infrastructure Services
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. Expensive and
inflexible land line services are moving users toward cost effective high-speed
broadband wireless infrastructure services.
Wireless infrastructure services includes the internal and external
design and installation of a fixed wireless solution to support data, voice or
video transmission between two or more points without the utilization of
landline infrastructure. Wireless infrastructure services includes radio
frequency engineering, site survey, which determines "line of sight" issues,
site design that determines terrain status and where mounting and alignment will
occur and spectrum analysis to study the performance of licensed and unlicensed
frequencies for a specific area. Also, we will mount and align equipment and
integrate the products into one system, and finally test, document and support
the installation. We also provide network security, training and technical
support. Wireless infrastructure services offer the user lower costs compared to
landline, high-speed connectivity, immediate installation and network ownership.
The products offered as part of the system include microwave radios,
repeaters, amplifiers, antennas, cables and specialty components. The specific
products used and serviced vary depending on the connection speed required and
distances between points, accordingly, we are technology and vendor independent.
We believe that this aligns our goals with those of the customers and enables us
to objectively evaluate and recommend specific component products or
technologies. The wireless infrastructure segment represents approximately 20%
of total sales.
Sales and Marketing
In both segments, we primarily service major corporations, government
entities and educational institutions in the United States. We also perform
limited services internationally, which account for less than 1% of total sales.
We market and sell services through a direct sales team of sales and project
engineering professionals. Sales personnel work collaboratively with senior
management, project managers and project engineers to develop new sales leads
and procure new contracts. We generate revenue opportunities through formal bid
23
responses, end user referrals, contracting assignments from technology providers
and subcontracting assignments from general infrastructure providers. We also,
through our subsidiaries, are listed on the Federal GSA schedule for government
contracts.
Customers
We provide specialty communication systems, wireless fidelity (WiFi)
deployment and fixed wireless deployment to many major corporations, government
entities and educational institutions. At March 31, 2004, we had a backlog of
unfilled orders believed to be firm of approximately $19 million, representing
the uncompleted portion of services to be performed under job-specific contracts
or purchase orders. We expect these projects to be completed and the backlog
fully converted to revenue within the next twelve months.
Competition
The markets in the specialty communication systems and wireless
infrastructure services segments are relatively competitive and fragmented and
represented typically by numerous service providers, ranging from small
independent firms servicing local markets to larger firms servicing regional and
national markets. We also face competition from existing or prospective clients
which employ in-house personnel to perform some of the same types of services we
provide. Historically, there have been relatively few significant barriers to
entry into the markets in which we operate, and, as a result, any organization
that has adequate financial resources and access to technical expertise may
become one of our competititors. Overall, we believe that there are no dominant
competitors in the either of the segments that we provide products and services.
We believe that the principal competitive factors in our markets
include the ability to deliver results within budget (time and cost),
reputation, accountability, staffing flexibility, project management expertise,
industry experience and competitive pricing. In addition, expertise in new and
evolving technologies has become increasingly important. We believe that the
ability to integrate these technologies from multiple vendors gives us a
competitive advantage. Our ability to compete also depends on a number of
additional factors which are outside of our control, including:
o competitive pricing for similar services;
o The ability and willingness of our competitors to finance customers'
projects on favorable terms;
o The ability of our customers to perform the services themselves; and
o The responsiveness of our competitors to customer needs.
We believe that our principal competitive advantage is the ability to
integrate multiple component products and services across the vast
majority of wireless infrastructure services and specialty
communication systems. We have a trained and certified staff, the
ability to provide national coverage and a strong customer base. We use
proven methodologies to rapidly design, install, integrate and manage a
communications deployment.
24
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 products and services. 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 March 31, 2004, we employed 150 full time employees, of which
121 are project engineers, 13 are project managers, 11 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 fiscal years 2003
and 2004, 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, 2006 $13,000
San Leandro, California July 31, 2006 $13,000
Denville, New Jersey month-to-month $11,000 (b)
Auburn, California month-to-month $44,000 (b)
St. Louis, Missouri August 31, 2004 $49,124
(a) The lease for our Fairfield, California location is with trusts, of which,
certain of our officers and shareholders are the trustees.
25
(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.
26
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
--------------------------------- ------------ ---------------------------------------------------
James Heinz 42 Executive Vice President
--------------------------------- ------------ ---------------------------------------------------
Joseph Heater 40 Chief Financial Officer
--------------------------------- ------------ ---------------------------------------------------
Norm Dumbroff 43 Director
--------------------------------- ------------ ---------------------------------------------------
Neil Hebenton 47 Director
--------------------------------- ------------ ---------------------------------------------------
Gary Walker 49 Director
--------------------------------- ------------ ---------------------------------------------------
William Whitehead 48 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 November 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.
27
James Heinz, Executive Vice President
Mr. Heinz has been Executive Vice President since April 2004. Mr. Heinz
was the founder of Heinz Corporation and its President from January 1994 until
it's acquisition by WPCS in April 2004. He has over twenty years of project
engineering experience in civil and commercial construction projects with over
ten years specifically dedicated to wireless infrastructure services. He is
Chairman of the Construction Advisory Board for Southern Illinois University and
a general advisory member of the School of Engineering. He holds a B.S. degree
in construction management from Southern Illinois University.
Joseph A. Heater, Chief Financial Officer
Mr. Heater has been Chief Financial Officer since July 2003. From
November 2001 to June 2003, Mr. Heater was the Controller for Locus
Pharmaceuticals, Inc., a development stage pharmaceutical company. Prior to
that, from April 1999 to September 2001, Mr. Heater was Director of Finance and
Corporate Controller for esavio Corporation, an information technology
consulting company providing application development, network design,
integration, and managed services. Prior to that, from March 1995 to November
1998, Mr. Heater was Director of Financial Planning and Assistant Corporate
Controller for Airgas, Inc. Mr. Heater holds a B.S. from the University of
Nebraska and an M.B.A. from Villanova University.
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.
28
Director and Executive Compensation
Directors serve without cash compensation and without other fixed
remuneration. Directors are entitled to receive stock options under our 2002
Stock Option as determined by the Board of Directors. We reimburse our directors
for expenses incurred in connection with attending Board meetings.
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. 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.
29
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
Other Annual Restricted Stock Options LTIPS Compensation
Name Position Year Salary ($) Bonus ($) Compensation $ Awards SAR's(#)(1) Payouts ($)
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Andrew Hidalgo CEO 2003 $ 141,000 - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Stephen C. Jacks 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 February 1, 2004, 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 $168,000 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.
30
Joseph Heater
On February 1, 2004, we entered into a three-year employment contract
with Joseph Heater, to act as Chief Financial Officer. The base salary under the
agreement is $132,000 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.
James Heinz
On April 2, 2004, we entered into a three-year employment contract
with James Heinz, to act as President of Heinz, who is also one of our Executive
Vice-Presidents. The base salary underr the agreement is $140,000 per annum plus
benefits.
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 March 31,
2004:
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Grant Exercise
Name of Beneficial Owner Title Date Price Options
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Neil Hebenton Director 10/1/02 $1.66 25,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
William Whitehead Director 3/25/03 $1.35 50,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
E.J. von Schaumburg Executive Vice President 5/27/03 $0.45 300,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Donald Walker Executive Vice President 6/3/03 $0.75 200,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Gary Walker Director 6/3/03 $0.75 200,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
William Whitehead Director 6/3/03 $0.75 25,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Joseph Heater Chief Financial Officer 6/12/03 $0.75 250,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Joseph Heater Chief Financial Officer 8/6/03 $1.07 150,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
E.J. von Schaumburg Executive Vice President 12/10/03 $1.00 100,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Norm Dumbroff Director 3/31/04 $0.97 25,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Neil Hebenton Director 3/31/04 $0.97 25,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
William Whitehead Director 3/31/04 $0.97 25,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
1,375,000
- -------------------------------------- -------------------------------- ------------ ------------ =====================
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.
31
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 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.
32
(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 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.
33
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.
34
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At the time of the following transactions, there were no affiliations
between us and the other parties. As a result of these transactions, the other
parties became affiliates. The transactions were ongoing after the close
resulting in payoffs to the other parties who became affiliates.
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 January 31, 2004, $103,016 was payable to the Walker Comm
shareholders against this earn-out provision.
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.
On August 22, 2003, we acquired all of the outstanding shares of
Clayborn Contracting Group, Inc. in exchange for an aggregate $900,000 cash
consideration and 826,446 newly issued shares of our common stock. An additional
$1,100,000 is due by September 30, 2007, payable in quarterly distributions, by
payment to the Clayborn shareholders of 50% of the quarterly post tax profits of
Clayborn.
On April 2, 2004, we acquired all of the issued and outstanding common
stock of Heinz. We acquired all of the issued and outstanding shares of Heinz
for $1,000,000, as follows: (1) $700,000 of our common stock, based on the
closing price of our common stock on March 30, 2004 of $0.98 per share, for an
aggregate of 714,286 newly issued shares of the Company's common stock and (2)
$300,000 total cash consideration, of which $100,000 was paid at closing and a
$200,000 non-interest bearing promissory note. Of the $200,000, $75,000 is
payable on the first and second anniversaries of the closing date and $50,000 is
payable on the third anniversary of the closing date.
35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of March 31, 2004 (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 25.8% 20.7%
Donald Walker 1,016,645 4.9% 3.9%
E.J. von Schaumburg 251,000 (1) 1.2% *
James Heinz 714,286 3.4% 2.8%
Joseph Heater 150,000 (1) * *
Norm Dumbroff 875,000 (1) 4.2% 3.4%
Neil Hebenton 37,500 (1) * *
Gary Walker 930,759 4.5% 3.6%
William Whitehead 83,000 (1) * *
All officers, directors and key 9,438,190 (1) 45.3% 36.4%
executives (9 Persons)
* Less than 1%
** c/o WPCS International Incorporated, 140 South Village Avenue,
Suite 20, Exton, PA 19341.
*** Percentage based upon 25,959,376 shares of common stock, which assumes that
all shares underlying warrants being registered in this Offering will be sold.
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 April 26, 2004 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 20,849,976 shares of common stock outstanding on April 26,
2004, and the shares issuable upon the exercise of options and warrants
exercisable on or within 60 days of April 26, 2004, as described below.
36
(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 April 26, 2004 or become exercisable
within 60 days of that date: E.J. von Schaumburg, 100,000 shares; Joseph Heater,
150,000 shares; Norm Dumbroff, 25,000 shares; Neil Hebenton, 37,500 shares;
William Whitehead, 83,000 shares; and all directors and officers as a group,
387,500 shares.
37
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 April 26, 2004, there were 20,849,976 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.
38
Warrants and Options
As of March 31, 2004, we had outstanding warrants and options to
acquire approximately 8,572,875 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.
39
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective non-sale pledgees,
non-sale donees, non-sale assignees and other non-sale 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.
Brookshire Securities Corporation will be deemed to be an underwriter
of the shares of stock which it is offering.
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 non-sale pledgees,
non-sale donees, non-sale transferees or other non-sale 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.
40
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.
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.
41
Underwriter Status
The selling security holders and any broker-dealers or agents that are
involved in selling the shares may be considered to be "underwriters" within the
meaning of the Securities Act for such sales. An underwriter is a person who has
purchased shares from an issuer with a view towards distributing the shares to
the public. 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
considered to be underwriting commissions or discounts under the Securities Act.
Brookshire Sercurities Corporation, which is a broker dealer, is an underwriter
in this offering. Because Brookshire Securities Corporation is deemed an
"underwriter" within the meaning of Section 2(11) of the Securities Act, it will
be subject to the prospectus delivery requirements.
42
SELLING STOCKHOLDERS
The table below sets hares Offered (3) 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.
For the table set forth below, Andrew B. Worden is the control person
for Barron Partners, LP, Jeanine Schnapik is the control person for Benil
Finance, Ltd., Jaime Villarroel is the control person for Blue Green T, LLC,
Timothy Ruggiero is the control person for Brookshire Securities Corporation and
John Doss is the control person for Doss & Company, Inc.
Beneficial Ownership Beneficial Ownership
Prior to Offering (1) After Offering (1)
Name of Selling Security Holder Shares Percentage (2) Shares Offered (3) Shares (2) Percentage
- ----------------------------------- ----------------------- ---------------- --------------------------- ---------------- ----------
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 13.7% 2,848,150 (4) 0 *
Benil Finance, Ltd. 355,552 1.7% 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 3.2% 665,000 (5) 0 *
Coar, Robert M. 22,222 * 22,222 (4) 0 *
David G. Gove and Sharon K. Gove
Revocable Trust, dated July
7, 1995 826,446 4.0% 826,446 0 *
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 *
Dumbroff, Norm (6) 875,000 4.2% 850,000 25,000 *
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 *
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 *
43
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 1.1% 238,656 0 *
Seguso, Robert 799,992 3.8% 799,992 (4) 0 *
Spackeen, Scott 177,776 * 177,776 (4) 0 *
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.(7) 251,000 1.2% 150,000 101,000 *
Walker, Donald C. (8) 1,016,645 4.9% 1,016,645 0 *
Walker, Gary R. (9) 930,759 4.5% 930,759 0 *
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 April 26, 2004 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 20,849,976 shares of common stock
outstanding; percentage after offering is based on 25,959,376 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 exercisablewarrants.
(5) All 665,000 shares are issuable upon exercise of currently exercisable
warrants.
(6) Mr. Norm Dumbroff is currently a director.
(7) Mr. E.J. von Schaumburg is currently an Executive Vice President.
(8) Mr. Donald Walker is currently an Executive Vice President.
(9) Mr. Gary Walker is currently a director.
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.
44
EXPERTS
The consolidated financial statements of WPCS International
Incorporated 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.
The financial statements of Invisinet, Inc. for the year Ended
December 31, 2001 and period from July 10, 2000 (Inception) through December 31,
2000 included in this Prospectus have been audited by Blackman Kallick
Bartelstein, LLP, independent accountants, to the extent and for the periods set
forth in their report appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of said firm as experts in accounting
and auditing.
The financial statements of Walker Comm, Inc. for the years ended
December 31, 2002 and 2001 included in this Prospectus have been audited by
Leonard Friedman, Certified Public Accountant, independent accountant, to the
extent and for the periods set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Clayborn Contracting Group, Inc. for the
years ended September 30, 2002 and 2001 included in this Prospectus have been
audited by Burnett + Company LLP, independent accountants, to the extent and for
the periods set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Heinz Corporation for the years ended
December 31, 2003 and 2002 included in this Prospectus have been audited by
Michael N. Fitzgerald, Ph.D, Certified Public Accountant, independent
accountant, to the extent and for the periods set forth in their report
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of said firm as experts 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.
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.
45
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.
46
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
Report 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
Nine Months Ended January 31, 2004
Condensed Consolidated Balance Sheets at January 31, 2004 (unaudited) and April 30, 2003 F-29
Condensed Consolidated Statements of Operations for the nine months ended January 31, 2004
and 2003 (unaudited) F-31
Condensed Consolidated Statement of Shareholders' Equity for the nine months ended January 31, 2004
(unaudited) F-32
Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2004 and 2003
(unaudited) F-33
Notes to Condensed Consolidated Financial Statements F-35
Audited Financial Statements of Invisinet, Inc. for the year ended December 31, 2001 and the period
from July 10, 2000 (inception) through December 31, 2000 F-44
Unaudited Financial Statements of Invisinet, Inc. for the nine months ended September 30, 2002 F-51
Audited Financial Statements of Walker Comm, Inc. for the years ended December 31, 2001 and 2000 F-60
Unaudited Financial Statements of Walker Comm, Inc. for the nine months ended September 30, 2002 F-72
Audited Financial Statements of Clayborn Contracting Group, Inc. for the years ended September 30,
2002 and 2001 F-80
Unaudited Financial Statements of Clayborn Contracting Group, Inc. for the nine months ended June 30, F-92
2003
Pro Forma Unaudited Consolidated Statements of Operations - "WPCS" for the twelve months ended April
30, 2003 and "Clayborn" for the twelve months ended April 30, 2003 F-100
Pro Forma Unaudited Consolidated Statements of Operations - "WPCS" for the nine months ended January
31, 2004 and "Clayborn" for the four months ended July 31, 2003 F-101
Audited Financial Statements of Heinz Corporation for years ended December 31, 2003 and 2002 F-108
Pro Forma Unaudited Consolidated Statements of Operations - "WPCS" for the twelve months ended April 30,
2003 and "Heinz" for the twelve months ended March 31, 2003 F-120
Pro Forma Unaudited Consolidated Statements of Operations - "WPCS" for the nine months ended January 31,
2004 and "Heinz" for the nine months ended December 31, 2003 F-126
47
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
-----------------
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
--------------------
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
---------------------- ----------------------
REVENUE $ 5,422,858 $ 402,289
---------------------- ----------------------
COSTS AND EXPENSES
Cost of revenue 3,768,495 267,032
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 costs and expenses 5,784,602 386,705
---------------------- ----------------------
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
------------- -------------
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
============= =============
The accompanying notes are an integral part of these consolidated financial
statements
F-7
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the period
November 15, 2001
Year Ended (date of inception) to
April 30, April 30,
2003 2002
------------ ------------
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. The Company provides a range of
specialty communication services including project management, site design,
structured cabling, product integration, network security, and technical
support.
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
The Company generates its revenue by providing project engineering and
installation services for specialty communication systems, including wireless
fidelity (WiFi) and fixed wireless deployment. The Company provides a range of
specialty communication services including project management, site design,
structured cabling, product integration, network security and technical support.
These projects may require the integration of multiple communication components
and engineering services in order to complete the project.
The Company records profits on these projects 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.
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 capable of deploying wireless systems. WPCS concentrates
its business in fixed wireless products and services, 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.
A valuation of certain assets was completed, including property and equipment,
list of major customers, and the Company internally determined the fair value of
its other assets and liabilities. In determining the fair value of acquired
assets, standard valuation techniques were used including the market and cost
approaches. The initial purchase price allocation has been adjusted as a result
of final valuation, 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 specialty
communication systems 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.
A valuation of certain assets was completed, including
property and equipment, inventory, list of major customers, contract backlog and
the Company internally determined the fair value of its other assets and
liabilities. In determining the fair value of acquired assets, standard
valuation techniques were used including the market and cost approaches. The
initial purchase price allocation has been adjusted as a result of the final
valuation 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 final valuation, 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
services, the external customers and customer industries and the sales and
distribution methods used to market the products. The Company has two reportable
segments: wireless infrastructure services and specialty communication systems.
The Company evaluates performance based upon (loss) income before income taxes.
Corporate includes corporate salaries and external professional fees, such as
accounting, legal and investor relations costs which are not allocated to the
other subsidiaries. Corporate assets include cash, prepaid expenses, and
deferred tax assets. Segment 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 years ended April 30, 2003 and 2002 are as
follows:
CORPORATE WIRELESS SPECIALTY Total
INFRASTRUCTURE COMMUNICATIONS
-------------------- -------------------- -------------------- --------------------
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
For the year ended April 30, 2002
Revenue $ - $ - $ - $ 402,289
Net income before income taxes $ - $ - $ - $ 15,584
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.
Walker Comm, Inc. Acquisition
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. At April 30, 2003,
$58,207 was payable to the Walker shareholders against this earn-out provision.
Accordingly, goodwill was increased by $58,207.
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
JANUARY 31, APRIL 30,
ASSETS 2004 2003
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 1,094,422 $ 167,547
Accounts receivable, net of allowance of $16,696 and $11,779 at
January 31, 2004 and April 30, 2003, respectively ...................... 3,286,681 2,397,236
Costs and estimated earnings in excess of billings on uncompleted
contracts .............................................................. 972,564 408,194
Inventory .............................................................. 72,324 77,775
Prepaid expenses ....................................................... 219,818 143,113
Income tax refund receivable ........................................... 104,765 --
Deferred income taxes .................................................. -- 70,000
------------- -------------
Total current assets ................................................... 5,750,574 3,263,865
PROPERTY AND EQUIPMENT, net ............................................ 902,059 647,951
CUSTOMER LISTS, net .................................................... 418,000 499,000
GOODWILL ............................................................... 7,967,593 5,388,882
OTHER ASSETS ........................................................... 84,162 21,528
------------- -------------
Total assets.................................................. $15,122,388 $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)
CURRENT LIABILITIES:
Accounts payable and accrued expenses ........................... $ 1,956,486 $1,278,443
Billing in excess of costs and estimated earnings on
uncompleted contracts ........................................... 883,065 215,819
Borrowings under line of credit ................................. 100,000 --
Current maturities of capital lease obligation .................. 2,472 2,294
Current maturities of equipment loans payable ................... 19,623 21,268
Due to officer .................................................. -- 100,000
Due to shareholders ............................................. 1,203,016 58,207
Income taxes payable ............................................ 19,517 23,700
Deferred income taxes ........................................... 196,100 129,000
------------ ----------
Total current liabilities .................................... 4,380,279 1,828,731
Capital lease obligation, net of current portion ....................... 2,731 4,608
Equipment loans payable, net of current portion ........................ 35,839 --
Deferred income taxes, net of current portion .......................... 416,900 527,000
------------ ----------
Total liabilities ............................................ 4,835,749 2,360,339
------------ ----------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Preferred Stock - $0.0001 par value, 5,000,000
shares authorized, none issued
Common Stock - $0.0001 par value, 30,000,000 shares authorized,
20,135,690 shares and 13,078,844 shares issued and outstanding,
respectively ................................................. 2,014 1,308
Additional paid-in capital ...................................... 11,262,012 8,002,639
Accumulated deficit ............................................. (977,387) (543,060)
------------ ----------
Total shareholders' equity ................................... 10,286,639 7,460,887
------------ ----------
Total liabilities and shareholders' equity ................... $15,122,388 $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)
Nine Months Ended
January 31,
2004 2003
------------- -------------
REVENUE ........................................... $ 13,874,616 $ 2,185,739
------------- -------------
COSTS AND EXPENSES.................................
Cost of revenue.................................... 10,084,508 1,812,515
Selling, general and administrative expenses....... 3,930,352 889,982
Provision for doubtful accounts ................... 35,669 26,285
Depreciation and amortization ..................... 254,214 18,680
------------- -------------
Total Costs and Expenses................. 14,304,743 2,747,462
------------- -------------
LOSS BEFORE BENEFIT (PROVISION) FOR INCOME TAXES .. (430,127) (561,723)
Income tax benefit (provision) .................... (4,200) --
------------- -------------
NET LOSS .......................................... (434,327) (561,723)
Imputed dividends accreted on Convertible Series B
Preferred stock.................................... -- (173,000)
------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS....... $ (434,327) $ (734,723)
============= =============
Basic net loss per common share ................... $ (0.02) $ (0.08)
============= =============
Basic weighted average number of common shares
outstanding........................................ 17,573,786 9,505,337
============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-31
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JANUARY 31, 2004
(UNAUDITED)
Additional Total
Preferred Stock Common Stock Paid-In Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Equity
---------- --------- ------------ ------------ ------------- -------------- --------------
BALANCE, MAY 1, 2003 1,000 $0 13,078,844 $1,308 $8,002,639 ($543,060) $7,460,887
Conversion of Series C
Preferred Stock to common stock (1,000) - 1,786,000 179 (179) - -
Issuance of common stock through
private placement - - 4,444,400 444 2,204,247 - 2,204,691
Issuance of common stock, acquisition
of Clayborn Contracting Group, Inc. - - 826,446 83 867,685 - 867,768
Fair value of stock options granted
to nonemployees - - - - 187,620 - 187,620
Net loss - - - - - (434,327) (434,327)
---------- --------- ------------ ------------ ------------- -------------- --------------
BALANCE, JANUARY 31, 2004 0 $0 20,135,690 $2,014 $11,262,012 ($977,387) $10,286,639
========== ========= ============ ============ ============= ============== ==============
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)
Nine Months Ended
January 31,
2004 2003
------------ ------------
OPERATING ACTIVITIES :
Net loss ................................................................................ $ (434,327) $ (561,723)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization ......................................................... 254,214 18,680
Provision for doubtful accounts ....................................................... 35,669 26,285
Fair value of stock options granted ................................................... 187,620 --
Deferred income taxes ................................................................. (156,800) --
Deferred tax asset .................................................................... 70,000 --
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ................................................................... (349,310) 108,236
Costs and estimated earnings in excess of billings on uncompleted contracts ........... (332,808) (695,838)
Inventory ............................................................................. 5,451 (112,355)
Prepaid expenses ...................................................................... (30,134) (161,023)
Other assets .......................................................................... (11,536) --
Accounts payable and accrued expenses ................................................. 255,801 658,474
Billings in excess of costs and estimated earnings on uncompleted contracts ........... 658,377 (48,662)
Income taxes payable .................................................................. (4,183) 6,500
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ........................................... 148,034 (761,426)
------------ ------------
INVESTING ACTIVITIES:
Acquisition of property & equipment ..................................................... (57,142) (787)
Acquisition of Clayborn, net of cash received ........................................... (822,381) --
Acquisition earn-out and other transaction costs ........................................ (394,211) (374,709)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES ......................................................... (1,273,734) (375,496)
------------ ------------
FINANCING ACTIVITIES:
Cash received in reverse acquisition .................................................... -- 3,257
Restricted cash ......................................................................... -- (200,000)
Repayment of advances from officers ..................................................... (100,000) (20,743)
Proceeds from sale of preferred stock ................................................... -- 1,455,000
Proceeds from issue of common stock ..................................................... 2,204,691 --
Borrowings on line of credit ............................................................ 100,000 --
Repayment of equipment loans payable .................................................... (150,417) (7,029)
Payments of capital lease obligations ................................................... (1,699) (1,717)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................................... 2,052,575 1,228,768
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................................................... 926,875 91,846
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................................ 167,547 15,554
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................................... $ 1,094,422 $ 107,400
============ ============
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 FLOW (continued)
(Unaudited)
Nine Months Ended
January 31,
2004 2003
-------------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ................................................ $ 11,134 $ 2,875
============== ==============
Income taxes............................................. $ 105,456 $ 353
============== ==============
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for net
noncash assets received in acquisitions .................... $ 867,768 $ 6,324,249
============== ==============
Earn-out consideration unpaid relating to acquisitions ..... $ 1,203,016 $ -
============== ==============
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)
============== ==============
Conversion of Series A preferred stock to common stock ..... $ - $ 300
============== ==============
Conversion of Series B preferred stock to common stock ..... $ - $ 56
============== ==============
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 quarterly reports on Form 10-QSB 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 consolidated 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 and nine month periods
ended January 31, 2004 are not necessarily indicative of the results that may be
expected for the fiscal year ending April 30, 2004. Certain reclassifications
have been made to prior period financial statements to conform to the current
presentation.
The accompanying unaudited condensed consolidated financial statements include
the accounts of WPCS International Incorporated ("WPCS") and its wholly-owned
subsidiaries, WPCS Incorporated , Invisinet Inc. ("Invisinet") from November 13,
2002 (date of acquisition), Walker Comm Inc. ("Walker") from December 30, 2002
(date of acquisition), and Clayborn Contracting Group, Inc. from August 22, 2003
(date of acquisition) collectively the "Company".
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. The Company provides a range of
specialty communication services including project management, site design,
structured cabling, product integration, network security and technical support.
On May 17, 2002, Phoenix Star Ventures, Inc.("PSVI") a publicly held "shell
company", became the legal acquirer of WPCS Holdings, Inc. ("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
F-35
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. Through January 31, 2004, $484,638 has been charged to goodwill
relating to this earn-out provision.
On August 22, 2003, the Company acquired all of the outstanding shares of
Clayborn in exchange for an aggregate of 826,446 newly issued shares of the
Company's common stock and $900,000 cash consideration. An additional $1,100,000
is due by September 30, 2007, payable in quarterly distributions, by payment to
the Clayborn shareholders of 50% of the quarterly post-tax profits of Clayborn.
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)
Goodwill through the nine months ended January 31, 2004, consisted of the
following:
Beginning balance, May 1, 2003 $5,388,882
Clayborn acquisition 2,139,690
Walker earn out provision 426,431
Transaction costs 12,590
-----------------
Ending balance, January 31, 2004 $7,967,593
=================
Revenue recognition
The Company generates its revenue by providing project engineering and
deployment services for specialty communication systems, including wireless
fidelity (WiFi) and fixed wireless systems. These projects may require the
integration of multiple communication components and engineering services in
order to complete the customer's requirements.
The Company records profits on these projects 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.
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 and
warrants. At January 31, 2004, the Company had 8,271,875 stock options and
warrants outstanding. At January 31, 2003, 27,000 stock options were
outstanding. Diluted EPS is not presented since the assumed exercise of stock
options and warrants would be anti dilutive.
F-37
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
NOTE 3- ACQUISITION
On August 22, 2003, the Company completed a merger with Clayborn Contracting
Group, Inc, a California corporation ("Clayborn"). The acquisition of Clayborn
gives the Company expertise in engineering and deployment services for specialty
communication systems and additional wireless opportunities to pursue.
The aggregate consideration paid by the Company for Clayborn was approximately
$2,925,000. The Company acquired all of the issued and outstanding shares of
Clayborn in exchange for $900,000 cash consideration and $57,000 of transaction
costs, 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 due by September 30, 2007, payable in
quarterly distributions, by payment to the Clayborn shareholders of 50% of the
quarterly post tax profits of Clayborn. Based on the preliminary information
currently available, the acquisition resulted in goodwill of approximately
$2,140,000. 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 other intangible assets.
The acquisition of Clayborn was accounted for under the purchase accounting
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 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.
F-38
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The preliminary purchase price allocation has been calculated as follows:
Assets purchased:
Cash $ 134,218
Accounts receivable 575,804
Costs in excess of billings 231,562
Income tax refunds receivable 104,765
Fixed assets 370,180
Other assets 97,669
Goodwill 2,139,690
------------------
3,653,888
------------------
Liabilities assumed:
Accounts payable (294,992)
Accrued expenses (136,119)
Notes payable (184,611)
Deferred tax liability (113,800)
------------------
(729,522)
------------------
Purchase price $ 2,924,366
==================
The following unaudited pro forma financial information presents the combined
results of operations of the Company and Clayborn, as if the acquisition had
occurred on May 1, 2003 and 2002, after giving effect to certain adjustments,
including the issuance of the Company's common stock to Clayborn as part of the
purchase price. The pro forma financial information does not necessary reflect
the results of operations that would have occurred had the Company and Clayborn
been a single entity during this period.
Nine months ended
January 31,
2004 2003
--------------- ----------------
Revenue $15,407,595 $6,921,494
Net loss attributable to common shareholders ($562,635) ($609,264)
Weighted average number of shares used in
calculations of basic loss per share 17,912,149 10,331,783
Basic net loss per share ($0.03) ($0.06)
F-39
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the following
at January 31, 2004:
Costs incurred on uncompleted contracts $12,373,509
Estimated contract profit 3,267,965
---------------
15,641,474
Less: billings to date 15,551,975
---------------
Net costs in excess $89,499
===============
Costs and estimated earnings in excess of billings $972,564
Billings in excess of costs and estimated earnings
on uncompleted contracts (883,065)
---------------
Net costs in excess $89,499
===============
NOTE 5 - 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 January 31, 2004, an additional $103,016 was payable to the Walker
shareholders against this earn-out provision and, accordingly, goodwill was
increased by $103,016. At January 31, 2004, the total payable to the Walker
shareholders under this earn-out provision was $103,016.
In connection with the acquisition of Walker, 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 nine months ended January 31,
2004, $42,000 was paid as rent for this lease.
In connection with the acquisition of Clayborn, an additional $1,100,000 is due
by September 30, 2007, payable in quarterly distributions to the Clayborn
shareholders, by payment of 50% of the quarterly post tax profits of Clayborn.
NOTE 6- LINE OF CREDIT
On October 29, 2003, Walker obtained a revolving line of credit facility with a
commercial bank in the amount of $750,000. The borrowing limit is up to 70% of
eligible Walker accounts receivable. As of January 31, 2004, the borrowing base
was $750,000 and the outstanding balance was $100,000. The line of credit is
collateralized by all of Walker's accounts receivable, inventory and equipment
and bears interest at the Wall Street Journal Prime Index Rate plus 1.5% (5.50%
as of January 31, 2004). In addition, the Company and certain executive officers
of the Company have personally guaranteed this line of credit facility. This
line is subject to annual renewal and matures on November 5, 2004. Accrued
interest is payable monthly.
F-40
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - 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 one to five years after grant, are exercisable at prices
equal to the fair market value of the stock at the date of the grant and become
exercisable in accordance with terms established at the time of the grant. At
January 31, 2004, there were 1,837,525 shares available for grant under the 2002
Plan.
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.
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 No.
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 would
have been as follows:
Nine months ended
January 31, 2004
Net loss attributable to common shareholders,
as reported ($434,327)
Deduct: total stock-based employee compensation expenses
determined under fair value based method for all awards, net
of tax (110,075)
--------------------------
Net loss per share attributable to common shareholders, pro
forma ($544,402)
==========================
Net loss per share: basic
As reported ($0.02)
Basic- pro forma ($0.03)
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: Risk-free
interest rate range of 2.1% to 3.6%, dividend yield of 0%, term of five years
and volatility of 71.0%.
F-41
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8- SHAREHOLDERS' EQUITY
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"). 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.
The Company sold all 100 Units from the Offering and received proceeds of
$2,204,691, net of the placement agent commissions and other issuance costs. 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.
For the nine months ended January 31, 2004, the Company granted options to
purchase 1,230,000 shares of its common stock to certain consultants. The
options have exercise prices ranging from $0.45 to $2.33, and vesting periods of
one to five years. The Company has valued these options using the Black-Scholes
Option pricing model and recorded $187,620 of expense for the nine months ended
January 31, 2004.
On August 13, 2003, all 1,000 Series C Preferred shares were converted into
1,786,000 shares of the Company's common stock.
NOTE 9 - SEGMENT REPORTING
The Company's reportable segments are determined based upon the nature of the
services, the external customers and customer industries and the sales and
distribution methods used to market the products. The Company has two reportable
segments: wireless infrastructure services and specialty communication systems.
The Company evaluates performance based upon income (loss) before income taxes.
Corporate includes corporate salaries and external professional fees, such as
accounting, legal and investor relations costs which are not allocated to the
other subsidiaries. Corporate assets include cash, prepaid expenses and deferred
tax assets. Segment reporting commenced after the Company acquired Walker in
December 2002. Prior to that date, the Company operated as only one segment.
F-42
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Segment results for the nine months ended January 31, 2004 and 2003
are as follows:
Nine Months Ended January 31, 2004 Nine Months Ended January 31, 2003
Wireless Specialty Wireless Specialty
Corporate Infrastructure Communication Total Corporate Infrastructure Communication Total
--------- -------------- ------------- ----------- --------- -------------- ------------- ----------
Revenue - $2,477,117 $11,397,499 $13,874,616 - $1,166,286 $1,019,453 $2,185,739
(Loss) income
before income
taxes ($777,028) $11,442 $335,459 ($430,127) ($289,423) ($180,023) ($92,277) ($561,723)
Goodwill - $1,632,544 $6,335,049 $7,967,593 - $1,658,967 $3,921,366 $5,580,333
Total assets $348,873 $2,781,569 $11,991,946 $15,122,388 $186,669 $2,595,905 $6,797,974 $9,580,548
F-43
Independent Auditor's Report
Stockholders
Invisinet, Inc.
West Chicago, Illinois
We have audited the accompanying balance sheets of Invisinet, Inc. as of
December 31, 2001 and 2000, and the related statements of loss and accumulated
deficit and cash flows for the year ended December 31, 2001 and the period from
July 10, 2000 (inception) through December 31, 2000.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Invisinet, Inc. as of December
31, 2001 and 2000, and the results of its operations and its cash flows for the
year ended December 31, 2001 and the period from July 10, 2000 (inception)
through December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming Invisinet,
Inc. will continue as a going concern. As more fully described in Note 2, the
company has incurred operating losses since inception. These losses raise
substantial doubt about the company' s ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and the
amounts and classifications of liabilities that may result from the outcome of
this uncertainty.
Also, as discussed in Note 5, the company purchases the majority of its
inventory from a company related through common ownership and management at
terms that this related company offers to its best customers. In addition, a
nonrecurring discretionary management fee charged in 2000 to another related
company had a significant impact on earnings. The financial statements are not
necessarily indicative of the results of operations or related effects on the
financial position that would occur if the above related party transactions and
relationships were not present.
/s/Blackman Kallick Bartelstein, LLP
- ------------------------------------
Blackman Kallick Bartelstein, LLP
Chicago, Illinois
September 23, 2002
F-44
Invisinet, Inc.
Balance Sheets
December 31, 2001 and 2000
Assets
2001 2000
------------- --------------
Current Assets
Cash $ 30,911 $ 119,656
Receivables (Net of allowance for doubtful accounts
of $7,000 in 2001 and $5,000 in 2000) 99,861 211,401
Due from related party - 63,577
Inventory (Net of valuation reserve of
$14,825 in 2001 and $5,825 in 2000) 22,758 17,130
Prepaid expenses 5,117 -
------------- --------------
Total Current Assets 158,647 411,764
Computer Equipment (Net of accumulated depreciation
of $6,777 in 2001 and $2,825 in 2000) 10,730 17,507
Deposits 350 350
------------- --------------
$ 169,727 $ 429,621
============= ==============
Liabilities and Stockholder's Deficit
Current Liabilities
Note payable - Related party $ 439,000 $ 439,000
Accounts payable
Trade 28,906 18,035
Related party 111,339 181,291
Accrued expenses
Salaries, wages and other compensation 5,735 16,596
Other expenses and taxes 45,031 10,675
------------- --------------
Total Current Liabilities 630,011 665,597
------------- --------------
Stockholder's Deficit
Common stock - $.01 par value; authorized -
10,000 shares; issued and outstanding - 1,000 shares 1,000 1,000
Accumulated deficit (461,284) (236,976)
------------- --------------
Total Stockholder's Deficit (460,284) (235,976)
------------- --------------
$ 169,727 $ 429,621
============= ==============
The accompanying notes are an integral part of the financial statements.
F-45
Invisinet, Inc.
Statements of Loss and Accumulated Deficit
Year Ended December 31, 2001 and Period from July 10, 2000
(Inception) through December 31, 2000
2001 2000
------------- --------------
Net Sales $ 1,414,190 $ 531,817
Cost of Sales 1,170,638 426,180
------------- --------------
Gross Profit 243,552 105,637
Operating Expenses 432,740 458,471
------------- --------------
Loss from Operations (189,188) (352,834)
------------- --------------
Other Expense (Income)
Management fee income - (120,922)
Interest 35,120 5,064
------------- --------------
Total Other Expense (Income), Net 35,120 (115,858)
------------- ---------------
Net Loss (224,308) (236,976)
Accumulated Deficit, Beginning of Period (236,976) -
------------- --------------
Accumulated Deficit, End of Period $ (461,284) $ (236,976)
============= ==============
The accompanying notes are an integral part of the financial statements.
F-46
Invisinet, Inc.
Statements of Cash Flows
Year Ended December 31, 2001 and Period from July 10, 2000
(Inception) through December 31, 2000
2001 2000
------------- -------------
Cash Flows from Operating Activities
Net loss $ (224,308) $ (236,976)
------------- -------------
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 6,777 2,825
Provision for losses on receivables - Customers 2,646 7,400
(Increase) decrease in
Receivables 108,894 (218,801)
Due from (to) related party 63,577 (63,577)
Inventories (5,628) (17,130)
Prepaid expenses and deposits (5,117) (350)
Increase (decrease) in
Accounts payable (59,081) 178,994
Accrued expenses 23,495 27,271
------------- -------------
Total Adjustments 135,563 (83,368)
------------- -------------
Net Cash Used in Operating Activities (88,745) (320,344)
------------- -------------
Cash Flows from Financing Activities
Borrowings under line-of-credit - Related party - 439,000
Proceeds from issuance of common stock - 1,000
------------- -------------
Net Cash Provided by Financing Activities - 440,000
------------- -------------
Net (Decrease) Increase in Cash (88,745) 119,656
Cash, Beginning of Period 119,656 -
------------- -------------
Cash, End of Period $ 30,911 $ 119,656
============= ==============
The accompanying notes are an integral part of the financial statements.
F-47
Invisinet, Inc.
Notes to Financial Statements
Year Ended December 31, 2001 and Period from July 10, 2000
(Inception) through December 31, 2000
Note 1 - Industry Operations
The company is a value-added reseller of portable transaction computers that
sells to end-users throughout the United States. The company grants credit to
substantially all of its customers.
Note 2 - Going Concern
The accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America on a going-concern
basis which assumes that the company will be able to realize its assets and
discharge its liabilities in the normal course of business for the foreseeable
future.
The company has incurred operating losses since inception, which created a
deficit in stockholder's equity as of December 31, 2001. The company' s
continuation as a going concern is dependent upon attaining profitable
operations and the ability to maintain adequate financing or capital. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and the
amounts and classifications of liabilities that may result from the outcome of
this uncertainty.
Note 3 - Summary of Significant Accounting Policies
Cash
The company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The company has not experienced any losses in
such accounts. The company believes it is not exposed to any significant credit
risk on cash.
Depreciation
The company's policy is to depreciate the cost of computer equipment over the
estimated useful life of the asset, which is determined to be three years, by
use of the straight-line method.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market, and
consists primarily of finished goods on hand and demonstrator inventory on loan
to customers.
F-48
Invisinet, Inc.
Notes to Financial Statements
Year Ended December 31, 2001 and Period from July 10, 2000
(Inception) through December 31, 2000
Note 3 - Summary of Significant Accounting Policies (Continued)
Revenue Recognition
Sales are recognized when the goods are shipped to the customers.
Income Taxes
The company has elected to be taxed as an S Corporation under the provisions of
the Internal Revenue Code. Accordingly, the accompanying financial statements do
not reflect income taxes, except for state replacement tax.
Management Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Note 4 - Note Payable - Related Party
The company has borrowings under a line-of-credit agreement with the majority
stockholder in the amount of $439,000 as of December 31, 2001 and 2000.
Borrowings on this line bear interest at 8% per annum. Accrued interest on the
note as of December 31, 2001 and 2000 was $40,184 and $5,064, respectively, and
is included in accrued other expenses and taxes on the balance sheet. This note
is automatically renewed for successive periods of one year unless written
notice of termination is given prior to the renewal date of August 1st by the
majority stockholder. In the event of any termination or nonrenewal by the
majority stockholder, the note is due and payable in cash within ten business
days after the date of termination and nonrenewal. As of December 31, 2001 and
2000, maximum additional borrowings under the line-of-credit were $61,000.
F-49
Invisinet, Inc.
Notes to Financial Statements
Year Ended December 31, 2001 and Period from July 10, 2000
(Inception) through December 31, 2000
Note 5 - Related Party Transactions
The company pays a management fee to a company, related through common ownership
and management, equivalent to approximately 2% of the company' s net sales, for
the use of facilities, personnel and equipment. Management fees for the years
ended December 31, 2001 and 2000 were approximately $28,000 and $24,907,
respectively. The company also purchases the majority of its inventory from the
same related company, at terms that this related company offers to its best
customers. Purchases of inventory from the related company for the years ended
December 31, 2001 and 2000 were approximately $759,000 and $314,000,
respectively. In 2000, the company purchased computer equipment in the amount of
$20,332 from the related company. The company owed approximately $111,339 and
$181,291 to the related company as of December 31, 2001 and 2000, respectively.
In addition, the company charged a discretionary management fee to a separate
company, related through common ownership and management, during 2000 of
$120,922. The balance due from this related company was $0 and $63,577 as of
December 31, 2001 and 2000, respectively.
The financial statements are not necessarily indicative of the results of
operations or related effects on the financial position that would occur if the
above related party transactions and relationships were not present.
See additional related party disclosures in Note 4.
Note 6 - Major Customers
For the year ended December 31, 2001, sales to one major customer amounted to
more than 10% of total revenue. The amount of revenue from this customer was
$195,698. There was no receivable balance due from this customer as of December
31, 2001.
For the year ended December 31, 2000, sales to two major customers amounted to
more than 10% of total revenue. The amount of revenue from these customers was
$78,511 and $69,453, respectively. The receivable balances to these major
customers were $26,934 and $85, respectively.
Note 7 - Common Stock Restriction Agreement
The company's founding minority stockholder is obligated under a stock
restriction agreement to forfeit his 150 shares in whole or in part if he ceases
to be an employee of the company or an affiliate prior to July 10, 2004. The
shares vest and become nonforfeitable on a pro rata basis of 25% per year
beginning with July 10, 2001. As the shares had no significant value as of the
date of issuance, no compensation expense has been recorded.
F-50
Stockholders
Invisinet, Inc.
West Chicago, Illinois
We have reviewed the accompanying balance sheet of Invisinet, Inc. as of
September 30, 2002, and the related statements of loss and accumulated deficit
and cash flows for the nine months ended September 30, 2002.
A review consists principally of inquiries of company personnel and analytical
procedures applied to financial data. It is substantially less in scope than an
audit in accordance with auditing standards generally accepted in the United
States of America, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming Invisinet,
Inc. will continue as a going concern. As more fully described in Note 2, the
company has incurred operating losses since inception. These losses raise
substantial doubt about the company' s ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and the
amounts and classifications of liabilities that may result from the outcome of
this uncertainty.
Also, as discussed in Note 5, the company purchases the majority of its
inventory from a company related through common ownership and management at
terms more favorable than those terms given to other customers. In addition, the
company received management services and certain compensation at no charge in
2002 and also had some liability balances forgiven or assumed as part of a
merger agreement effective September 30, 2002. See Notes 4, 5 and 8. The
financial statements are not necessarily indicative of the results of operations
or related effects on the financial position that would occur if the above
related party transactions and relationships were not present.
/s/ Blackman Kallick Bartelstein, LLP
- -------------------------------------
Blackman Kallick Bartelstein, LLP
Chicago, Illinois
November 13, 2002
F-51
Invisinet, Inc.
Balance Sheet
September 30, 2002
Assets
Current Assets
Cash $ 34,401
Receivables (Net of allowance for doubtful
accounts of $13,000) 159,438
Due from related party 164,514
Inventory (Net of valuation reserve of
$14,825) 13,286
Prepaid expenses 2,372
--------------
Total Current Assets 374,011
Computer Equipment (Net of accumulated depreciation
of $12,530) 5,003
Deposits 350
--------------
$ 379,364
==============
Liabilities and Stockholder's Deficit
Current Liabilities
Note payable - Related party $ 600,000
Accounts payable
Trade 222,120
Related party 14,372
Accrued expenses 4,928
--------------
Total Current Liabilities 841,420
--------------
Stockholder's Equity (Deficit)
Common stock - $.01 par value; authorized -
10,000 shares; issued and outstanding - 1,000
shares 1,000
Additional paid-in capital 62,472
Accumulated deficit (525,528)
--------------
Total Stockholder's Deficit (462,056)
--------------
$ 379,364
==============
See accountants' review report.
The accompanying notes are an integral part of the
financial statements.
F-52
Invisinet, Inc.
Statement of Loss and Accumulated Deficit
Nine Months Ended September 30, 2002
Net Sales $ 891,242
Cost of Sales 680,203
--------------
Gross Profit 211,039
Operating Expenses 274,986
--------------
Loss from Operations (63,947)
Interest Expense (297)
--------------
Net Loss (64,244)
Accumulated Deficit, Beginning of Period (461,284)
--------------
Accumulated Deficit, End of Period $ (525,528)
==============
See accountants' review report.
The accompanying notes are an integral part of the
financial statements.
F-53
Invisinet, Inc.
Statement of Cash Flows
Nine Months Ended September 30, 2002
Cash Flows from Operating Activities
Net loss $ (64,244)
-------------
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation 4,383
Provision for losses on receivables - Customers 6,000
(Increase) decrease in
Receivables (220,091)
Inventories 9,472
Prepaid expenses and deposits 2,745
Increase in
Accounts payable 109,879
Accrued expenses (5,654)
--------------
Total Adjustments (93,266)
--------------
Net Cash Used in Operating Activities (157,510)
Net Cash Provided by Financing Activities -
Borrowings under
line-of-c redit - Related party 161,000
-------------
Net Increase in Cash 3,490
Cash, Beginning of Period 30,911
-------------
Cash, End of Period $ 34,401
=============
See accountants' review report.
The accompanying notes are an integral part of the
financial statements.
F-54
Invisinet, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2002
Note 1 - Industry Operations
The company is a value-added reseller of portable transaction computers that
sells to end-users throughout the United States. The company grants credit to
substantially all of its customers.
Note 2 - Going Concern
The accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America on a going-concern
basis which assumes that the company will be able to realize its assets and
discharge its liabilities in the normal course of business for the foreseeable
future.
The company has incurred operating losses since inception, which created a
deficit in stockholder's equity as of September 30, 2002. The company' s
continuation as a going concern is dependent upon attaining profitable
operations and the ability to maintain adequate financing or capital. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and the
amounts and classifications of liabilities that may result from the outcome of
this uncertainty.
Note 3 - Summary of Significant Accounting Policies
Cash
The company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The company has not experienced any losses in
such accounts. The company believes it is not exposed to any significant credit
risk on cash.
Depreciation
The company's policy is to depreciate the cost of computer equipment over the
estimated useful life of the asset, which is determined to be three years, by
use of the straight-line method.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market, and
consists primarily of finished goods on hand and demonstrator inventory on loan
to customers.
Revenue Recognition
Sales are recognized when the goods are shipped to the customers.
See accountants' review report.
F-55
Invisinet, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2002
Note 3 - Summary of Significant Accounting Policies
(Continued)
Income Taxes
The company has elected to be taxed as an S Corporation under the provisions of
the Internal Revenue Code. Accordingly, the accompanying financial statements do
not reflect income taxes, except for state replacement tax.
Management Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Note 4 - Note Payable - Related Party
The company has borrowings under a line-of-credit agreement with the majority
stockholder in the amount of $600,000 as of September 30, 2002. Borrowings on
this line bear interest at 8% per annum. In conjunction with the merger
agreement (Note 8), the majority stockholder waived the accrual of interest of
$30,633 for the nine months ended September 30, 2002. In addition, the majority
stockholder forgave the remaining interest accrual of $40,184 with the amount
being contributed to capital as of September 30, 2002. This note is
automatically renewed for successive periods of one year unless written notice
of termination is given prior to the renewal date of August 1st by the majority
stockholder. In the event of any termination or nonrenewal by the majority
stockholder, the note is due and payable in cash within ten business days after
the date of termination and nonrenewal. As of September 30, 2002, there were no
maximum additional borrowings available under the line-of-credit.
Note 5 - Related Party Transactions
The company pays a management fee to a company, related through common ownership
and management, equivalent to approximately 2% of the company's net sales, for
the use of facilities, personnel and equipment. The related company waived the
management fee of approximately $13,000 for the nine months ended September 30,
2002, in connection with the merger described in Note 8 . The company also
purchases the majority of its inventory from the same related company, at terms
that this related company offers to its best customers. However, also in
connection with the merger described in Note 8, the related company gave a
volume discount to the company of approximately $21,000 for the nine months
ended September 30, 2002, which made the overall terms more favorable than those
given to other customers. Purchases of inventory from the related company for
the nine months ended September 30, 2002 was approximately $163,000. During the
nine months ended September 30, 2002, the company sold computer equipment in the
amount of $1,344 to the related company. The company owed approximately $14,372
to the related company as of September 30, 2002.
F-56
Invisinet, Inc.
Notes to Financial Statements
Nine Months Ended September 30, 2002
Note 5 - Related Party Transactions (Continued)
In addition, a company related through common ownership and management, assumed
an outstanding customer receivable balance of $154,514 as of September 30, 2002.
The balance is included in due from related party in the accompanying balance
sheet.
The financial statements are not necessarily indicative of the results of
operations or related effects on the financial position that would occur if the
above related party transactions and relationships were not present.
See additional related party disclosures in Notes 4 and 8.
Note 6 - Major Customers
For the period ended September 30, 2002, sales to four major customers amounted
to more than 10% of total revenue. The amount of revenue from each such customer
was $162,514, $139,764, $99,514, and $96,839. The receivable balance from each
customer was $0, $1,532, $53,521, and $35,978, respectively, as of September 30,
2002.
Note 7 - Common Stock Restriction Agreement
The company's founding minority stockholder is obligated under a stock
restriction agreement to forfeit his 150 shares in whole or in part if he ceases
to be an employee of the company or an affiliate prior to July 10, 2004. The
shares vest and become nonforfeitable on a pro rata basis of 25% per year
beginning with July 10, 2001. As the shares had no significant value as of the
date of issuance, no compensation expense has been recorded.
Note 8 - Merger Agreement
The company entered into a merger agreement, with an un related company, on
November 13, 2002 with an effective date as of September 30, 2002. As part of
the agreement, the stockholders of the company, or a company owned by the
majority stockholder, forgave or assumed the following accrued expenses owed by
the company as of the beginning of the year, along with adjusting certain 2002
expenses as described in Note 5, as of September 30, 2002:
Interest $ 40,184
Legal fees 22,288
-----------
Total $ 62,472
The above forgiveness or assumption was treated as a contribution to capital by
the stockholders.
F-57
Board of Directors
Invisinet, Inc.
West Chicago, Illinois
Our report on our review of the basic financial statements of Invisinet, Inc.
for the nine months ended September 30, 2002 appears on page one. The review was
made for the purpose of expressing limited assurance that there are no material
modifications that should be made to the financial statements in order for them
to be in conformity with accounting principles generally accepted in the United
States of America. The information included in the accompanying schedule of
operating expenses is presented only for supplemental analysis purposes. Such
information has been subjected to the inquiry and analytical procedures applied
in our review of the basic financial statements , and we are not aware of any
material modification that should be made thereto.
November 13, 2002
F-58
Invisinet, Inc.
Operating Expenses
Nine Months Ended September 30, 2002
Leased employees $ 211,545
Bad debts 6,000
Bank and credit card fees 1,624
Depreciation 4,383
Insurance 2,180
Professional fees 23,377
Rent 2,103
Supplies 1,138
Telephone 7,829
Travel 13,078
Miscellaneous 1,729
--------------
Total $ 274,986
See accountants' supplemental review report.
F-59
LEONARD FRIEDMAN
CERTIFIED PUBLIC ACCOUNTANT
385 Old Westbury Road
East Meadow, New York 11554
Tel: (516) 735-0824 Fax: (516) 735-6301
E-mail: lenmar@optonline.net
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders of
Walker Comm, Inc.
I have audited the accompanying balance sheets of Walker Comm, Inc. as of
December 31, 2001 and 2000, and the related statements of operations,
shareholders' equity and cash flows for the years then ended. 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 I 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 financial statements referred to above present fairly, in all
material respects, the financial position of Walker Comm, Inc. as of December
31, 2001 and 2000, and the results of their operations and their cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ LEONARD FRIEDMAN
- --------------------
LEONARD FRIEDMAN
East Meadow, New York
February 5, 2003
F-60
WALKER COMM, INC.
BALANCE SHEETS
DECEMBER 31,
ASSETS 2001 2000
------------- ------------
CURRENT ASSETS
Cash and cash equivalents $ 137,863 $ 183,114
Contract receivable, net of allowance of $60,000
in 2001 and $35,000 in 2000 2,861,296 4,826,869
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,071,559 1,997,619
Insurance refund receivable and other current assets 401,345 25,662
------------- ------------
Total current assets 4,472,063 7,033,264
PROPERTY AND EQUIPMENT, NET 469,194 430,626
OTHER ASSETS 23,827 10,271
------------- ------------
Total Assets $ 4,965,084 $ 7,474,161
------------- ------------
The accompanying notes are an integral part of these statements.
F-61
WALKER COMM, INC.
BALANCE SHEETS
DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
------------- ------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 775,774 $3,379,587
Billings in excess of costs and estimated earnings on
uncompleted contracts 93,724 796,973
Current maturities of equipment loans payable 86,494 98,553
Income taxes payable 61,180 49,980
------------- ------------
Total current liabilities 1,017,172 4,325,093
------------- ------------
EQUIPMENT LOANS PAYABLE, less current maturities 44,484 118,183
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - no par value; 1,000
shares authorized; 100 shares issued and
outstanding in 2001 and 2000, respectively 20,000 20,000
Retained earnings 3,883,428 3,010,885
------------- ------------
Total Shareholders' Equity 3,903,428 3,030,885
------------- ------------
Total Liabilities and Shareholders' Equity $ 4,965,084 $ 7,474,161
------------- ------------
The accompanying notes are an integral part of these statements.
F-62
WALKER COMM, INC.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
2001 2000
------------- ------------
Contract revenue earned $ 14,799,579 $23,665,896
Cost of revenue earned 11,137,763 19,584,117
------------- ------------
Gross profit 3,661,816 4,081,779
------------- ------------
Operating expenses
Selling 45,749 59,812
General and administrative 2,413,750 1,947,929
Depreciation and amortization 187,055 176,176
Provision for bad debts 46,126 25,000
------------- ------------
2,692,680 2,208,917
------------- ------------
Operating profit 969,136 1,872,862
------------- ------------
Other income
Interest income, net 14,607 12,487
Gain on disposition of fixed assets - 7,280
------------- ------------
14,607 19,767
------------- ------------
Earnings before income taxes 983,743 1,892,629
Income tax provision 11,200 28,330
------------- ------------
NET INCOME $ 972,543 $ 1,864,299
------------- ------------
The accompanying notes are an integral part of these statements.
F-63
WALKER COMM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001 AND 2000
CAPITAL RETAINED
STOCK EARNINGS TOTAL
---------------- --------------- ---------------
Balance January 1, 2000 $ 20,000 $ 1,365,586 $ 1,385,586
Net Income for the year - 1,864,299 1,864,299
Dividend distributions - (219,000) (219,000)
---------------- --------------- ---------------
Balance December 31, 2000 20,000 3,010,885 3,030,885
Net Income for the year - 972,543 972,543
Dividend distributions - (100,000) (100,000)
---------------- --------------- ---------------
Balance December 31, 2001 $ 20,000 $ 3,883,428 $ 3,903,428
---------------- --------------- ---------------
The accompanying notes are an integral part of these statements.
F-64
WALKER COMM, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2001 2000
------------- ------------
Cash flows from operating activities
Net income $ 972,543 $1,864,299
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 187,055 176,176
Provision for doubtful accounts 46,126 25,000
Changes in operating assets and liabilities:
Contracts receivable 1,919,447 (3,484,494)
Costs and estimated earnings in excess of
billings on uncompleted contracts 926,060 (942,129)
Insurance refund receivable and other assets (389,239) (18,154)
Accounts payable and accrued expenses (2,603,813) 2,598,107
Billings in excess of costs and estimated
earnings on uncompleted contracts (703,249) 73,237
Income taxes payable 11,200 28,330
------------- ------------
Net cash provided by operating activities 366,130 320,372
------------- ------------
Cash flows used in investing activities
Acquisition of property and equipment (225,623) (289,722)
------------- ------------
Net cash used in investing activities (225,623) (289,722)
------------- ------------
Cash flows from financing activities
Proceeds from equipment loans payable 18,600 180,438
Repayment of equipment loans payable (104,358) (103,143)
Dividends paid (100,000) (219,000)
------------- ------------
Net cash used in financing activities (185,758) (141,705)
------------- ------------
NET DECREASE IN CASH
AND CASH EQUIVALENTS (45,251) (111,055)
Cash and cash equivalents, beginning of year 183,114 294,169
------------- ------------
Cash and cash equivalents, end of year $ 137,863 $ 183,114
============= ============
The accompanying notes are an integral part of these statements.
F-65
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Walker Comm, Inc. (the "Company") is engaged in the business of fiber
optics, data and voice cable installation. The Company was incorporated in 1997
and is headquartered in Fairfield, California with satellite offices in
Livermore and Rocklin, California.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly liquid investments with an
original maturity of three months or less.
2. Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided for, using straight-line and accelerated methods, in amounts sufficient
to relate the cost of depreciable assets to operations over their estimated
service lives. Leased property under capital leases is amortized over the
shorter of the service lives of the assets or the term of the lease. Repairs and
maintenance are charged to operations as incurred.
3. Revenue recognition on Long-term Contracts
The Company records profits on long-term contracts on a
percentage-of-completion basis on the cost to cost method. Contracts in process
are valued at cost plus accrued profits less earned revenues and progress
payments on uncompleted contracts. Contracts are generally considered
substantially complete when engineering is completed and/or site construction is
completed. The Company includes pass-through revenue and costs on cost-plus
contracts, which are customer-reimbursable materials, equipment and
subcontractor costs when the Company determines that it is responsible for the
engineering specification, procurement and management of such cost components on
behalf of the customer.
The Company has numerous contracts that are in various stages of completion.
Such contracts require estimates to determine the appropriate cost and revenue
recognition. The Company has a history of making reasonably dependable estimates
of the extent of progress towards completion, contract 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.
F-66
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2001 and 2000
NOTE A (continued)
4. Contracts receivable
In accordance with terms of long-term contracts, certain percentages of billings
are withheld by customers until completion and acceptance of the contracts. In
conformity with industry practice, however, the full amount of accounts
receivable, including such amounts withheld, has been included in current
assets.
5. Income Taxes
The Company has elected to be treated as an "S" Corporation under the applicable
sections of the Internal Revenue Code. In general, corporate income or loss of
an "S" Corporation is allocated to the Stockholders for inclusion in their
personal Federal Income tax returns. Accordingly, there is no provision for
Federal income tax in the accompanying financial statements.
The Company has also elected to be treated as an "S" Corporation for California
state income tax purposes. However, the State of California does impose a tax on
"S" Corporation income at a reduced rate and, accordingly, a provision for such
tax is included in the accompanying financial statements.
6. Uses of Estimates and Fair Value of Financial Instruments
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. Significant estimates are used when accounting for long-term contracts
including customer and vendor claims, depreciation, employee benefit plans,
taxes, and expected recoveries and contingencies, among others. Actual results
could differ from those estimates.
Management of the Company believes that the fair value of financial instruments,
consisting of cash, contracts receivable and debt, approximates carrying value
due to the immediate or short-term maturity associated with its cash and
accounts receivable and the interest rates associated with its debt.
F-67
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2001 and 2000
NOTE B - CONTRACTS RECEIVABLE
Contracts receivable consist of the following at December 31,
2001 2000
Contract billing $2,571,346 $3,999,927
Retention on contracts 349,950 861,942
--------------- --------------
2,921,296 4,861,869
Less: reserve for uncollectible accounts 60,000 35,000
--------------- --------------
$2,861,296 $4,826,869
--------------- --------------
NOTE C - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the
following at December 31,
2001 2000
Costs incurred on uncompleted contracts $6,741,687 $15,856,213
Estimated contract profit 2,289,485 2,674,688
--------------- ---------------
9,031,172 18,530,901
Less: billings to date 8,053,337 17,330,255
--------------- ---------------
977,835 1,200,646
--------------- ---------------
Costs and estimated earnings in excess of billings 1,071,559 1,997,619
Billings in excess of costs and estimated earnings
on uncompleted contracts (93,724) (796,973)
--------------- ---------------
$ 977,835 $ 1,200,646
--------------- ---------------
F-68
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2001 and 2000
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
Estimated
useful life
(years) 2001 2000
Furniture and equipment 5 - 7 $ 30,286 $19,688
Automobiles 5 - 7 558,726 535,441
Computer equipment 3 - 5 251,473 198,918
Leasehold improvements 3 - 10 149,012 7,746
989,497 761,793
Less accumulated depreciation
and amortization 520,301 331,167
----------- -------------
$ 469,196 $ 430,626
=========== =============
Depreciation and amortization expense for property and equipment for the years
ended December 31, 2001 and 2000 was approximately $187,055 and $176,176,
respectively.
NOTE E - NOTES PAYABLE
Notes payable at December 31, 2001 and 2000 consist of the following:
2001 2000
Note payable to credit unions and banks with principal
and interest due monthly through February 2004,
interest rates, fixed and variable, ranging from 6.20%
to 9.15%, collateralized by vehicles $ 130,978 $ 216,736
Less: current maturities 86,494 98,553
--------- ---------
Long-term debt $ 44,484 $ 118,183
--------- ---------
Related interest expense for the years ended December 31, 2001 and 2000 was
$14,598 and $17,514, respectively.
F-69
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2001 and 2000
NOTE F - LINE OF CREDIT
On July 10, 2002, the Company renewed its revolving credit agreement with a
major bank that provided for a borrowing facility not to exceed $1,500,000. At
December 31, 2001 this credit agreement had a borrowing facility of $1,000,000.
There were no borrowings outstanding under the agreement as of that date. The
agreement is secured by all assets of the Company along with the personal
guarantees by the two major shareholders of the Company.
NOTE G - RELATED PARTY TRANSACTIONS
On March 1, 2001, the Company entered into a ten year lease with shareholder
Gary R. Walker and Donald C. and Anita G. Walker for a building and land located
in Fairfield, California, which will serve as the Company's headquarters. The
lease calls for initial monthly rental payments of $6,934, with annual
increases, calculated using the San Francisco-Oakland-San Jose Consolidated
Metropolitan Statistical Area Consumer Price Index.
NOTE H - MAJOR CUSTOMERS
Contract revenue for the years ended December 31, 2001 and 2000 include amounts
from one major customer which accounted for 19% and 48% respectively, of the
total contract revenue in those years. There were four and two other major
customers, during 2001 and 2000 respectively, each of which accounted for 6% or
more of the total contract revenue of the Company for those periods.
NOTE I - RETIREMENT PLAN AND CONTIGENCY
The Company contributes to union-sponsored multi-employer retirement plans in
accordance with negotiated labor contracts. The retirement plans cover all of
the Company's union employees, which represent substantially all of the
Company's employees. Contributions, which are based on varying rates for the
hours worked by the employees, totaled $260,634 and $366,473 for the years ended
December 31, 2001 and 2000, respectively.
Governmental regulations impose certain requirements relative to multi-employer
plans. In the event of plan termination or employer withdrawal, an employer may
be liable for a portion of the plan's unfunded vested benefits. As of December
31, 2001, the Company's multi-employer plans are fully funded. The Company does
not anticipate withdrawal from the plans, nor is the Company aware of any
expected plan terminations.
F-70
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2001 and 2000
NOTE J - COMMITMENTS AND CONTINGENCIES
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 liquidity
of the Company.
Lease Commitments
The Company leases its main office (see Note G) and sales office facilities
pursuant to non-cancelable operating leases expiring through February 2011. The
minimum rental commitments under these non-cancelable leases, at December 31,
2001, are summarized as follows:
Year ending December 31,
2002 $ 152,615
2003 151,265
2004 91,000
Thereafter 597,000
-----------
Total minimum lease payments $ 991,880
Less current maturities ===========
Rent expense for all operating leases was $157,242 and $65,681 in 2001 and 2000,
respectively.
NOTE L - SUBSEQUENT EVENT
On December 30, 2002, the Board of Directors of the Company approved an
Agreement and Plan of Merger with WPCS International, Inc. The merger closed
effective December 30, 2002. The change in ownership resulting from the merger
constitutes an event of default under the line of credit agreement with the Bank
referred to in Note F.
F-71
WALKER COMM, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
2002 2001
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 306,005 $ 137,863
Contract receivable, net of allowance of $85,000
in 2002 and $60,000 in 2001 1,554,484 2,861,296
Costs and estimated earnings in excess of billings on
uncompleted contracts 540,808 1,071,559
Insurance Refund Receivable and other current assets 378,444 401,345
----------- -----------
Total current assets 2,779,741 4,472,063
PROPERTY AND EQUIPMENT, NET 467,499 469,194
OTHER ASSETS 21,809 23,827
----------- -----------
Total Assets $3,269,049 $4,965,084
----------- -----------
The accompanying notes are an integral part of these statements.
F-72
WALKER COMM, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
2002 2001
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $557,810 $775,774
Billings in excess of costs and estimated earnings on
uncompleted contracts 152,423 93,724
Current maturities of equipment loans payable 70,317 86,494
Income taxes payable 61,180 61,180
---------- ----------
Total current liabilities 841,730 1,017,172
---------- ----------
EQUIPMENT LOANS PAYABLE, less current maturities 26,557 44,484
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - no par value; 3,000
shares authorized; 100 shares issued and
outstanding at September 30, 2002 and
December 31, 2001, respectively 20,000 20,000
Retained earnings 2,380,762 3,883,428
---------- ----------
Total Shareholders' Equity 2,400,762 3,903,428
---------- ----------
Total Liabilities and Shareholders' Equity $3,269,049 $4,965,084
---------- ----------
The accompanying notes are an integral part of these statements.
F-73
WALKER COMM, INC.
CONDENSED STATEMENTS OF OPERATIONS
Nine months ended
September 30,
2002 2001
------------ ------------
Contract revenue earned $5,815,286 $11,018,475
Cost of revenue earned 5,427,259 8,938,699
------------ ------------
Gross profit 388,027 2,079,776
------------ ------------
Operating expenses
Selling 36,397 42,639
General and administrative 1,463,792 1,617,289
Depreciation and amortization 146,542 134,931
Provision for bad debts 25,600 62,830
------------ ------------
1,672,331 1,857,689
------------ ------------
Operating profit (loss) (1,284,304) 222,087
Other income
Interest income, net 1,638 11,439
------------ ------------
1,638 11,439
------------ ------------
Earnings (loss) before income taxes (1,282,666) 233,526
Income tax provision - -
------------ ------------
NET INCOME (LOSS) $(1,282,666) $ 233,526
------------ ------------
The accompanying notes are an integral part of these statements.
F-74
WALKER COMM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Nine months ended
September 30,
2002 2001
-------------- ------------
Cash flows from operating activities
Net income (loss) $ (1,282,666) $ 233,526
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 146,542 134,931
Provision for doubtful accounts 25,600 62,830
Changes in operating assets and liabilities
Contracts receivable 1,281,812 861,685
Costs and estimated earnings in excess of
billings on uncompleted contracts 530,751 975,915
Prepaid expenses and other assets 24,919 (30,090)
Accounts payable and accrued expenses (217,964) (1,670,948)
Billings in excess of costs and estimated
earnings on uncompleted contracts 58,699 (271,485)
-------------- ------------
Net cash provided by (used in) operating activities 567,693 296,364
-------------- ------------
Cash flows used in investing activities
Acquisition of property and equipment (145,447) (217,742)
-------------- ------------
Net cash used in investing activities (145,447) (217,742)
-------------- ------------
Cash flows from financing activities
Proceeds from equipment loans payable 32,017 18,600
Repayment of equipment loans payable (66,121) (79,932)
Dividends paid (220,000) (100,000)
-------------- ------------
Net cash used in financing activities (254,104) (161,332)
-------------- ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 168,142 (82,710)
Cash and cash equivalents, beginning of year 137,863 183,114
-------------- ------------
Cash and cash equivalents, end of year $ 306,005 $ 100,404
-------------- ------------
The accompanying notes are an integral part of these statements.
F-75
WALKER COMM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial reporting and Securities and Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted
pursuant to such rules and regulations. In the opinion of the management, the
unaudited interim consolidated financial statements reflect all adjustments,
consisting of normal recurring items, necessary to fairly present the results of
operations, financial position and cash flows for the periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year. These financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
this Form 8-K/A (Amendment No. 1) for the year ended December 31, 2001 and 2000.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Walker Comm, Inc. (the "Company") is engaged in the business of fiber
optics, data and voice cable installation. The Company was incorporated in 1997
and is headquartered in Fairfield, California with satellite offices in
Livermore and Rocklin, California.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
1. Revenue recognition on Long-term Contracts
The Company records profits on long-term contracts on a
percentage-of-completion basis on the cost to cost method. Contracts in process
are valued at cost plus accrued profits less earned revenues and progress
payments on uncompleted contracts. Contracts are generally considered
substantially complete when engineering is completed and/or site construction is
completed. The Company includes pass-through revenue and costs on cost-plus
contracts, which are customer-reimbursable materials, equipment and
subcontractor costs when the Company determines that it is responsible for the
engineering specification, procurement and management of such cost components on
behalf of the customer.
The Company has numerous contracts that are in various stages of completion.
Such contracts require estimates to determine the appropriate cost and revenue
recognition. The Company has a history of making reasonably dependable estimates
of the extent of progress towards completion, contract 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.
F-76
WALKER COMM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002
NOTE 2 (continued)
2. Income Taxes
The Company has elected to be treated as an "S" Corporation under the applicable
sections of the Internal Revenue Code. In general, corporate income or loss of
an "S" Corporation is allocated to the Stockholders for inclusion in their
personal Federal Income tax returns. Accordingly, there is no provision for
Federal income tax in the accompanying financial statements.
The Company has also elected to be treated as an "S" Corporation for California
state income tax purposes. However, the State of California does impose a tax on
"S" Corporation income at a reduced rate.
3. 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. Significant estimates are used when accounting for long-term contracts
including customer and vendor claims, depreciation, employee benefit plans,
taxes, and expected recoveries and contingencies, among others. Actual results
could differ from those estimates.
F-77
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 2002
NOTE 3 - CONTRACTS RECEIVABLE
Contracts receivable consist of the following at September 30, 2002 and December
31, 2001:
Contract billing ................................. $1,593,602 $2,571,346
Retention on contracts ........................... 45,882 349,950
---------- ----------
1,639,484 2,921,296
Less: reserve for uncollectible accounts ......... 85,000 60,000
---------- ----------
$1,554,484 $2,861,296
---------- ----------
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the following
at September 30, 2002 and December 31, 2001:
September 30, December 31,
2002 2001
Costs incurred on uncompleted contracts .......... $ 4,068,735 $ 6,741,687
Estimated contract profit ........................ 483,781 2,289,485
----------- -----------
4,552,516 9,031,172
Less: billings to date ........................... 4,164,131 8,053,337
----------- -----------
388,385 977,835
----------- -----------
Costs and estimated earnings in excess of billings 540,808 1,071,559
Billings in excess of costs and estimated earnings
on uncompleted contracts ....................... (152,423) (93,724)
----------- -----------
$ 388,385 $ 977,835
----------- -----------
F-78
WALKER COMM, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
September 30, 2002
NOTE 5 - SUBSEQUENT EVENT
On December 30, 2002, the Board of Directors of the Company approved an
Agreement and Plan of Merger with WPCS International, Inc. The merger closed
effective December 30, 2002.
F-79
To the Board of Directors
CLAYBORN CONTRACTING GROUP, INC.
Auburn, California
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of CLAYBORN CONTRACTING GROUP,
INC. as of September 30, 2002 and 2001, and the related statements of income and
retained earnings, cash flows for the years 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial positions of CLAYBORN CONTRACTING GROUP,
INC. as of September 30, 2002 and 2001, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles generally accepted in the United States of America.
/s/ Burnett + Company LLP
- -------------------------
Burnett + Company LLP
Rancho Cordova, California
September 15, 2003
F-80
CLAYBORN CONTRACTING GROUP, INC.
BALANCE SHEETS
September 30, 2002 and 2001
ASSETS 2002 2001
---------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 459,580 $ 33,702
Cash held in lieu of retentions 19,170 66,209
Contract receivables 678,284 756,901
Costs and estimated earnings
in excess of billings 319,726 198,938
Prepaid expenses 48,329 27,536
Prepaid income tax 15,224 30,405
---------------- -----------------
Total current assets 1,540,313 1,113,691
EQUIPMENT,
net of accumulated depreciation of $458,242
and $331,695, for 2002 and 2001, respectively 368,918 453,905
OTHER ASSETS 55,265 37,150
---------------- -----------------
Total assets $ 1,964,496 $ 1,604,746
================ =================
The accompanying notes are an integral part of these financial statements.
F-81
LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001
---------------- ----------------
CURRENT LIABILITIES
Accounts payable $ 517,688 $ 404,997
Accrued expenses 176,036 50,431
Current maturity of long-term debt 47,735 49,890
Billings in excess of costs and
estimated earnings 8,092 34,382
Income taxes payable 13,882 0
Deferred income taxes 76,000 94,500
---------------- ----------------
Total current liabilities 839,433 634,200
LONG-TERM LIABILITIES
Long-term debt, net of current maturity 123,604 150,450
Deferred income taxes 44,000 19,500
---------------- ----------------
Total long-term liabilities 167,604 169,950
---------------- ----------------
Total liabilities 1,007,037 804,150
---------------- ----------------
STOCKHOLDERS' EQUITY
Common stock, no par value,
50,000 shares authorized,
1,000 shares issued and outstanding 100,000 100,000
Retained earnings 857,459 700,596
---------------- ----------------
Total stockholders' equity 957,459 800,596
---------------- ----------------
Total liabilities and stockholders' equity $ 1,964,496 $ 1,604,746
================ ================
The accompanying notes are an integral part of these financial statements.
F-82
CLAYBORN CONTRACTING GROUP, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
For the Year Ended September 30, 2002 and 2001
2002 2001
------------ ------------
CONTRACT REVENUE $ 6,059,117 $ 5,059,214
COST OF SALES . 4,612,703 3,917,962
------------ ------------
Gross profit from contracting 1,446,414 1,141,252
GENERAL AND ADMINISTRATIVE EXPENSES 1,178,827 888,840
------------ ------------
Income from operations 267,587 252,412
------------ ------------
OTHER INCOME (EXPENSE)
Loss on sale of assets . (3,311) (6,986)
Interest income 5,117 22,192
Interest expense (12,717) (10,416)
------------ ------------
Total other income (expenses) (10,911) 4,790
------------ ------------
Income before taxes 256,676 257,202
PROVISION FOR INCOME TAXES 99,813 105,000
------------ ------------
NET INCOME 156,863 152,202
RETAINED EARNINGS, beginning of year 700,596 548,394
------------ ------------
RETAINED EARNINGS, end of year $ 857,459 $ 700,596
============ ============
The accompanying notes are an integral part of these financial statements.
F-83
CLAYBORN CONTRACTING GROUP, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended September 30, 2002 and 2001
CASH FLOWS FROM OPERATING ACTIVITIES 2002 2001
----------------- ----------------
Net income $ 156,863 $ 152,202
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 136,633 122,822
Loss on sale of assets 3,311 6,986
Appreciation in cash surrender
value of life insurance (6,115) (10,902)
(Increase) decrease in assets:
Contract receivables 66,617 (327,315)
Costs and estimated earnings in
excess of billings (120,788) (63,313)
Prepaid expenses (20,793) (5,342)
Prepaid income tax 15,181 (30,405)
Increase (decrease) in liabilities:
Accounts payable 112,691 136,254
Accrued expenses 125,605 (24,812)
Billings in excess of costs and
estimated earnings (26,290) 28,838
Income taxes payable 13,882 (22,200)
Deferred income taxes 6,000 53,000
Other assets 0 2,687
---------------- ----------------
Net cash provided by operating activities 462,797 18,500
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (41,064) (158,215)
Proceeds from sale of assets 25,075 13,000
Decrease (increase) in cash held in lieu of retentions 47,039 (66,209)
Proceeds from employee receivable 0 1,900
---------------- ----------------
Net cash provided by (used in) investing activities 31,050 (209,524)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (67,969) (56,545)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH 425,878 (247,569)
CASH, beginning of year 33,702 281,271
---------------- ----------------
CASH, end of year $ 459,580 $ 33,702
================ ================
SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Cash paid for interest $ 12,717 $ 10,416
================ ================
Cash paid for income taxes $ 64,750 $ 104,605
================ ================
The accompanying notes are an integral part of these financial statements.
F-84
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company's Activities - Clayborn Contracting Group, Inc. ("the Company") is
engaged in electrical and heavy construction primarily in the public works
sector. The work is performed under fixed price bid contracts. The Company
performs the majority of their work in Northern and Central California.
Estimates and Assumptions - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Accounting Basis for Recording Income - The Company records income on
construction contracts using the percentage-of-completion method of accounting
based on the proportion of costs incurred on the contract to total estimated
contract costs, except that material estimated losses which are apparent prior
to completion are provided for in their entirety. No profit is taken into income
until a contract has reached a stage of completion sufficient to reasonably
determine, in the opinion of management, the ultimate realizable profit. Base
percentages which range from 1% to 5%, depending on the type of contract, are
generally used to determine when a sufficient stage of completion has been
reached. Claims for additional contract compensation due the Company are not
reflected in the accounts until the year in which such claims are allowed. As
contracts extend over one or more periods, revisions in estimated costs and
profits are reflected in the accounting period in which the facts which require
the revisions become known.
Cost of sales includes all direct labor and labor costs, materials,
subcontractors, equipment costs and other costs related to contract performance,
such as indirect labor, supplies, tools and repairs. General and administrative
costs are charged to expense as incurred.
The asset, "Costs and estimated earnings in excess of billings," represents
revenues recognized in excess of amounts billed on construction contracts in
progress. The liability, "Billings in excess of costs and estimated earnings,"
represents billings in excess of revenues recognized on construction contracts
in progress.
Financial Statement Classification - In accordance with normal practice in the
construction industry, the Company includes in current assets and liabilities
amounts realizable and payable over a period in excess of one year. Consistent
with this practice, asset and liability accounts relating to construction
contracts, including related deferred income taxes, are classified as current.
The lives of the contracts entered into by the Company generally range from
three to eighteen months.
Cash and Cash Equivalents - For financial statement purposes, the Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
F-85
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Concentration of Credit Risk - The Company maintains cash balances in excess of
Federal Deposit Insurance Corporation insurable limits.
The Company performed a significant amount of work for one customer, comprising
approximately 75% of outstanding contract receivables as of September 30, 2002.
The Company performed a significant amount of work for two customers, comprising
approximately 82% of outstanding contract receivables as of September 30, 2001.
Contract revenue earned from one customer was approximately 62% and 56% of total
contract revenue for the years ended September 30, 2002 and 2001, respectively.
Contract Receivables - The Company writes off contract receivables when
uncollectible and payments subsequently received on such receivables are
credited to revenue. Included in contract receivables is retainage receivable of
$107,579 and $164,551 for the years ended September 30, 2002 and 2001,
respectively, which is expected to be collected within one year.
Equipment - Equipment is recorded at cost and includes improvements that
significantly add to its productivity or extend its useful life. Costs of
maintenance and repairs are charged to expense. Upon retirement or disposal of
equipment, the costs and related depreciation are removed from the accounts, and
gain or loss, if any, is reflected in the earnings for both financial statement
and income tax reporting purposes. Depreciation is provided for using the
straight-line method. The estimated useful lives used for calculating
depreciation for equipment classifications are as follows:
Lives
-----------
Automotive equipment 5-7 Years
Construction equipment 5-7 Years
Office equipment 7-10 Years
Income Taxes - For income tax purposes, the Company reports income on the
completed contract method of accounting. Under this method, billings and costs
are accumulated during the period of construction, but profits or losses are not
recorded until completion of the contracts.
Straight-line and accelerated depreciation are used for tax reporting purposes.
Assets purchased after December 31, 1986, are subject to modified ACRS rules
under the guidelines of the Tax Reform Act of 1986 (TRA 86).
Deferred income taxes are recorded using the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax basis. Significant
differences between the financial statement amounts and the tax basis for the
Company arise from the recording of depreciation and the recognition of income
from construction contracts. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period of enactment.
F-86
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
2. CASH HELD IN LIEU OF RETENTIONS
In exchange for the early release of retentions on various contracts, escrow
accounts have been established in the amounts of $19,170 and $66,209 at
September 30, 2002 and 2001, respectively.
3. COSTS AND ESTIMATED EARNINGS ON CONSTRUCTION CONTRACTS IN PROGRESS
Costs and estimated earnings on construction contracts in progress contrast
related billings at September 30, 2002 and 2001 as follows:
2002 2001
---------------- ----------------
Cost of sales to date $ 928,866 $ 868,308
Gross profit to date 219,809 269,333
---------------- ----------------
Earned contract revenue 1,148,675 1,137,641
Contract billings to date 837,041 973,085
---------------- ----------------
Net under billings $ 311,634 $ 164,556
================ ================
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings $ 319,726 $ 198,938
Billings in excess of costs and estimated earnings (8,092) (34,382)
---------------- ----------------
Net under billings $ 311,634 $ 164,556
================ ================
F-87
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
4. EQUIPMENT
Equipment consists of the following as of September 30:
2002 2001
---------------- ----------------
Automotive equipment $ 409,409 $ 397,659
Construction equipment 382,594 351,030
Office equipment 35,157 36,911
---------------- ----------------
Subtotals 827,160 785,600
Less accumulated depreciation 458,242 331,695
---------------- ----------------
Totals $ 368,918 $ 453,905
================ ================
Depreciation charged to equipment costs and general and administrative expenses
amounted to $121,789 and $14,844, respectively, for the year ended September 30,
2002, and $106,337 and $16,485 respectively, for the year ended September 30,
2001.
5. LINES OF CREDIT
The Company has an unsecured revolving line of credit with Wells Fargo Bank, due
on demand with interest at prime plus 1.00% per annum, which expired March 10,
2003 and was subsequently renewed until March 10, 2004. The line of credit
available with Wells Fargo Bank is $250,000. As of September 30, 2002 and 2001,
there was no balance due.
The Company has a second line of credit with Wells Fargo Bank to finance
equipment purchases. Upon the use of this line of credit, equipment purchases
are financed in separate term notes (Note 6). The amounts financed under this
credit facility bear interest at the bank's current fixed or variable rate in
effect when the individual equipment is financed. The line of credit available
annually is $200,000. Balances of $161,032 and $182,407 were available on the
line of credit as of September 30, 2002 and 2001, respectively. The line of
credit expired on March 5, 2003 and was subsequently renewed until March 5,
2004.
F-88
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
6. LONG-TERM DEBT
Long-term debt consists of the following:
Interest
Rate 2002 2001
---------------- -------------------- ----------------
General Motors Acceptance Corporation,
secured by automotive equipment, aggregate 6.90%
monthly principal and interest payments to
of $834, due through January 2005 8.49% $ 13,916 $ 27,853
Wells Fargo Bank, secured by equipment, 6.65%
aggregate monthly principal and interest to
payments of $4,252, due through September 2007 8.90% 141,593 151,751
Chrysler Financial Corporation, secured by
automotive equipment, monthly principal and
interest payments of $423, due November 2005 0.90% 15,830 20,736
-------------------- ----------------
Current maturity of long-term debt 47,735 49,890
-------------------- ----------------
Long-term debt, net of current maturity $ 123,604 $ 150,450
==================== ================
Aggregate maturities on long-term debt are as follows:
Year Ending September 30: 2002 2001
------------------------ -------------------- ----------------
2002 $ 0 $ 49,890
2003 47,735 45,153
2004 48,913 46,175
2005 43,415 40,477
2006 22,274 18,645
2007 9,002 0
--------------------- ----------------
$ 171,339 $ 200,340
===================== ================
F-89
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
7. PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following for the year ended
September 30:
2002 2001
---------------- ----------------
Current tax expense $ 93,813 $ 52,000
Deferred tax expense 6,000 53,000
---------------- ----------------
Total provision for income taxes $ 99,813 $ 105,000
================ ================
The September 30, 2002 and 2001 income tax expense differed from the amounts
computed by applying the federal statutory income tax rate of 34% to the pre-tax
net income as a result of the following:
2002 2001
---------------- ----------------
Federal tax at the statutory rate $ 87,300 $ 87,400
State income taxes, net of federal tax benefit 15,000 15,000
Utilization of tax credits (5,500) 0
Permanent differences 4,400 2,800
Other (1,387) (200)
---------------- ----------------
$ 99,813 $ 105,000
================ ================
The components of the temporary differences that give rise to significant
portions of the deferred tax liabilities are as follows:
2002 2001
---------------- ----------------
Contract revenue recognition $ 79,500 $ 98,300
Depreciation 44,000 19,500
Other (3,500) (3,800)
---------------- ----------------
Net deferred tax liabilities $ 120,000 $ 114,000
================ ================
F-90
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
8. EMPLOYEE PROFIT SHARING PLAN
The Company has an employee profit sharing plan under Section 401(k) covering
eligible employees. The Company matches 25% of employee deferrals up to 3% of
wages. The Company's contribution for the year ended September 30, 2002 and 2001
amounted to $7,256 and $7,814, respectively, and is included in employee
benefits in general and administrative expenses.
9. LITIGATION
From time to time, the Company may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm the Company. The Company's
management is currently not aware of any such legal proceedings or claims that
they believe will have, individually or in the aggregate, a material adverse
affect on the Company's financial condition or operating results.
10. SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Non-cash investing and financing activities for the years ended September 30,
2002 and 2001 consisted of the acquisition of equipment through long-term debt
totaling $38,968 and $170,805, respectively.
11. SUBSEQUENT EVENT
In August 2003, the Board of Directors of the Company approved an Agreement and
Plan of Merger with WPCS International Incorporated ("WPCS"). The merger closed
effective August 22, 2003. The change in ownership resulting from the merger
constitutes an event of default under the line of credit agreement with the Bank
referred to in Note 5. WPCS acquired all of the issued and outstanding shares of
the Company in exchange for $900,000 cash consideration and 826,446 newly issued
shares of WPCS common stock. An additional $1,100,000 is payable by delivery to
the Company shareholders of 50% of the post tax profits of the Company, payable
in quarterly distributions.
F-91
CLAYBORN CONTRACTING GROUP, INC.
CONDENSED BALANCE SHEETS
(unaudited)
June 30, September 30,
ASSETS 2003 2002
----------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 298,069 $ 459,580
Cash held in lieu of retentions 45,760 19,170
Contract receivables 569,462 678,284
Costs and estimated earnings
in excess of billings 128,807 319,726
Prepaid expenses 9,787 48,329
Prepaid income tax 3,224 15,224
----------------- -----------------
Total current assets 1,055,109 1,540,313
EQUIPMENT, NET 365,940 368,918
OTHER ASSETS 61,515 55,265
----------------- -----------------
Total assets $ 1,482,564 $ 1,964,496
================= =================
The accompanying notes are an integral part of these financial statements.
F-92
CLAYBORN CONTRACTING GROUP, INC.
CONDENSED BALANCE SHEETS (continued)
(unaudited)
June 30, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
----------------- -----------------
CURRENT LIABILITIES
Accounts payable $ 136,405 $ 517,688
Accrued expenses 13,149 176,036
Current maturity of long-term debt 55,287 47,735
Billings in excess of costs and
estimated earnings 47,509 8,092
Income taxes payable - 13,882
Deferred income taxes 120,000 76,000
----------------- -----------------
Total current liabilities 372,350 839,433
LONG-TERM LIABILITIES
Long-term debt, net of current maturity 118,141 123,604
Deferred income taxes - 44,000
----------------- -----------------
Total long-term liabilities 118,141 167,604
----------------- -----------------
Total liabilities 490,491 1,007,037
----------------- -----------------
STOCKHOLDERS' EQUITY
Common stock, no par value,
50,000 shares authorized,
1,000 shares issued and outstanding 100,000 100,000
Retained earnings 892,073 857,459
----------------- -----------------
Total stockholders' equity 992,073 957,459
----------------- -----------------
Total liabilities and stockholders' equity $ 1,482,564 $ 1,964,496
================= =================
The accompanying notes are an integral part of these financial statements.
F-93
CLAYBORN CONTRACTING GROUP, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Nine months ended
June 30,
2003 2002
---------------- -----------------
CONTRACT REVENUE $ 3,472,102 $ 3,941,780
COST OF SALES 2,753,577 2,895,320
---------------- ----------------
Gross profit from contracting 718,525 1,046,460
GENERAL AND ADMINISTRATIVE EXPENSES 619,580 759,510
--------------- ----------------
Income from operations 98,945 286,950
---------------- ----------------
OTHER INCOME (EXPENSE)
Loss on sale of assets (1,450) -
Interest income 4,282 6,214
Interest expense (8,063) (9,942)
---------------- ----------------
Total other income (expense) (5,231) (3,728)
----------------- -----------------
Income before taxes 93,714 283,222
PROVISION FOR INCOME TAXES 59,100 19,261
---------------- -----------------
NET INCOME $ 34,614 $ 263,961
================ =================
The accompanying notes are an integral part of these financial statements.
F-94
CLAYBORN CONTRACTING GROUP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
June 30,
CASH FLOWS FROM OPERATING ACTIVITIES 2003 2002
--------------- ---------------
Net income $ 34,614 $ 263,961
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation 98,555 106,284
Appreciation in cash surrender
value of life insurance (11,185) 0
(Increase) decrease in assets:
Contract receivables 108,822 (3,445)
Costs and estimated earnings in
excess of billings 190,919 (123,656)
Prepaid expenses 38,542 23,323
Prepaid income tax 12,000 (20,989)
Increase (decrease) in liabilities:
Accounts payable (381,283) 153,912
Accrued expenses (162,887) (41,971)
Billings in excess of costs and
estimated earnings 39,417 36,730
Income taxes payable (13,882) (5,300)
Other assets 4,934 0
--------------- ---------------
Net cash (used in) provided by operating activities (41,434) 388,849
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (95,576) (9,874)
(Increase) decrease in cash held in lieu of retentions (26,590) 37,049
--------------- ---------------
Net cash (used in) provided by investing activities (122,166) 27,175
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 39,463 0
Principal payments on long-term debt (37,374) (38,019)
--------------- ---------------
Net cash provided by (used in) financing activities 2,089 (38,019)
--------------- ---------------
NET (DECREASE) INCREASE IN CASH (161,511) 378,005
CASH, beginning of year 459,580 33,702
--------------- ---------------
CASH, end of period $ 298,069 $ 411,707
=============== ===============
The accompanying notes are an integral part of these financial statements.
F-95
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying unaudited condensed interim financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") 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 the audited financial
statements and notes thereto for the fiscal year ended September 30, 2002.
Operating results for the nine month period ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the full year.
Company's Activities - Clayborn Contracting Group, Inc. ("the Company") is
engaged in electrical and heavy construction primarily in the public works
sector. The work is performed under fixed price bid contracts. The Company
performs the majority of their work in Northern and Central California.
Estimates and Assumptions - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Accounting Basis for Recording Income - The Company records income on
construction contracts using the percentage-of-completion method of accounting
based on the proportion of costs incurred on the contract to total estimated
contract costs, except that material estimated losses which are apparent prior
to completion are provided for in their entirety. No profit is taken into income
until a contract has reached a stage of completion sufficient to reasonably
determine, in the opinion of management, the ultimate realizable profit. Base
percentages which range from 1% to 5%, depending on the type of contract, are
generally used to determine when a sufficient stage of completion has been
reached. Claims for additional contract compensation due the Company are not
reflected in the accounts until the year in which such claims are allowed. As
contracts extend over one or more periods, revisions in estimated costs and
profits are reflected in the accounting period in which the facts which require
the revisions become known.
Cost of sales includes all direct labor and labor costs, materials,
subcontractors, equipment costs and other costs related to contract performance,
such as indirect labor, supplies, tools and repairs. General and administrative
costs are charged to expense as incurred.
The asset, "Costs and estimated earnings in excess of billings," represents
revenues recognized in excess of amounts billed on construction contracts in
progress. The liability, "Billings in excess of costs and estimated earnings,"
represents billings in excess of revenues recognized on construction contracts
in progress.
F-96
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
2. COSTS AND ESTIMATED EARNINGS ON CONSTRUCTION CONTRACTS IN PROGRESS
Costs and estimated earnings on construction contracts in progress contrast
related billings at June 30, 2003 and September 30, 2002 as follows:
June 30, September 30,
2003 2002
(unaudited)
---------------- ----------------
Cost of sales to date $ 1,959,467 $ 928,866
Gross profit to date 708,496 219,809
---------------- ----------------
Earned contract revenue 2,667,963 1,148,675
Contract billings to date 2,586,665 837,041
---------------- ----------------
Net under billings $ 81,298 $ 311,634
================ ================
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings $ 128,807 $ 319,726
Billings in excess of costs and estimated earnings (47,509) (8,092)
---------------- ----------------
Net under billings $ 81,298 $ 311,634
================ ================
F-97
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, September 30,
Interest 2003 2002
Rate (unaudited)
--------------- --------------- ---------------
General Motors Acceptance Corporation,
secured by automotive equipment, aggregate 6.50%
monthly principal and interest payments to
of $946, due through May 2008 8.49% $ 23,072 $ 13,916
Wells Fargo Bank, secured by equipment, 6.65%
aggregate monthly principal and interest to
payments of $4,088, due through February 2008 8.90% 87,940 141,593
Chrysler Financial Corporation, secured by
automotive equipment, monthly principal and
interest payments of $423, due November 2005 0.90% 7,127 15,830
--------------- ---------------
Current maturity of long-term debt 55,287 47,735
--------------- ---------------
Long-term debt, net of current maturity $ 118,141 $ 123,604
--------------- ---------------
Aggregate maturities on long-term debt are as follows:
June 30, September 30,
2003 2002
(unaudited)
--------------- ---------------
2003 $ 0 $ 47,735
2004 55,287 $ 48,913
2005 65,040 43,415
2006 30,001 22,274
2007 17,263 9,002
2008 5,837 0
--------------- ---------------
$ 173,428 $ 171,339
=============== ===============
4. LITIGATION
From time to time, the Company may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm the Company. The Company's
management is currently not aware of any such legal proceedings or claims that
they believe will have, individually or in the aggregate, a material adverse
affect on the Company's financial condition or operating results.
F-98
5. SUBSEQUENT EVENT
In August 2003, the Board of Directors of the Company approved an Agreement and
Plan of Merger with WPCS International Incorporated ("WPCS"). The merger closed
effective August 22, 2003. The change in ownership resulting from the merger
constitutes an event of default under the line of credit agreement with the Bank
referred to in Note 5. WPCS acquired all of the issued and outstanding shares of
the Company in exchange for $900,000 cash consideration and 826,446 newly issued
shares of WPCS common stock. An additional $1,100,000 is payable by delivery to
the Company shareholders of 50% of the post tax profits of the Company, payable
in quarterly distributions.
F-99
WPCS INTERNATIONAL INCORPORATED
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
We are providing the following unaudited pro forma condensed consolidated
financial information of WPCS International ("WPCS") and its acquisition of
Clayborn Contracting Group, Inc. ("Clayborn") to present the results of
operations and financial position of WPCS had the merger been completed at an
earlier date.
In addition, the pro forma condensed consolidated financial information for the
year ended April 30, 2003 include unaudited financial statements related to the
acquisitions of Invisinet, Inc. and Walker Comm, Inc.
On November 13, 2002, the Company entered into an agreement and completed a
merger with Invisinet, Inc. ("Invisinet"). Invisinet is in a similar business as
the Company, providing fixed wireless technology services to its customers. The
acquisition of Invisinet broadens the Company's customer base and expands it
technical resources capable of deploying wireless systems. To complete the
merger, the Company acquired 100% of the common stock of Invisinet by issuing
1,000,000 shares of the Company's common stock with a fair value of $1,750,000,
based on the average value of the Company's common stock as of a few days before
and after the merger was announced. Based on the net assets acquired of
Invisinet, the Company has recognized goodwill of approximately $1.6 million.
On December 30, 2002, the Company acquired all of the outstanding common stock
of Walker Comm, Inc. ("Walker"). The acquisition of Walker gives the Company the
ability to provide specialty communication systems to its customers along with
strengthening its project management capabilities. The aggregate consideration
paid by the Company for Walker was approximately $5,113,000. To complete the
merger, all of the issued and outstanding shares of common stock of Walker were
exchanged for aggregate merger consideration consisting of $500,000 in cash and
the common stock of the Company with a value of approximately $4,574,000, or
2,486,000 shares valued at $1.84 per share based on the average value of the
Company's common stock as of a few days before and after the merger was
announced. Based on the net assets acquired of Walker, the Company recognized
goodwill of approximately $4.2 million.
ACQUISITION OF CLAYBORN CONTRACTING GROUP, INC.
On August 22, 2003, WPCS International Incorporated, a Delaware corporation
(the "Company"), entered into and completed an Agreement and Plan of Merger with
Clayborn Contracting Acquisition Corp. a California corporation wholly-owned by
the Company (the "Subsidiary"), Clayborn Contracting Group, Inc., a California
corporation ("Clayborn"), David G. Gove, as trustee ("D. Gove") and Sharon Gove,
as trustee ("S. Gove" and together with D. Gove, the "Clayborn Shareholders").
Pursuant to the terms of the Agreement and Plan of Merger (the
"Acquisition"), the Company acquired all of the issued and outstanding shares of
capital stock of Clayborn from the Clayborn Shareholders in exchange for
$900,000 cash consideration and of 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 due by September
3, 2007, payable in quarterly distributions, by payment to the Clayborn
shareholders of 50% of the post tax profits of Clayborn. Based on the historical
net assets acquired from Clayborn, the Company preliminarily expects to
recognize goodwill of approximately $2,140,000, including transaction costs.
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 unaudited pro forma condensed consolidated statement of operations of
the Company gives effect to the merger as if it had occurred on May 1, 2002 for
the twelve months ended April 30, 2003, and on May 1, 2003, for the nine months
ended January 31, 2004, respectively.
The acquisition of Clayborn was accounted for under the purchase method of
accounting in accordance with the 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 is created 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.
This unaudited pro forma condensed consolidated financial information is
based on the estimates and assumptions set forth herein and in the notes
thereto. The unaudited pro forma results for the twelve months ended April 30,
2003 have been prepared utilizing (a) the audited financial statements of WPCS
included in Form 10-KSB for the fiscal year ended April 30, 2003; (b) the
unaudited financial statements of Clayborn for the twelve months ended March 31,
2003; (c) unaudited financial statements of Invisinet, Inc. for the six months
ended September 30, 2002; and (d) the unaudited financial statements of Walker
Comm, Inc. for the eight months ended December 31, 2002.
F-100
The unaudited pro forma results for the nine months ended January 31, 2004
have been prepared utilizing (a) the unaudited interim financial statements of
WPCS included in Form 10-QSB for the nine months ended January 31, 2004; and (b)
the unaudited financial statements of Clayborn for the four months ended August
31, 2003.
The following unaudited pro forma financial information is presented for
informational purposes only and is not necessarily indicative of (i) the results
of operations of the Company that actually would have occurred had the
"Agreement and Plan of Merger" been consummated on the dates indicated or (ii)
the results of operations of the Company that may occur or be attained in the
future. The following information is qualified in its entirety by reference to
and should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", WPCS's audited consolidated
financial statements, including the notes thereto contained in its Annual Report
on Form 10-KSB for the year ended April 30, 2003 incorporated herein by
reference, Clayborn's audited financial statements, including the notes thereto,
for the years ended September 30, 2002 and 2001 and other historical financial
information appearing elsewhere herein.
F-101
WPCS International Incorporated and Subsidiaries
Condensed Consolidated Pro Forma Unaudited Statement of Operations
for the Year Ended April 30, 2003
FOR THE FOR THE SIX FOR THE EIGHT
YEAR ENDED MONTHS ENDED MONTHS ENDED CONSOLIDATED
APRIL 30, SEPTEMBER 30, DECEMBER 31, before
2003 2002 2002 PRO FORMA CLAYBORN
WPCS INVISINET WALKER ADJUSTMENTS ACQUISITION
---------------- ---------------- -------------- ---------------- -----------------
Revenue $ 5,422,858 $ 656,295 $ 4,599,372 $ - $ 10,678,525
Cost of revenue 3,768,495 521,630 4,093,286 - 8,383,411
---------------- ---------------- -------------- ---------------- -----------------
Gross profit 1,654,363 134,665 506,086 - 2,295,114
---------------- ---------------- -------------- ---------------- -----------------
Operating expenses
Selling expenses 27,741 - 29,786 - 57,527
General and administrative 1,833,086 172,516 1,288,532 - 3,294,134
Provision for doubtful accounts 38,779 6,000 (14,393) - 30,386
Depreciation and amortization 116,501 3,366 134,353 (a) 106,949 361,169
---------------- ---------------- -------------- ---------------- -----------------
Total operating expenses 2,016,107 181,882 1,438,278 106,949 3,743,216
---------------- ---------------- -------------- ---------------- -----------------
Income (loss) from operations (361,744) (47,217) (932,192) (106,949) (1,448,102)
Other income (expense)
Interest income - - 2,435 - 2,435
Interest expense - (297) - - (297)
---------------- ---------------- -------------- ---------------- -----------------
Total other income (expense) - (297) 2,435 - 2,138
---------------- ---------------- -------------- ---------------- -----------------
Income (loss) before
provision for income taxes (361,744) (47,514) (929,757) (106,949) (1,445,964)
Provision for income taxes (19,550) - 60,246 - 40,696
---------------- ---------------- -------------- ---------------- -----------------
Net Income (loss) $ (381,294) $ (47,514) $ (869,511) $ (106,949) $ (1,405,268)
Imputed dividends accreted on Convertible
Seried B Preferred Stock (173,000) - - - (173,000)
---------------- ---------------- -------------- ---------------- -----------------
Net loss attributable to
common shareholders $ (554,294) $ (47,514) $ (869,511) $ (106,949) $ (1,578,268)
================ ================ ============== ================ =================
Basic net loss per common share $ (0.05) $ (0.13)
================ =================
Basic weighted average number of
common shares outstanding 10,376,685 12,571,474
---------------- -----------------
F-102
WPCS International Incorporated and Subsidiaries
Condensed Consolidated Pro Forma Unaudited Statement of Operations
for the Year Ended April 30, 2003 (continued)
FOR THE TWELVE PRO FORMA
MONTHS ENDED CONSOLIDATED
MARCH 31, after
2003 CLAYBORN
CLAYBORN ACQUISITION
---------------- ----------------
Revenue $ 5,976,308 $ 16,654,833
Cost of revenue 4,614,228 12,997,639
---------------- ----------------
Gross profit 1,362,080 3,657,194
---------------- ----------------
Operating expenses
Selling expenses - 57,527
General and administrative 1,044,303 4,338,437
Provision for doubtful accounts - 30,386
Depreciation and amortization 16,109 377,278
---------------- ----------------
Total operating expenses 1,060,412 4,803,628
---------------- ----------------
Income (loss) from operations 301,668 (1,146,434)
Other income (expense)
Interest income - 2,435
Interest expense (11,982) (12,279)
---------------- ----------------
Total other income (expense) (11,982) (9,844)
---------------- ----------------
Income (loss) before
provision for income taxes 289,686 (1,156,278)
Provision for income taxes (135,152) (94,456)
---------------- ----------------
Net Income (loss) $ 154,534 $ (1,250,734)
Imputed dividends accreted on
Convertible
Seried B Preferred Stock - (173,000)
Net loss attributable to
common shareholders $ 154,534 $ (1,423,734)
================ ================
Basic net loss per common share $ (0.11)
================
Basic weighted average number of
common shares outstanding 13,397,920
----------------
F-103
WPCS INTERNATIONAL INCORPORATED and SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS for the year ended April 30, 2003
NOTE 1. WPCS International Incorporated ("WPCS") is a publicly held corporation
whose newly formed subsidiaries completed the following transactions: (a) on
November 13, 2002, merged with Invisinet, Inc. ("Invisinet") (b) on December 30,
2002, merged with Walker Comm, Inc, ("Walker") and (c) on August 22, 2003,
merged with Clayborn Contracting Group, Inc. ("Clayborn"). For accounting
purposes, each of these transactions has been treated as a purchase with the net
assets of each acquired company being stated at fair value in accordance with
the purchase method of accounting.
NOTE 2. The unaudited pro forma condensed consolidated statements of operations
for the twelve months ended April 30, 2003 presented herein has been prepared as
if the merger of WPCS and Clayborn had been consummated as of May 1, 2002.
Likewise, the pro forma condensed consolidated statement of operations for the
twelve months ended April 30, 2003 include the unaudited statements of
operations of Invisinet for the six months ended September 30, 2002, and Walker
for the eight months ended December 31, 2002, as if the merger of these
companies had been consummated as of May 1, 2002. Pro forma statement of
operations adjustments for the twelve months ended April 30, 2003 have been made
for the following.
(a) To record a full year of depreciation and amortization for the fair
value of property and equipment and customer lists acquired related to
the Invisinet and Walker acquisitions, as if the merger of these
companies had been consummated as of May 1, 2002. Accordingly,
addition depreciation on property and equipment of $39,949 and
amortization of $67,000, totaling $106,949, is included as a pro forma
adjustment.
F-104
WPCS INTERNATIONAL INCORPORATED and SUBSIDIARIES
Condensed Consolidated Pro Forma Statement of Operations for the
Nine Months ended January 31, 2004
FOR THE NINE FOR THE FOUR PRO FORMA
MONTHS ENDED MONTHS ENDED CONSOLIDATED
JANUARY 31, AUGUST 31, AFTER
2004 2003 CLAYBORN
WPCS CLAYBORN ACQUISITION
------------------- ---------------- --------------------
Revenue $ 13,874,616 $ 1,532,979 $ 15,407,595
------------------- ---------------- --------------------
Costs and expenses:
Cost of revenue 10,084,508 1,092,206 11,176,714
Selling, general and administrative expenses 3,930,352 605,512 4,535,864
Provision for doubtful accounts 35,669 - 35,669
Depreciation and amortization 254,214 47,610 301,824
------------------- ---------------- --------------------
Total costs and expenses 14,304,743 1,745,328 16,050,071
------------------- ---------------- --------------------
Loss before provision for income taxes (430,127) (212,349) (642,476)
Provision for income taxes (4,200) 84,041 79,841
------------------- ---------------- --------------------
Net loss attributable to common shareholders $(434,327) $(128,308) $(562,635)
=================== ================ ====================
Basic net loss per common share $ (0.02) $ (0.03)
=================== ====================
Basic weighted average number of
common shares outstanding 17,573,786 338,363 17,912,149
=================== ================ ====================
F-105
WPCS INTERNATIONAL INCORPORATED and SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS for the Nine Months ended January 31, 2004
NOTE 1. The statement of operations of WPCS was derived from its interim
unaudited financial statements on Form 10Q-SB for the nine months endedJanuary
31, 2004.
The statement of operations of Clayborn was derived from its interim unaudited
financial statements for the four months ended August 31, 2003.
F-106
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder
of Heinz Corporation
I have audited the accompanying balance sheets of Heinz Corporation, a Missouri
Corporation, as of December 31, 2003 and 2002, and the related statements of
income, retained earnings, and cash flows for the years then ended. 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 I plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. And audit includes, 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 financial statements referred to above present fairly, in all
material respects, the financial position of Heinz Corporation as of December
31, 2003 and 2002, and the results of its operations and its cash flow for the
years then ended in conformity with generally accepted accounting principles.
Michael N. Fitzgerald
Fenton, Missouri
March 5, 2004
F-107
HEINZ CORPORATION
BALANCE SHEET
DECEMBER 31, 2003 and 2002
ASSETS
2003 2002
---- ----
Current Assets
Cash and cash equivalents $ 30,308 $ 167,187
Contract receivable, net of allowance
for doubtful accounts of $0 for 2003 and
2002 395,159 1,079,593
Billings below cost and estimated
earnings on uncompleted
contracts 57,962 269,340
Prepaid assets 14,353 -
------------- --------------
497,782 1,516,120
Equipment and vehicles at cost
Equipment and vehicles 290,246 290,246
Accumulated depreciation (261,276) (237,488)
------------- ---------------
28,970 52,758
Other Assets
Deposits 18,342 14,515
Life insurance - CSV 42,970 -
------------- --------------
61,312 14,515
------------- --------------
TOTAL ASSETS $ 588,064 $1,583,393
============= ==============
See accompanying notes.
F-108
HEINZ CORPORATION
BALANCE SHEET
DECEMBER 31, 2003 and 2002
LIABILITIES AND STOCKHOLDERS EQUITY
2003 2002
----- ----
Current Liabilities
Accounts payable $ 466,553 $ 829,453
Current portion long term debt 92,114 203,049
Billings in excess of cost and
estimated earnings on
uncompleted contracts 56,638 20,516
------------ ------------
615,305 1,053,018
Long Term Debt 3,677 21,133
Stockholders Equity
Common stock - $1 par value,
30,000 shares authorized
2,500 shares issued and out-
standing, including 1,500 shares held
as treasury stock 2,500 2,500
Capital in excess of par 99,500 99,500
Retained earnings 1,115,598 1,655,758
Treasury stock (1,248,516) (1,248,516)
----------- ----------
(30,918) 509,242
TOTAL LIABILITIES AND
----------- ----------
STOCKHOLDERS EQUITY $ 588,064 $1,583,393
=========== ==========
See accompanying notes.
F-109
HEINZ CORPORATION
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 2003 and 2002
2003 2002
---- ----
Contract revenues - net of allowances $4,152,922 $6,940,260
Contract costs - net of allowances 3,954,653 6,245,480
-------------- ------------
Gross profit 198,269 694,780
General & administrative expenses 766,309 1,165,338
Depreciation 23,788 38,660
Interest expense 13,289 30,791
------------- ------------
803,386 1,234,789
Other income 67,456 1,165
------------- ------------
Net income $ (537,661) $ (538,844)
============== =============
See accompanying notes.
F-110
HEINZ CORPORATION
STATEMENT OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 2003 and 2002
2003 2002
---- ----
Retained earnings
- beginning of year $1,655,758 $2,564,602
Stockholder distribution (2,499) (370,000)
Net income (537,661) (538,844)
Retained earning
----------------- -----------------
- end of year $1,115,598 $1,655,758
================= =================
See accompanying notes.
F-111
HEINZ CORPORATION
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 and 2002
2003 2002
---- ----
Cash Flows from Operating Activities
Net income/(loss) $ (537,661) $(538,844)
Adjustment to reconcile net
income to net cash provided
by operating activities
Depreciation 23,788 38,660
(Increase)/ decrease in
Contract receivable 684,434 2,013,475
Prepaid assets (14,353) -
Billings below cost and
estimated earnings 211,378 (58,412)
Deposits (3,827) (5,000)
Cash surrender value (42,970) -
Increase/(decrease) in
Accounts payable (362,900) (213,590)
Profit sharing payable - (28,109)
Billing over cost and
estimated earnings 36,122 (303,869)
---------------- ----------------
(5,989) 904,311
Cash Flow from Investing Activities
Acquisition of equipment - (18,966)
Disposition of equipment - -
---------------- ----------------
- (18,966)
Cash Flow from Financing Activities
Distribution to stockholders (2,499) (370,000)
New borrowings - -
Debt reduction (128,391) (446,115)
---------------- ----------------
(130,890) (816,115)
---------------- ----------------
Net Change in Cash (136,879) $ 69,230
================ ================
Cash and cash equivalents
Beginning of year $ 167,187 $ 97,957
End of year $ 30,308 $ 167,187
================ ================
Supplemental information
Interest paid $ 13,289 $ 30,791
Income taxes paid $ 0 $ 0
See accompanying notes.
F-112
HEINZ CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 and 2002
NOTE A SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently
applied in the preparation of the accompanying consolidated
financial statements follows:
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.
Contract receivables are recorded when invoices are issued and
are presented in the balance sheet net of the allowance for
doubtful accounts. Contract receivables are written off when
they are determined to be uncollectible.
Property and equipment are stated at cost, normal repairs and
maintenance are expensed as incurred. When properties are
retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the accounts and
gains or losses on the disposition are reflected in
operations.
Depreciation of property and equipment is computed over their
estimated useful lives. The Company uses an accelerated method
of depreciation. The Company also has elected to expense
certain equipment items purchased during the year.
The Company recognizes revenues from fixed-price and modified
fixed-price construction contracts on the
percentage-of-completion method, measured by the percentage of
cost incurred to date to estimated total cost for each
contract. That method is used because management considers
total cost to be the best available measure of progress on the
contracts. Because of inherent uncertain- ties in estimating
costs, it is at least reasonably possible that the estimates
used will change within the near term.
Contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as
indirect labor, supplies, tools and repairs. Selling, general,
and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are
made in the period
F-113
HEINZ CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 and 2002
in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability may
result in revisions to costs and income, which are recognized
in the period in which the revisions are determined. Changes
in estimated job profitability resulting from job performance,
job conditions, contract penalty provisions, claims, change
orders, and settlements, are accounted for as changes in
estimates in the current period.
The asset, "Billings below cost and estimated earnings on
uncompleted contracts" represents revenues recognized in
excess of amounts billed. The liability, "Billings in excess
of costs and earnings on uncompleted contracts," represents
billings in excess of revenues recognized.
Management uses estimates and assumptions in preparing these
financial statements in accordance with accounting principles
generally accepted in the United States of America. Those
estimates and assumptions affect the reported amounts of
assets and liabilities and the reported revenues and expenses.
Actual results could vary from the estimates that were used.
For purposes of the statements of cash flows, the Company
considers all highly liquid investments available for current
use with an initial maturity of three months or less to be
cash equivalents.
NOTE B ORGANIZATION
The Company was incorporated in Missouri on December 6, 1993
and began business on January 1, 1994. The Company is
authorized to issue 30,000 shares of $1.00 par value stock. As
of December 31, 2000, 2,500 shares were issued and and
outstanding. James J. Heinz owns 1,000 shares. The Company has
repurchased the remaining 1,500 shares. See Note F.
The Company is engaged in consulting, engineering, integration
and implementation services relating to wireless
infrastructure, including macro wireless networks, in building
antenna systems, low voltage installations, and cell site
construction. The Company operates on a nationwide basis.
The Company has made an election under Subchapter "S" of the
Internal Revenue Code to be treated as an S-Corporation for
income tax purposes. The Company received notification of
acceptance as an S-Corporation on March 14, 1994. As an
S-Corporation the Company does not pay any federal or state
income tax on income that it earns; those taxes are paid by
the stockholders. Consequently, there are no accruals for
income taxes.
F-114
HEINZ CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 and 2002
NOTE C LINE OF CREDIT
The Company negotiated a $200,000 line of credit with First
National Bank on September 16, 2003 The note matures on
September 16, 2004 interest. The rate is First National Bank's
prime rate. The line was secured by a first lien on contract
receivable, business equipment and general intangibles and the
personal guarantee and assets of the stockholder. The Company
had a balance of $0 and $0 as of December 31, 2003 and 2002
respectively.
NOTE D PROFIT SHARING PLAN
The Company adopted a regional prototype standardized profit
sharing and trust from Retirement Plan Services, Inc.
effective for the year beginning January 1, 1997. The plan is
designed to generally exclude any employee covered by a
collectively bargained union contract. Contributions to the
plan amounted to $0 and $0 in 2003 and 2002 respectively.
NOTE E COLLECTIVELY BARGAINED AGREEMENTS
The Company, through its participation in the Associated
General Contractors of St. Louis, has a labor agreement with
Laborers' Local Unions Nos. 42, 53 and 110 affiliated with the
Eastern Missouri Laborers' District Council. The agree- ment
covers the period March 1, 1999 through March 1, 2004.
F-115
The Company also has agreements with the Southern
Illinois District Council of Carpenters covering the period
August 1, 2003 through July 31, 2008.
The Company, through its participation in the St. Louis Area
Building Contractors, has a labor agreement with Carpenters'
District Council of Greater St. Louis affiliated with the
United Brotherhood of Carpenters and Joiners of America,
AFL-CIO. The current agreement covers the period May 5, 1999
through May 3, 2004.
The Company, through its participation in the Associated
General Contractors of Missouri has a labor agreement with the
Western Missouri and Kansas Laborer's District Council and
their affiliated local unions. The current agreement covers
the period May 1, 2002 through April 30, 2006.
F-116
HEINZ CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 and 2002
The Company negotiated additional agreements with the
Electrical Insurance Trustees in Chicago, Illinois which
automatically renews yearly; the Mason Tenders District of
Greater New York from 2002 through 2005; and the Construction
and General Laborers' District Council of Chicago Illinois and
vicinity which renews annually.
The Company has a labor agreement with the International
Brotherhood of Electrical Workers, Local Union No. 1, AFL-CIO,
effective January 10, 2000. The agreement expires March 10,
2004.
NOTE F TREASURY STOCK
On January 1, 1998 the Company entered into a contract to
repurchase 1,000 shares of stock held/owned by a stockholder
representing that stockholder's 100% interest in the Company.
The purchase price was $1,044,316 and was collateralized by a
promissory note carrying an interest rate of 8.5%. The note is
for a term of 84 months with monthly payments of $16,117.38
which includes principal and interest. The payments began on
February 1, 1998.
On August 25, 2000 the Company entered into a contract to
repurchase 250 shares of stock held/owned by a stockholder
representing that stockholder's 100% interest in the Company.
The purchase price was $134,200 consisting of cash of $2,701,
forgiveness of stock subscription agreement note of $50,000
and a promissory note of $81,499. The note is payable in 36
monthly payments and carries on interest rate of 8.5%. Monthly
payments are $2,572.72.
On December 30, 2000 the Company entered into a contract to
repurchase 250 shares of stock held/owned by a stockholder
representing that stockholder's 100% interest in the Company.
The purchase price was $170,000 consisting of cash of $70,000,
forgiveness of a stock subscription agreement note of $50,000
and a promissory note of $50,000. The note was paid in two
equal installments during 2001.
NOTE G CONCENTRATION OF BUSINESS
As noted earlier, the Company is engaged in the construction
of cellular towers for a number of telecommunications
companies. This is a highly competitive industry and the
Company must operate in numerous mid-western geographical
venues.
F-117
HEINZ CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 and 2002
NOTE H SCHEDULE OF WORK IN PROCESS (OVER)/UNDER BILLED
The following Schedule of Work in Process (Over)/Under Billed
reflects the following:
2003 2002
---- ----
Billings below cost and estimated earnings on
on uncompleted contracts $ 57,962 $263,940
Billings in excess of costs and estimated
earnings on uncompleted contracts $ 56,638 $ 20,516
========= =========
Where a loss on a contract is anticipated, the full amount of
the loss has been recognized in the financial statements.
NOTE I SUBSIDIARY-HEINZ TOWER SERVICES, INC.
Heinz Tower Services, Inc., is a wholly owned subsidiary of
Heinz Corporation. Heinz Tower provides tower erection,
antenna erection, and cable communication installation
services to Heinz Corporation.
NOTE J LEASE OBLIGATIONS-VEHICLES
The Company has annual lease obligations for vehicles as
follows:
2003 2002
---- ----
YEAR $ AMOUNT YEAR $ AMOUNT
---- -------- ---- --------
2003 $101,581
2004 $ 32,589 2004 $ 31,839
2005 $ 11,762 2005 $ 3,357
2006 $ 4,266 2006 $ -
2007 $ - 2007 $ -
2008 $ -
F-118
WPCS INTERNATIONAL INCORPORATED
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
We are providing the following unaudited pro forma condensed combined financial
information of WPCS International Incorporated ("WPCS" or the "Company") and its
acquisition of Heinz Corporation ("Heinz") to present the results of operations
and financial position of WPCS had the merger been completed at an earlier date.
ACQUISITION OF HEINZ CORPORATION
On April 2, 2004, ( the "Closing Date") WPCS entered into and completed an
Agreement and Plan of Merger to acquire all of the issued and outstanding common
stock of Heinz. Heinz is a St. Louis, Missouri based provider of in-building
wireless infrastructure services for both cellular and WiFi applications
including consulting, integration and installation services for wireless
infrastructure. WPCS acquired all of the issued and outstanding shares of Heinz
for $1,000,000, as follows: (1) $700,000 of its common stock, based on the
closing price of its common stock on March 30, 2004 or $0.98 per share, for an
aggregate of 714,286 newly issued shares of WPCS common stock and (2) $300,000
total cash consideration, of which $100,000 was paid at closing and a $200,000
non-interest bearing promissory note. Of the $200,000, $75,000 is payable on the
first and second anniversaries of the closing date and $50,000 is payable on the
third anniversary of the closing date.
The unaudited pro forma condensed consolidated balance sheet of the Company
gives effect to the merger as if it had occurred on January 31, 2004 and the
unaudited pro forma condensed consolidated statement of operations of the
Company gives effect to the merger as if it had occurred on May 1, 2002 for the
twelve months ended April 30, 2003, and on May 1, 2003, for the nine months
ended January 31, 2004, respectively.
The acquisition of Heinz is accounted for under the purchase method of
accounting in accordance with the 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 is created 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. Based
on the preliminary information currently available, we expect to recognize
goodwill of approximately $1,000,000. 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 other intangible assets.
This unaudited pro forma condensed consolidated financial information is
based on the estimates and assumptions set forth herein and in the notes
thereto. The unaudited pro forma results for the twelve months ended April 30,
2003 have been prepared utilizing (a) the audited financial statements of WPCS
included in Form 10-KSB for the fiscal year ended April 30, 2003; (b) the
unaudited financial statements of Heinz for the twelve months ended March 31,
2003; (c) the unaudited financial statements of Invisinet, Inc. for the six
months ended September 30, 2002; (d) the unaudited financial statements of
Walker Comm, Inc. for the eight months ended December 31, 2002; and (e) the
unaudited financial statements of Clayborn Contracting Group, Inc. for the
twelve months ended March 31, 2003.
The unaudited pro forma results for the nine months ended January 31, 2004
have been prepared utilizing (a) the unaudited interim financial statements of
WPCS included in Form 10-QSB for the nine months ended January 31, 2004; (b) the
unaudited financial statements of Heinz for the nine months ended December 31,
2003; and (c) the unaudited financial statements of Clayborn for the four months
ended August 31, 2003.
The following unaudited pro forma financial information is presented for
informational purposes only and is not necessarily indicative of (i) the results
of operations of the Company that actually would have occurred had the
"Agreement and Plan of Merger" been consummated on the dates indicated or (ii)
the results of operations of the Company that may occur or be attained in the
future. The following information is qualified in its entirety by reference to
and should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", WPCS's audited consolidated
financial statements, including the notes thereto contained in its Annual Report
on Form 10-KSB for the year ended April 30, 2003 incorporated herein by
F-119
reference, Heinz' audited financial statements, including the notes thereto, for
the years ended December 31, 2003 and 2002, and other historical financial
information appearing elsewhere herein.
F-120
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED PROFORMA UNAUDITED BALANCE SHEETS
JANUARY 31, DECEMBER 31,
2004 2003 PRO FORMA
WPCS HEINZ ADJUSTMENTS CONSOLIDATED
------------------- ------------------ ---- -------------------- -----------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,094,422 $ 30,308 (a) $ (100,000) $ 1,024,730
Accounts receivable - net 3,286,681 395,159 - 3,681,840
Costs in excess of billings 972,564 57,962 - 1,030,526
Inventory 72,324 - - 72,324
Prepaid expenses 219,818 14,353 - 234,171
Income tax refund receivable 104,765 - - 104,765
------------------- ------------------ ---- -------------------- -----------------------
Total current assets
5,750,574 497,782 (100,000) 6,148,356
Property and Equipment - net 902,059 28,970 - 931,029
Customer Lists, net 418,000 - - 418,000
Goodwill 7,967,593 - (b) 1,013,566 8,981,159
Other Assets 84,162 61,312 - 145,474
------------------- ------------------ ---- -------------------- -----------------------
Total Assets $ 15,122,388 $ 588,064 $ 913,566 $ 16,624,018
=================== ================== ==== ==================== =======================
F-121
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED PROFORMA UNAUDITED BALANCE SHEETS
JANUARY 31, DECEMBER 31,
2004 2003 PRO FORMA
WPCS HEINZ ADJUSTMENTS CONSOLIDATED
----------------- --------------- ---- ----------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 1,956,486 $ 466,553 $ - $ 2,423,039
Billings in excess of cost 883,065 56,638 - 939,703
Current maturities of capital lease obligation 2,472 - - 2,472
Current maturities of equipment loans payable 19,623 - - 19,623
Borrowings under line of credit 100,000 92,114 - 192,114
Due to shareholders 1,203,016 - (c) 182,648 1,385,664
Income taxes payable 19,517 - - 19,517
Deferred income taxes, current portion 196,100 - - 196,100
----------------- --------------- ---- ----------------- -------------------
Total current liabilities 4,380,279 615,305 182,648 5,178,232
----------------- --------------- ---- ----------------- -------------------
Capital lease obligations, net of current
maturities 2,731 - - 2,731
Long-term debt, net of current maturities 35,839 3,677 - 39,516
Deferred income taxes, net of current portion 416,900 - - 416,900
----------------- --------------- ---- ----------------- -------------------
Total liabilities 4,835,749 618,982 182,648 5,637,379
----------------- --------------- ---- ----------------- -------------------
Stockholders' equity
Common stock 2,014 2,500 (d) (2,430) 2,084
Additional paid-in capital 11,262,012 99,500 (d) 600,430 11,961,942
Treasury stock - (1,248,516) (d) 1,248,516 -
(Accumulated deficit) retained earnings (977,387) 1,115,598 (d) (1,115,598) (977,387)
----------------- --------------- ----------------- -------------------
Total shareholder's equity 10,286,639 (30,918) 730,918 10,986,639
----------------- --------------- ----------------- -------------------
$ 15,122,388 $ 588,064 $ 913,566 $ 16,624,018
================= =============== ================= ===================
F-122
WPCS International Incorporated and Subsidiaries
Condensed Consolidated Pro Forma Unaudited Statement of
Operations for the Year Ended April 30, 2003
WPCS INTERNATIONAL INC AND SUBSIDIARIES
PROFORMA STATEMENTS OF OPERATIONS
FOR THE FOR THE SIX FOR THE EIGHT FOR THE TWELVE FOR THE TWELVE
YEAR ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
APRIL 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, MARCH 31,
2003 2002 2002 2003 2003
WPCS INVISINET WALKER CLAYBORN HEINZ
-------------- --------------- -------------- --------------- ----------------- ----
Revenue $ 5,422,858 $ 656,295 $ 4,599,372 $ 5,976,308 $ 6,061,729
-------------- --------------- -------------- --------------- ----------------- ----
Costs and Expenses:
Cost of revenue 3,768,495 521,630 4,093,286 4,614,228 5,360,403
Selling, general and
adminstrative expenses 1,860,827 172,516 1,318,318 1,044,303 1,082,564
Provision for doubtful
accounts 38,779 6,000 (14,393) - -
Depreciation and amortization 116,501 3,366 134,353 16,109 38,660 (a)
-------------- --------------- -------------- --------------- ----------------- ----
Total costs and expenses 5,784,602 703,512 5,531,564 5,674,640 6,481,627
-------------- --------------- -------------- --------------- ----------------- ----
Income (loss) from operations (361,744) (47,217) (932,192) 301,668 (419,898)
-------------- --------------- -------------- --------------- ----------------- ----
Other income (expense)
Interest income - - 2,435 - 599
Interest expense - (297) - (11,982) (19,384)
-------------- --------------- -------------- --------------- ----------------- ----
Total other income
(expense) - (297) 2,435 (11,982) (18,785)
-------------- --------------- -------------- --------------- ----------------- ----
Income (loss) before
provision for income
taxes (361,744) (47,514) (929,757) 289,686 (438,683)
Provision for income taxes (19,550) - 60,246 (135,152) -
-------------- --------------- -------------- --------------- ----------------- ----
Net Income (loss) $ (381,294) $ (47,514) $ (869,511) $ 154,534 $ (438,683)
-------------- --------------- -------------- --------------- ----------------- ----
Imputed dividends accreted
on Convertible Series B
Preferred Stock (173,000) - - -
-------------- --------------- -------------- --------------- ----------------- ----
Net loss attributable to
common shareholders $ (554,294) $ (47,514) $ (869,511) $ 154,534 $(438,683)
============== =============== ============== =============== ================= ====
Basic net loss per common
share $ (0.05)
==============
Basic weighted average number
of common shares outstanding 10,376,685
==============
F-123
PRO FORMA
CONSOLIDATED
after
PRO FORMA HEINZ
ADJUSTMENTS ACQUISITION
--------------- -----------------
Revenue $ - $ 22,716,562
--------------- -----------------
Costs and Expenses:
Cost of revenue 18,358,042
Selling, general and
adminstrative expenses 5,478,528
Provision for doubtful
accounts 30,386
Depreciation and amortization 106,949 415,938
--------------- -----------------
Total costs and expenses 106,949 24,282,894
--------------- -----------------
Income (loss) from operations (106,949) (1,566,332)
Other income (expense)
Interest income 3,034
Interest expense (31,663)
--------------- -----------------
Total other income
(expense) - (28,629)
--------------- -----------------
Income (loss) before
provision for income
taxes (106,949) (1,594,961)
Provision for income taxes (94,456)
--------------- -----------------
Net Income (loss) $ (106,949) $ (1,689,417)
--------------- -----------------
Imputed dividends accreted
on Convertible Series B
Preferred Stock - (173,000)
--------------- -----------------
Net loss attributable to
common shareholders $ (106,949) $ (1,862,417)
=============== =================
Basic net loss per common
share $ (0.13)
=================
Basic weighted average number
of common shares outstanding 14,112,206
=================
F-124
WPCS INTERNATIONAL INCORPORATED and SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 2003
NOTE 1. WPCS International Incorporated ("WPCS") is a publicly held
corporation whose newly formed subsidiaries completed the
following transactions: (a) on November 13, 2002, merged with
Invisinet, Inc. ("Invisinet") (b) on December 30, 2002, merged
with Walker Comm, Inc, ("Walker") (c) on August 22, 2003, merged
with Clayborn Contracting Group, Inc. ("Clayborn"), and (d) on
April 2, 2004 merged with Heinz. For accounting purposes, each of
these transactions has been treated as an acquisition with the
net assets of each acquired company being stated at fair value in
accordance with the purchase method of accounting.
NOTE 2. The unaudited pro forma consolidated balance sheet at January 31,
2004 presented herein has been prepared as if the merger of WPCS
and Heinz had been consummated on May 1, 2003. Pro forma balance
sheet adjustments have been made for the following:
(a) To record the cash consideration of $100,000 paid to the
shareholders of Heinz at the closing of the acquisition.
(b) To reflect the excess of acquisition cost over the estimated fair
value of the net assets acquired (goodwill). The allocation of
the purchase price is based on financial information of Heinz as
of December 31, 2003. There might be further adjustments to the
purchase price allocation upon finalization of financial
information as of the date of the merger. However, we do not
believe that the final purchase price allocation will have a
material impact on our pro forma results of operations or
financial position. The purchase price and purchase price
allocation are summarized as follows:
Purchase price paid as:
Cash consideration $ 100,000
Common stock issued 700,000
Promissory note 182,648
------------------
Total purchase price consideration 982,648
Allocated to:
Historical net book value of Heinz at December 31, 2003 $ (30,918)
------------------
Cost in excess of net assets acquired $ 1,013,566
------------------
(c) To record the present value, discounted at 5%, of the $200,000
non-interest bearing promissory note related to the remaining
purchase price payments. Of the $200,000, $75,000 is payable on
the first and second anniversaries of the Closing Date and
$50,000 is payable on the third anniversary of the Closing Date.
(d) To reflect the elimination of the shareholders' equity accounts
of Heinz of ($30,918) and the issuance of WPCS common stock. To
effect the merger, WPCS issued 714,286 shares of WPCS common
stock with a fair value of approximately $700,000, based on the
closing price of its common stock on March 30, 2004 of $0.98 per
share.
NOTE 3. The unaudited pro forma condensed consolidated statements of
operations for the twelve months ended April 30, 2003 presented
herein has been prepared as if the merger of WPCS and Heinz had
been consummated as of May 1, 2002. Likewise, the pro forma
condensed consolidated statement of operations for the twelve
months ended April 30, 2003 include the unaudited statements of
operations of Invisinet for the six months ended September 30,
2002, Walker for the eight months ended December 31, 2002, and
Clayborn for the twelve months ended March 31, 2003, as if the
merger of these companies had been consummated as of May 1, 2002.
Pro forma statement of operations adjustments for the twelve
months ended April 30, 2003 have been made for the following:
(a) To record a full year of depreciation and amortization for the
fair value of property and equipment and customer lists acquired
related to the Invisinet and Walker acquisitions, as if the
merger of these companies had been consummated as of May 1, 2002.
Accordingly, addition depreciation on property and equipment of
$39,949 and amortization of $67,000, totaling $106,949, is
included as a pro forma adjustment.
F-125
WPCS INTERNATIONAL INC AND SUBSIDIARIES
PROFORMA STATEMENT OF OPERATIONS
FOR THE NINE FOR THE FOUR FOR THE NINE PRO FORMA
MONTHS ENDED MONTHS ENDED MONTHS ENDED CONSOLIDATED
JANUARY 31, AUGUST 31, DECEMBER 31, after
2004 2003 2003 HEINZ
WPCS CLAYBORN HEINZ ACQUISITION
----------------- ----------------- ---------------- ------------------
Revenue $ 13,874,616 $ 1,532,979 $3,052,761 $ 18,460,356
----------------- ----------------- ---------------- ------------------
Costs and expenses:
Cost of revenue 10,084,508 1,092,206 2,772,341 13,949,055
Selling, general and administrative
expenses 3,930,352 605,512 473,229 5,009,093
Provision for doubtful accounts 35,669 - 14,998 50,667
Depreciation and amortization 254,214 47,610 23,788 325,612
----------------- ----------------- ---------------- ------------------
Total costs and expenses 14,304,743 1,745,328 3,284,356 19,334,427
----------------- ----------------- ---------------- ------------------
Loss from operations (430,127) (212,349) (231,595) (874,071)
Provision for income taxes (4,200) 84,041 - 79,841
----------------- ----------------- ---------------- ------------------
Net Loss $ (434,327) $ (128,308) $ (231,595) $ (794,230)
================= ================= ================ ==================
Basic net loss per common share $(0.02) $ (0.04)
================= ==================
Basic weighted average number of
common shares outstanding 17,573,786 18,626,435
================= ==================
F-126
WPCS INTERNATIONAL INCORPORATED and SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JANUARY 31, 2004
NOTE 1. The statement of operations of WPCS was derived from its interim
unaudited financial statements on Form 10Q-SB for the nine months
ended January 31, 2004.
The statement of operations of Clayborn was derived from its interim
unaudited financial statements for the four months ended August 31,
2003.
The statement of operations of Heinz was derived from its interim
unaudited financial statements for the nine months ended December 31,
2003.
- ------------------------------------------------------------------------------------------------------------------
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. 13,566,306 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
________, 2004
- ---------------------------------------------------------- ----------------------------------------------------------
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 $ 1,631.96
Accounting fees and expenses *10,000.00
Legal fees and expenses *35,000.00
Printing and related expenses *10,000.00
----------------
TOTAL *$56,631.96
================
* 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.
On April 2, 2004, we issued 714,286 shares of our common stock in
exchange for all of the issued and outstanding shares of Heinz Corporation. The
shares were issued to one accredited investor in a transaction exempt under Rule
506 of Regulation D promulgated under Section 4(2) of the Securities Act of
1933, as amended.
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, dated as of February 1, 2004 (filed
herewith).
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, dated as of February 1, 2004 (filed
herewith).
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.
10.11 Agreement and Plan of Merger by and among WPCS International Incorporated,
Heinz Acquisition Corp., Heinz Corporation and James Heinz made as of the
2nd day of April, 2004, incorporated by reference to Exhibit 3 of WPCS
International Incorporated's Current Report on Form 8-K, filed April 9,
2004.
10.12 James Heinz Employment Agreement, dated as of April 2, 2004 (filed
herewith).
16.1 Letter on Change in Certifying Accountant; incorporated by reference to
WPCS International Incorporated's Current Report on Form 8-K, filed August
21, 2002.
23.1 Consent of J. H. Cohn LLP (filed herewith).
23.2 Consent of Leonard Friedman (filed herewith)
23.3 Consent of Blackman Kallick Bartelstein LLP regarding the audited financial
statements of Invisinet, Inc. (filed herewith).
23.4 Consent of Leonard Friedman regarding the audited financial statements of
Walker Comm, Inc. (filed herewith).
23.5 Consent of Burnett & Company LLP regarding the audited financial statements
of Clayborn Contracting Group, Inc. (filed herewith).
23.6 Consent of Michael N. Fitzgerald regarding the audited financial statements
of Heinz Corporation (filed herewith).
23.7 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.
II-4
(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 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/A and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Exton,
State of Pennsylvania, on April 30, 2004.
WPCS INTERNATIONAL INCORPORATED
By: /s/ Andrew Hidalgo
--------------------
Andrew Hidalgo, Chairman, Chief Executive Officer and Director
By: /s/ Joseph Heater
--------------------
Joseph Heater, Chief Financial Officer
(Principal Accounting Officer)
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 April 30, 2004.
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