UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
Amendment No. 2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number: 0-26277
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WPCS INTERNATIONAL INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 98-0204758
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
140 South Village Avenue
Suite 20
Exton, Pennsylvania 19341
(Address of principal executive offices)
(610) 903-0400
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(Registrant's telephone number, including area code)
Phoenix Star Ventures, Inc.
2438 Marine Drive, Suite 215
West Vancouver, British Columbia, Canada V7V 1L2
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 after the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the registrant's classes of
common equity, as of the latest practicable date: 13,078,844 shares issued and
outstanding as of July 22, 2003.
PART I
ITEM 1. - BUSINESS
This Annual Report on Form 10-KSB/A (including the section regarding
Management's Discussion and Analysis of Financial Condition and Results of
Operations) contains forward-looking statements regarding our business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements, but are not deemed to represent an all-inclusive
means of identifying forward-looking statements as denoted in this Annual Report
on Form 10-KSB/A. Additionally, statements concerning future matters are
forward-looking statements.
Although forward-looking statements in this Annual Report on Form 10-KSB
reflect the good faith judgment of our management, such statements can only be
based on facts and factors currently known by us. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include, without
limitation, those specifically addressed under the heading "Risks Related to Our
Business" below, as well as those discussed elsewhere in this Annual Report on
Form 10-KSB/A. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-KSB/A. We file reports with the Securities and Exchange
Commission ("SEC"). We make available on our website under "Investor
Relations/SEC Filings," free of charge, our annual reports on Form 10-KSB,
quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to
those reports as soon as reasonably practicable after we electronically file
such materials with or furnish them to the SEC. Our website address is
www.wpcs.com. You can also read and copy any materials we file with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
You can obtain additional information about the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC
maintains an Internet site (www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC, including us.
We undertake no obligation to revise or update any forward-looking
statements in order to reflect any event or circumstance that may arise after
the date of this Annual Report on Form 10-KSB/A. Readers are urged to carefully
review and consider the various disclosures made throughout the entirety of this
Annual Report, which attempt to advise interested parties of the risks and
factors that may affect our business, financial condition, results of operations
and prospects.
2
Description of the Business
Overview
WPCS International Incorporated is a project engineering company that
focuses on the implementation requirements of specialty communication systems,
wireless fidelity (WiFi) deployment and fixed wireless deployment. 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 year ended April 30, 2003, the
acquisition of Invisinet increased sales by approximately $1.1 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 year ended April 30, 2003, the
acquisition of Walker increased sales by approximately $3.5 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 $3.8 million.
3
Our Business
We generate our revenue by providing project engineering and deployment
services for specialty communication systems, wireless fidelity ( WiFi) and
fixed wireless systems. We have two reportable segments, specialty communication
systems and wireless infrastructure services.
Specialty 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 66% 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.
4
Wireless infrastructure services include 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 34% 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
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 April 30, 2003, we had a backlog of unfilled
orders believed to be firm of approximately $4.8 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.
5
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.
6
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 July 31, 2003, we employed 81 full time employees, of which 62 are
project engineers, nine are project managers, five are in administration and
five are executives. The project engineers are represented by the International
Brotherhood of Electrical Workers. We also have non-union employees. We believe
our relations with all of our employees are good.
RISK RELATED TO BUSINESS
You should carefully consider the following risk factors and all other
information contained herein as well as the information included in this Annual
Report in evaluating our business and prospects. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties, other than those we describe below, that are not presently known
to us or that we currently believe are immaterial, may also impair our business
operations. If any of the following risks occur, our business and financial
results could be harmed. You should refer to the other information contained in
this Annual Report, including our consolidated financial statements and the
related notes.
7
We have a history of operating losses and may never become profitable
We incurred a net loss of approximately $381,000 for the year ended April
30, 2003. There can be no assurance that we will achieve or sustain
profitability or positive cash flow from operating activities in the future. If
we cannot achieve operating profitability or positive cash flow from operating
activities, we may not be able to meet our working capital requirements. 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.
8
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.
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;
9
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.
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.
10
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.
11
Potential future acquisitions could be difficult to integrate, disrupt our
business, dilute stockholder value and adversely affect our operating results.
Since November 1, 2002, we have acquired three companies and we intend to
further expand our operations through acquisitions over time. This may require
significant management time and financial resources because we may need to
integrate widely dispersed operations with distinct corporate cultures. Our
failure to manage future acquisitions successfully could seriously harm our
operating results. Also, acquisition costs could cause our quarterly operating
results to vary significantly. Furthermore, our stockholders would be diluted if
we financed the acquisitions by incurring convertible debt or issuing
securities. 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.
Our officers and directors, in the aggregate, beneficially own
approximately 42.8% 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.
12
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.
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.
ITEM 2 - PROPERTIES
Our principal executive offices are located in approximately 2,000 square
feet of office space in Exton, Pennsylvania. The lease for such space expires in
November 2004. The aggregate annual base rental for this space is $28,000.
In conjunction with acquisitions that occurred in 2002 and 2003, we assumed
the operating leases of additional office space in the following locations:
Location Lease Expiration Date Minimum Annual Rental
Fairfield, California (a) February 28, 2011 $56,000
13
Rocklin, California January 31, 2006 $13,000
Livermore, Californa October 31, 2003 $20,000
San Leandro, California July 31, 2006 $13,000
Denville, New Jersey month-to-month $11,000 (b)
(a) The lease for our Fairfield, California location is with trusts, of which,
certain of our officers and shareholders are the trustees.
(b) The lease for our Denville, New Jersey location is month to month lease,
therefore the minimum annual rental price assumes we rent the property for the
entire year.
We believe that our existing facilities are suitable and adequate to meet our
current business requirements.
ITEM 3 - LEGAL PROCEEDINGS
From time to time, the Company may become involved in various lawsuits and
legal proceedings which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these
or other matters may arise from time to time that may harm the Company's
business. The Company is currently not aware of any such legal proceedings or
claims that we believe will have, individually or in the aggregate, a material
adverse affect on our business, financial condition or operating results.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
14
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
During the fiscal year ended April 30, 2003, our common stock was quoted on
the over-the-counter bulletin board under the symbol "WPCS". The following table
sets forth the range of the high and low bid quotations for our common stock for
the periods indicated. Such market quotations reflect inter-dealer prices,
without mark-up, mark-down or commission and may not necessarily represent
actual transactions.
High Low
2003
First quarter $2.55 $0.07
Second quarter 1.90 1.35
Third quarter 2.08 1.05
Fourth quarter 1.95 1.11
As of July 22, 2003, there were approximately 53 holders of record of our
common stock and the closing bid quotation of our common stock was $1.12 per
share.
Dividend Policy
We have never paid any cash dividends on our capital stock and do not
anticipate paying any cash dividends on the Common Shares in the foreseeable
future. We intend to retain future earnings to fund ongoing operations and
future capital requirements of our business. Any future determination to pay
cash dividends will be at the discretion of the Board and will be dependent upon
our financial condition, results of operations, capital requirements and such
other factors as the Board deems relevant.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Overview
WPCS International Incorporated is a project engineering company that
focuses on the implementation requirements of specialty communication systems,
wireless fidelity (WiFi) deployment and fixed wireless deployment. We provide a
15
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 year ended April 30, 2003, the acquisition
of Invisinet increased our revenue by approximately $1.1 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 year ended April 30, 2003, the
acquisition of Walker increased our revenue approximately $3.5 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
16
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 $3.8 million.
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 two privately-held companies, Invisinet and Walker.
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 As of April 30, 2003, the specialty communications segment represents
approximately 66% of total revenue, and wireless infrastructure services
represent approximately 34% of total revenue.
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 April 30, 2003, our backlog has increased to approximately $4.8
million. 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.
Fiscal Year ended April 30, 2003 Compared to period November 15, 2001 (date of
inception) to April 30, 2002
17
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 costs and 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
18
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.
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.
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
19
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.
20
Liquidity and capital resources
At April 30, 2003, we had working capital of approximately $1,435,000,
which consisted of current assets of approximately $3,264,000 and current
liabilities of $1,829,000. Current assets included $168,000 in cash, $2,805,000
in accounts receivable and costs and estimated earnings in excess of billings on
uncompleted contracts, $78,000 in inventories, $143,000 in prepaid expenses and
$70,000 in current portion of deferred tax assets. Current liabilities included
$1,494,000 in accounts payable, accrued expenses and billings in excess of costs
and estimated earnings on uncompleted contracts, $100,000 payable to an officer
of the Company, $58,000 payable to shareholders of the company, $23,000 in
current lease obligations and equipment loans payable, $24,000 in income taxes
payable and $129,000 in current portion of deferred tax liabilities.
We used approximately $965,000 in cash from operating activities during the
year ended April 30, 2003. This was mainly comprised of a $381,000 net loss for
the year ended April 30, 2003, offset by $153,000 in net non-cash charges, a
$676,000 net increase in accounts receivables, $10,000 increase in costs and
estimated earnings in excess of billings on uncompleted contracts, $100,000
increase in prepaid expenses, offset by a $2,000 decrease in inventory, $27,000
increase in accounts payable and billings in excess of costs and estimated
earnings on uncompleted contracts and $20,000 increase in income taxes payable.
The Company's investing activities utilized approximately $165,000, which
consisted of $500,000 paid for the acquisition of Walker to its shareholders,
$54,000 paid as acquisition costs for acquiring Invisinet and Walker, offset by
approximately $178,000 received in cash on acquisition of these businesses. The
Company collected on a note receivable in connection with the acquisition of
Invisinet in the amount of $173,000. Additionally, $38,000 was received on
disposition of property and equipment, net of acquisitions.
The Company's financing activities generated cash of approximately
$1,282,000 during the year ended April 30, 2003. This was comprised of
$1,455,000 from proceeds of the sale of Series B and Series C Preferred Stock to
investors in a private placement, $3,000 of cash received from PSVI on reverse
acquisition, $100,000 received as a loan from an officer of the Company, offset
by repayment of $200,000 bank line of credit, $55,000 in repayment of notes
payable and principal on capital lease obligations and $21,000 due to a
stockholder.
21
On June 25, 2003, (and amended July 24, 2003), the Company offered in a
private placement memorandum, up to 100 units (the Units) for sale to accredited
investors at a price of $25,000 per Unit (the Offering). The Offering is on a
"best efforts" basis of a minimum offering of $1,000,000 and a maximum offering
of $2,500,000. Each Unit consists of (i) 44,444 shares of the Company's common
stock, and (ii) warrants to purchase 44,444 shares of common stock, exercisable
for a period of three years at an exercise price of $0.90 per share (the
Warrants). The Warrants may be redeemed in whole or in part at the option of the
Company, if the closing price of the Company's common stock is at least $1.25
per share on average for 10 consecutive trading days, ending not earlier than 30
days before the Warrants are called for redemption. In connection with the
offering, the placement agent was issued warrants to purchase 665,000 shares of
the Company's common stock, exercisable for a period of three years at an
exercise price of $0.75 per share. On July 22, 2003, we received net proceeds of
$898,000 from the Offering.
In June 2003, WPCS entered into a Letter of Intent to acquire Calyborn
Contracting Group, Inc. Founded in 1988, Clayborn Contracting is a diversified
project services firm that operates primarily on the west coast. As a diverse
services engineering company, Clayborn Contracting has designed and installed
smart highway systems and substations for state and local municipalities in
California. In addition, Clayborn Contracting has performed structured cabling,
underground and utility work. The proposed terms of the acquisition include:
o the payment of $900,000 at closing;
o the issuance at closing of such number of shares of our common stock
as equals $1,000,000, based on the market price of the stock at the
time of closing; and
o $1,100,000, payable by the delivery to the Clayborn shareholders of
50% of the post tax net income of Clayborn, payable on a quarterly
basis.
A definitive agreement with respect to acquisition has not been executed to
date and there can be no assurance that such acquisition will be completed on
the foregoing terms, or at all.
Our capital requirements depend on numerous factors, including market for
our products and services, the resources we devote to developing, marketing,
selling and supporting our products and services, the timing and extent of
establishing additional markets and other factors. At April 30, 2003, we had
22
cash of $167,000. To address our working capital needs and growth in our revenue
and customer base, we anticipate obtaining a working capital line of credit for
working capital needs. As discussed above, we are also raising $2.5 million in a
private placement for a number of uses. 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, and the $500,000
earn-out to be paid related to the Walker acquisition. 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.
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. We acquired Invisinet and Walker primarily by issuing the
Company's common stock. 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.
Critical Accounting Policies
Financial Reporting Release No. 60, published by the SEC, recommends that
all companies include a discussion of critical accounting policies used in the
preparation of their financial statements. The Company's significant accounting
policies are summarized in Note 2 of its consolidated financial statements.
While all these significant accounting policies impact its financial condition
and results of operations, the Company views certain of these policies as
critical. Policies determined to be critical are those policies that have the
most significant impact on the Company's consolidated financial statements and
require management to use a greater degree of judgment and estimates. Actual
results may differ from those estimates.
The Company believes that given current facts and circumstances, it is
unlikely that applying any other reasonable judgments or estimate methodologies
would cause a material effect on the Company's consolidated results of
operations, financial position or liquidity for the periods presented in this
report.
23
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.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes off accounts receivable when they become
uncollectible, and payment subsequently received on such receivables are
credited to the allowance for doubtful accounts.
Goodwill and other Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that their carrying value may not be recoverable from the
estimated future cash flows expected to result from their use and eventual
disposition. Our long-lived assets subject to this evaluation include property
and equipment and amortizable intangible assets. We assess the impairment of
goodwill annually in our fourth fiscal quarter and whenever events or changes in
circumstances indicate that it is more likely than not that an impairment loss
has been incurred. Intangible assets other than goodwill are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value may not be fully recoverable. We are required to make judgments
and assumptions in identifying those events or changes in circumstances that may
trigger impairment. Some of the factors we consider include:
24
o Significant decrease in the market value of an asset o Significant
changes in the extent or manner for which the asset is being used or
in its physical condition
o A significant change, delay or departure in our business strategy
related to the asset
o Significant negative changes in the business climate, industry or
economic conditions
o Current period operating losses or negative cash flow combined with a
history of similar losses or a forecast that indicates continuing
losses associated with the use of an asset
In view of the generally weak current economic climate, we are periodically
evaluating whether an impairment of our amortizable intangible assets and other
long-lived assets has occurred. Our evaluation includes an analysis of estimated
future undiscounted net cash flows expected to be generated by the assets over
their remaining estimated useful lives. If the estimated future undiscounted net
cash flows are insufficient to recover the carrying value of the assets over the
remaining estimated useful lives, we will record an impairment loss in the
amount by which the carrying value of the assets exceeds the fair value. We
determine fair value based on discounted cash flows using a discount rate
commensurate with the risk inherent in our current business model. If, as a
result of our analysis, we determine that our amortizable intangible assets or
other long-lived assets have been impaired, we will recognize an impairment loss
in the period in which the impairment is determined. Any such impairment charge
could be significant and could have a material adverse effect on our financial
position and results of operations. Major factors that influence our cash flow
analysis are our estimates for future revenue and expenses associated with the
use of the asset. Different estimates could have a significant impact on the
results of our evaluation.
We performed our annual review for goodwill impairment in the fourth
quarter of fiscal 2003 and tested for goodwill impairment in each reporting unit
that contains goodwill. Our tests found that no impairment existed. Our
impairment review is based on comparing the fair value to the carrying value of
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
25
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.
26
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.
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 the
Company's consolidated financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No.123." SFAS No.148 amends SFAS No.123,"Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No.25 and the related SFAS No. 123. The adoption of SFAS 148 did not
have a material effect on the Company's consolidated financial position, results
of operations or cash flows.
27
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.
In January 2003, the FASB issued FASB Interpretation No.46 ("FIN No. 46")
"Consolidation of Variable Interest Entities." In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used
for business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables real estate or
other property. A variable interest entity may be essentially passive or it may
engage in activities on behalf of another company. Until now, a company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN No.46 changes
that by requiring a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. FIN No. 46's consolidation requirements apply
immediately to variable interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year on interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company has
not adopted FIN No.46 for the year ended April 30, 2003. The Company does not
expect FIN 46 to have a material effect on its consolidated financial position,
results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
28
financial instruments that, under previous guidance, issuers could account for
as equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of our first
quarter for fiscal 2004. The Company does not expect the adoption of this
statement to have a material impact on its consolidated financial position,
results of operations or cash flows.
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements that
reflect Management's current views with respect to future events and financial
performance. Those statements include statements regarding the intent, belief or
current expectations of the Company and members of its management team as well
as the assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made
by the Company in this report and in the Company's other reports filed with the
Securities and Exchange Commission. Important factors currently known to
Management could cause actual results to differ materially from those in
forward-looking statements. The Company undertakes no obligation to update or
revise forward-looking statements to reflect changed assumptions, the occurrence
of unanticipated events or changes in the future operating results over time.
The Company believes that its assumptions are based upon reasonable data derived
from and known about its business and operations and the business and operations
of the Company. No assurances are made that actual results of operations or the
results of the Company's future activities will not differ materially from its
assumptions.
29
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
INDEX TO FINANCIAL STATEMENTS
Page
Reports of Independent Public Accountants F-2 - F-3
Consolidated Balance Sheet as of April 30, 2003 F-4 - F-5
Consolidated Statements of Operations for the year
ended April 30, 2003 and for the period November 15, 2001 (date of inception) to April
30, 2002 F-6
Consolidated Statement of Shareholders' Equity for the year ended
April 30, 2003 and for the period November 15, 2001 (date of inception) to April 30,
2002 F-7
Consolidated Statements of Cash Flows for the year ended
April 30, 2003 and for the period November 15, 2001 (date of inception) to April 30,
2002 F-8 -F- 9
Notes to Consolidated Financial Statements F-10 - F- 29
F-1
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-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
WPCS Holdings, Inc.
I have audited the accompanying consolidated statement of operations, changes in
shareholders' equity and cash flows for the period November 15, 2001 (date of
inception) to April 30, 2002, of WPCS Holdings, Inc. These financial statements
are the responsibility of the Company's management. My responsibility is to
express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that my audit provides a reasonable basis for
my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
WPCS Holdings, Inc. for the year ended April 30, 2002, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Leonard Friedman
--------------------
Leonard Friedman
East Meadow, New York
July 1, 2002
F-3
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED BALANCE SHEET
APRIL 30, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 167,547
Accounts receivable, net of allowance of $11,779 2,397,236
Costs and estimated earnings in excess of billings on
uncompleted contracts 408,194
Inventory 77,775
Prepaid expenses 143,113
Deferred tax assets 70,000
-------------
Total current assets 3,263,865
PROPERTY AND EQUIPMENT 647,951
CUSTOMER LISTS, net of accumulated
amortization of $41,000 499,000
GOODWILL 5,388,882
OTHER ASSETS 21,528
-------------
Totals $ 9,821,226
=============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED BALANCE SHEET
APRIL 30, 2003
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,278,443
Billings in excess of costs and estimated earnings on
uncompleted contracts 215,819
Current maturities of capital lease obligations 2,294
Current maturities of equipment loans payable 21,268
Note Payable, officer 100,000
Due to shareholders 58,207
Income taxes payable 23,700
Deferred income taxes, current portion 129,000
--------------
Total current liabilities 1,828,731
Capital lease obligations, net of current maturities 4,608
Deferred income taxes, net of current portion 527,000
--------------
Total Liabilities 2,360,339
--------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock - $0.0001 par value, 5,000,000 shares authorized
Series C Convertible Preferred Stock, 1,000 shares designated, 1,000 shares
issued and outstanding at April 30, 2003,
liquidation preference $1,000,000 -
Common Stock - $0.0001 par value,
30,000,000 shares authorized, 13,078,844 shares issued and outstanding
at April 30, 2003 1,308
Additional paid- in capital 8,002,639
Accumulated deficit (543,060)
--------------
Total shareholders' equity 7,460,887
--------------
Totals $ 9,821,226
==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period
November 15, 2001
Year Ended (date of inception) to
April 30, April 30,
2003 2002
---------------------- ----------------------
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-6
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED APRIL 30, 2003 AND FOR THE PERIOD NOVEMBER 15, 2001 (DATE OF INCEPTION) TO APRIL 30, 2002
ADDITIONAL TOTAL
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- -------- ------------ -------- ----------- ---------- -----------
Issuance of common stock
(date of inception, November 15, 2001) - $ - 5,500,000 $ 550 $ 4,450 $ - $ 5,000
Net income - - - - - 11,234 11,234
--------- -------- ------------ -------- ----------- ---------- -----------
BALANCE APRIL 30, 2002 - - 5,500,000 550 4,450 11,234 16,234
Effects of reverse acquisition 250 1 1,025,632 103 (80,919) - (80,815)
Return and retirement of common stock in
connection with reverse acquisition - (500,000) (50) 50 - -
Sale of Series B Preferred stock sold
through private placement 455 - - - 455,000 - 455,000
Series B Preferred stock issued in
consideration for payment of advances from
stockholder and accounts payable 64 - - - 64,000 - 64,000
Conversion of Series A Preferred stock to
common stock (250) (1) 3,000,000 300 (299) - -
Imputed Series B Preferred stock dividend
attributable to beneficial conversion
feature - - - - 173,000 (173,000) -
Sale of Series C Preferred stock sold
through private placement 1,000 - - - 1,000,000 - 1,000,000
Issuance of common stock for
acquisition of Invisinet, Inc. - - 1,000,000 100 1,749,900 - 1,750,000
Issuance of common stock for
acquisition of Walker Comm, Inc. - - 2,486,000 249 4,574,000 - 4,574,249
Conversion of Series B Preferred stock to
common stock (519) - 567,212 56 (56) - -
Stock options granted to an officer in
connection with the acquisition of
Invisinet, Inc. 63,513 - 63,513
NET LOSS - - - - - (381,294) (381,294)
--------- -------- ------------ -------- ----------- ---------- -----------
BALANCE, APRIL 30, 2003 1,000 $ - 13,078,844 $ 1,308 $8,002,639 $(543,060) $7,460,887
========= ======== ============ ======== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period
November 15, 2001
Year Ended (date of inception) to
April 30, April 30,
2003 2002
------------- -------------
OPERATING ACTIVITIES:
Net (loss) income $ (381,294) $ 11,234
Adjustments to reconcile net (loss) 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
============= =============
F-8
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
FORMERLY PHOENIX STAR VENTURES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
For the period
November 15, 2001
Year Ended (date of inception) to
April 30, April 30,
2003 2002
------------ -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 8,131 $ 640
============ =============
Income taxes $ 1,380 $ 200
============ =============
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital lease $ 9,468 -
============
Issuance of 64 shares of Series B preferred stock
as payment of advances from shareholder and
accounts payable $ 64,000 -
============
Imputed Series B preferred stock dividend attributable
to a beneficial conversion feature $ 173,000 -
============
Issuance of common stock for net non-cash assets
received in acquisitions $ 6,324,249 -
============
Conversion of Series A Preferred stock into common
stock $ 300 -
============
Conversion of Series B Preferred stock into common stock $ 56 -
============
Stock options issued relating to an acquisition $ 63,513
============
Earn-out consideration unpaid relating to an acquisition $ 58,207
============
The accompanying notes are an integral part of these consolidated financial statements
F-9
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of WPCS
International Incorporated ("WPCS") and its wholly owned subsidiaries, WPCS
Acquisition Corp. (which changed its name to WPCS Incorporated) ("Subsidiary"),
Invisinet Inc. ("Invisinet") from November 13, 2002 (date of acquisition) and
Walker Comm Inc. ("Walker") from December 30, 2002 (date of acquisition),
collectively the "Company". For the period November 15, 2001 (date of inception)
to April 30, 2002, the statement of operations, shareholders' equity and cash
flows are that of WPCS Holdings, Inc. ("Holdings"), the accounting acquirer of
the business of Phoenix Star Ventures, Inc. ("PSVI") as explained below.
The Company is a project engineering company that focuses on the implementation
requirements of specialty communication systems, wireless fidelity ("WiFi")
deployment and fixed wireless deployment. 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-10
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION (continued)
On December 30, 2002, the Company acquired all of the outstanding shares of
Walker in exchange for an aggregate of 2,486,000 newly issued shares of the
Company's common stock and $500,000 cash consideration. An additional $500,000
is payable contingent upon Walker achieving certain net profits, to be paid in
quarterly distributions equal to 75% of net income, which would increase the
purchase price.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
Principles of consolidation
All significant intercompany transactions and balances have been eliminated in
these consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly-liquid investments with an
original maturity of three months or less.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The Company
reduces credit risk by placing its temporary cash and investments with major
financial institutions with high credit ratings. At times, such amounts may
exceed Federally insured limits. The Company reduces credit risk related to
accounts receivable by routinely assessing the financial strength of its
customers and maintaining an appropriate allowance for doubtful accounts based
on its history of write-offs, current economic conditions and an evaluation of
the credit risk related to specific customers.
Accounts Receivable
Accounts receivable are due within contractual payment terms and are stated at
amounts due from customers net of an allowance for doubtful accounts. Credit is
extended based on evaluation of a customer's financial condition. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes off accounts receivable when they become
uncollectible, and payment subsequently received on such receivables are
credited to the allowance for doubtful accounts. Included in the accounts
receivable is retainage receivable of $106,995 which is expected to be collected
within one year.
F-11
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)
Inventory
Inventory consists of parts and supplies and is stated using the weighted
average cost method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
provided for, using straight-line methods, in amounts sufficient to relate the
cost of depreciable assets to operations over their estimated service lives.
Repairs and maintenance are charged to operations as incurred.
Goodwill
Effective May 1, 2002, the Company adopted Statement of Financial Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. In accordance with the
guidelines of this accounting standard, goodwill and indefinite-lived intangible
assets are no longer amortized but are assessed for impairment on at least an
annual basis. SFAS No. 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment.
SFAS No. 142 requires that goodwill be tested for impairment upon adoption and
at least annually thereafter, utilizing a two-step methodology. The initial step
requires the Company to determine the fair value of the business acquired
(reporting unit)and compare it to the carrying value, including goodwill, of
such business (reporting unit). If the fair value exceeds the carrying value, no
impairment loss would be recognized. However, if the carrying value of the
reporting unit exceeds its fair value, the goodwill of the unit may be impaired.
The amount, if any, of the impairment is then measured in the second step.
The Company completed the initial step of impairment testing which indicated
that no goodwill impairment existed as of April 30, 2003. The Company determined
the fair value of the businesses acquired for purposes of this test primarily by
using a discounted cash flow valuation technique. Significant estimates used in
the valuation include estimates of future cash flows, both future short-term and
long-term growth rates, and estimated cost of capital for purposes of arriving
at a discount factor. Based on comparing this discounted cash flow model to the
carrying value of the reporting units, no impairment was recognized in the
consolidated statement of operations for the year ended April 30, 2003. On an
ongoing basis, the Company expects to perform its annual impairment test during
the fourth quarter absent any interim impairment indicators.
F-12
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue recognition
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-13
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (loss) Per Share
Earnings (Loss) per common share is computed pursuant to SFAS No. 128, "Earnings
Per Share" ("EPS"). Basic income (loss) per share is computed as net income
(loss) available to common shareholders divided by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common stock issuable through stock options,
restrictive stock awards, warrants and other convertible securities. At April
30, 2003, the Company had 1,000 shares of Series C Convertible Preferred Stock
with potential conversion into 1,786,000 common shares of the Company as
described in NOTE 12 and 77,000 stock options grants outstanding. Diluted EPS is
not presented since the effect of the assumed exercise of options and the
assumed conversion of the Series C convertible preferred stock would be
antidilitive. At April 30, 2002, no potentially dilutive securities were
outstanding.
Stock-Based Compensation Plans
The Company maintains a stock option plan, as more fully described in Note 11 to
the consolidated financial statements, which is accounted for using the
"intrinsic value" method pursuant to the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, and, accordingly, when the exercise price of an employee stock
option granted by the Company is equal to or greater than the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. Therefore, the Company has elected the disclosure only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation."
Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
period. The most significant estimates relate to the calculation of percentage
of completion on uncompleted contracts, allowance for doubtful accounts,
valuation of inventory and life of customer lists. Actual results could differ
from those estimates.
Recently issued accounting pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which is effective for years
beginning after June 15, 2002. SFAS No. 143 addresses legal obligations
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. The standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. Any associated asset retirement
costs are to be capitalized as part of the carrying amount of the long-lived
asset and expensed over the life of the asset. The impact of the adoption of
SFAS No. 143 is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
F-14
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently issued accounting pronouncements (continued)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 clarifies accounting and reporting for
assets held for sale, scheduled for abandonment or other disposal, and
recognition of impairment loss related to the carrying value of long-lived
assets. The Company has adopted SFAS No. 144 for the year beginning May 1, 2002.
The adoption of SFAS 144 did not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated with
Exit or Disposal Activities." SFAS No.146 nullifies Emerging Issues Task Force
Issue No. 94-3 and requires that a liability for a cost associated with and exit
or disposal activity be recognized when the liability is incurred. This
statement also establishes that fair value is the objective for initial
measurement of the liability. SFAS No.146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The impact of the
adoption of SFAS No. 146 is not expected to have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement
No.123." SFAS No.148 amends SFAS No.123,"Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value-based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock- based
employee compensation. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB
Opinion No.25 for the year ending April 30, 2003. The adoption of SFAS 148 did
not have a material effect on the Company's consolidated financial position,
results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No.45, ("FIN No. 45")
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No.45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN No. 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN No.45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending December 15, 2002. The
adoption of the disclosure requirements of FIN No. 45 did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
F-15
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently issued accounting pronouncements (continued)
In January 2003, the FASB issued FASB Interpretation No.46 ("FIN No. 46")
"Consolidation of Variable Interest Entities." In general, a variable interest
entity is a corporation, partnership, trust, or any other legalstructure used
for business purposes that either (a) does not have equity investors with voting
rights or (b)has equity investors that do not provide sufficient financial
resources for the entity to support its activities.A variable interest entity
often holds financial assets, including loans or receivables real estate or
other property. A variable interest entity may be essentially passive or it may
engage in activities on behalf of another company. Until now, a company
generally has included another entity in its consolidated financial statements
only if it controlled the entity through voting interests. FIN No.46 changes
that by requiring a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. FIN No. 46's consolidation requirements apply
immediately to variable interest entities created or acquired after January 31,
2003. The consolidation requirements apply to older entities in the first fiscal
year on interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The Company has
not adopted FIN No.46 for the year ended April 30, 2003. The Company does not
expect FIN 46 to have a material effect on its consolidated financial position,
results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of our first
quarter for fiscal 2004. The Company does not expect the adoption of this
statement to have a material impact on its consolidated financial position,
results of operations or cash flows.
NOTE 3 - ACQUISITIONS
Invisinet, Inc.
On November 13, 2002, the Company, through its newly formed, wholly-owned
subsidiary, acquired all of the outstanding shares of Invisinet. Subsequently on
that date, the subsidiary was merged with and into Invisinet, with Invisinet
being the surviving corporation. Invisinet then became a wholly owned subsidiary
of WPCS.
The acquisition of Invisinet broadens the Company's customer base and expands
its technical resources. WPCS concentrates its business in fixed wireless
solutions, whereas Invisinet offers wireless fidelity (WiFi) deployment to its
customers.
F-16
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (continued)
Invisinet (continued)
The aggregate consideration paid by WPCS for Invisinet was approximately
$1,828,000. As a result of and at the effective time of the merger, all of the
issued and outstanding shares of common stock of Invisinet were exchanged for
aggregate merger consideration consisting of 1,000,000 shares of common stock of
WPCS with a value of approximately $1,750,000, based on $1.75 per share, the
average stock price a few days before after the announcement of the merger, and
an additional $15,000 in acquisition costs.
In addition, as an inducement to enter into the merger agreement, the Company
agreed to issue a shareholder of Invisinet, who is also the Executive Vice
President of the Company, up to 150,000 shares of the Company's common stock,
provided Invisinet achieved certain financial targets over a two year period
beginning on the first anniversary date of the merger. On May 27, 2003, the
Company and the shareholder mutually agreed to cancel the issuance of these
shares and in exchange, issued options to purchase 300,000 shares of the
Company's common stock at an exercise price of $0.45 per share expiring in May
2008. These options were valued at $63,513 and accordingly, the Company
increased goodwill and additional paid-in capital for the same amount at April
30, 2003.
The acquisition of Invisinet was accounted for under the purchase method of
accounting in accordance with SFAS No. 141, "Business Combinations". Under the
purchase method of accounting, assets acquired and liabilities assumed are
recorded at their estimated fair values. Goodwill and (or) other intangible
assets are recorded to the extent that the merger consideration, including
certain acquisition and closing costs, exceeds the fair value of the net
identifiable assets acquired at the date of the merger.
A valuation of certain assets was completed, including its 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 the 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-17
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (continued)
Invisinet (continued)
The purchase price allocation has been calculated as follows:
Assets purchased
Cash $ 132,672
Accounts receivable 111,815
Note receivable 172,514
Inventory 5,228
Fixed assets 3,760
Other assets 1,445
Customer list 150,000
Goodwill 1,627,044
------------
2,204,478
Liabilities assumed
Accounts payable (321,965)
Deferred tax liability (54,000)
------------
(375,965)
Purchase price $ 1,828,513
============
Customer lists are being amortized over a period of 5 years. The Company
recorded amortization expense of $15,000 for the year ended April 30, 2003. Any
future goodwill impairments are not deductible for income tax purposes.
Walker Comm, Inc.
On December 30, 2002, the Company, through its newly formed, wholly-owned
subsidiary, acquired all of the outstanding common stock of Walker. Subsequently
on that date, the subsidiary was merged with and into Walker, with Walker being
the surviving corporation. Walker then became a wholly-owned subsidiary of WPCS.
The acquisition of Walker gives the Company the ability to provide both
structured cabling and wireless solutions to its customers along with
strengthening its project management capabilities.
The aggregate consideration paid by WPCS for Walker was $5,171,455 subject to
further adjustment as explained below. As a result of and at the effective time
of the merger, all of the outstanding shares of common stock, par value $1.00
per share, of Walker were exchanged for aggregate merger consideration
consisting of $500,000 in cash and the common stock of WPCS with a value of
$4,574,248, or 2,486,000 shares valued at $1.84 per share based on an average
price a few days before and after the merger was announced and acquisition costs
of $39,000. An additional $500,000 is payable, provided Walker achieves certain
net profits, to be paid in quarterly distributions equal to 75% of net income.
At April 30, 2003, $58,207 was payable to the Walker shareholders against this
earn-out provision. Accordingly, the goodwill was increased by $58,207.
F-18
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (continued)
Walker Comm (continued)
The acquisition of Walker was accounted for under the purchase method of
accounting in accordance with Statement of Financial Accounting Standards No.
141, Business Combinations ("SFAS 141"). Under the purchase method of
accounting, assets acquired and liabilities assumed are recorded at their
estimated fair values. Goodwill and (or) other intangible assets are recorded to
the extent that the merger consideration, including certain acquisition and
closing costs, exceeds the fair value of the net identifiable assets acquired at
the date of the merger.
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 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-19
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARY
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS (continued)
Walker Comm (continued)
Liabilities assumed
Accounts payable (658,673)
Note payable - Bank (200,000)
Billings in excess of costs and estimated earnings on
uncompleted contracts (371,358)
Equipment loans payable (74,437)
Deferred income taxes (602,000)
---------------
(1,906,468)
Purchase price $ 5,171,455
===============
Based on the 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-20
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the following:
at April 30, 2003
Costs incurred on uncompleted contracts $ 4,077,019
Estimated contract profit 937,464
------------
5,014,483
Less: billings to date 4,822,108
------------
$ 192,375
============
Costs and estimated earnings in excess of billings $ 408,194
Billings in excess of costs and estimated earnings
on uncompleted contracts (215,819)
-------------
$ 192,375
=============
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at April 30, 2003:
Estimated Amount
useful life
(years)
Furniture and fixtures 5 - 7 $ 33,606
Automobiles 5 - 7 303,568
Machinery and equipment 5 193,860
Leasehold improvements 3 - 10 167,190
----------
698,224
Less accumulated depreciation and amortization 50,273
----------
$ 647,951
==========
Depreciation expense for property and equipment for the year ended April 30,
2003 and for the period ended April 30, 2002 was approximately $75,500 and
$2,600, respectively.
Property and equipment under capital leases totaled approximately $10,000 and
accumulated depreciation on such property and equipment aggregated approximately
$2,800 at April 30, 2003.
F-21
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - LINE OF CREDIT
The Company had a $200,000 line of credit with a bank, which matured on March
26, 2003. The line of credit provided for an interest rate of 3.4% and was
collateralized by a $200,000 certificate of deposit, At the maturity date, the
loan was paid back by the certificate of deposit.
NOTE 7- DUE TO OFFICER
The Company owes $100,000 to an officer. This loan bears interest at 5.75% and
is due on or before February 12, 2004.
NOTE 8 - RELATED PARTY TRANSACTIONS
In connection with the acquisition of Walker, the Company assumed a ten-year
lease with trusts, of which, certain officers of the Company are the trustees,
for a building and land located in Fairfield, California, which is occupied by
its Walker subsidiary. The lease requires for initial monthly rental payments of
$6,934, with annual increases, calculated using the San Francisco-Oakland-San
Jose Consolidated Metropolitan Statistical Area Consumer Price Index. For the
period December 30, 2002 (date of acquisition) through April 30, 2003, $29,000
was paid as rent for this lease.
NOTE 9 - RETIREMENT PLANS
Walker participates in an employee savings plan under Section 401(k) of the
Internal Revenue Code pursuant to which eligible employees may elect to defer a
portion of their annual salary by contributing to the plan. Contributions by
Walker are made at the discretion of the Board of Directors. There were no
contributions made for the year ended April 30, 2003 and none for 2002, since
Walker's results of operations are not included in these financial statements.
The Company also contributes to multi-employer pension plans which provide
benefits to union employees covered by collective bargaining agreements. General
and administrative expenses include approximately $239,000 for such costs and
none for 2002, since Walker's results of operations are not included in these
financial statements.
NOTE 10 - INCOME TAXES
The provision or income taxes for the year ended at April 30, 2003 and
period ended April 30, 2002 is summarized as follows:
2003 2002
Current ---------- ----------
Federal $ - $ -
State 19,550 4,350
Deferred
Federal - -
State - -
---------- ----------
Totals $ 19,550 $ 4,350
========== ==========
F-22
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (continued)
The actual provisions for income taxes reflected in the consolidated statements
of operations for the year ended April 30, 2003, 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-23
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (continued)
The Company has net operating loss carryforwards for Federal tax purposes
approximating $72,000, expiring through 2023. The Company has net operating loss
carryforward for State tax purposes approximating $328,000 expiring through
2010. Due to the uncertainty of recognizing a tax benefit on these losses, the
Company has provided a valuation allowance against these deferred tax assets.
NOTE 11 - STOCK OPTION PLAN
The Company established a nonqualified stock option plan pursuant to which
options to acquire a maximum of 5,000,000 shares of the Company's common stock
were reserved for grant (the "2002 Plan"). Under the terms of the 2002 Plan, the
options, which expire five years after grant, are exercisable at prices equal to
the fair market value of the stock at the date of the grant and become
exercisable in accordance with terms established at the time of the grant. At
April 30, 2003, there were 4,923,000 shares available for grant under the 2002
Plan.
The following is a summary of activity with respect to stock options granted
under the 2002 Plan:
Weighted-average
Shares Price per share price per share
-------------- ----------------- -----------------
May 1, 2002 - - -
Granted 77,000 $1.35 to $1.66 $1.45
--------------
Balance outstanding at April 30, 2003 77,000
==============
The following table summarizes the stock options outstanding and exercisable at
April 30, 2003:
Options outstanding Options exercisable
Weighted-
average
Shares remaining Exercise
Exercise Prices Under option life in years Shares price
--------------- ------------- ------------- -------- -------
$1.35 50,000 4.42 4,166 $1.35
$1.37 2,000 4.58 500 $1.37
$1.66 25,000 4.92 6,250 $1.66
------------- ----------
Total 77,000 10,916
------------- ---------
The weighted-average fair value on the grant date was $0.87 for options granted
during the year ended April 30, 2003. Prior to May 1, 2002, the company granted
no options.
F-24
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLAN (continued)
The Company applies the intrinsic value method in accounting for its stock-based
compensation plan. Had the Company measured compensation under the fair value
based method for stock options granted, the Company's net loss attributable to
common shareholders and net loss per share attributable to common shareholders
for the year ended April 30, 2003 would have been as follows:
Net loss attributable to common shareholders
As reported $ (554,294)
Pro forma $ (564,286)
Net loss per share attributable to common shareholders
As reported $ (0.05)
Pro forma $ (0.05)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes Option pricing model with the following assumptions for fiscal
2003: Risk-free interest rate of 2%, dividend yield of 0%, expected life of 5
years and volatility of 71.6%.
NOTE 12 - SHAREHOLDERS' EQUITY
Preferred Stock
Series B Convertible Preferred Stock
On May 15, 2002, the Board of Directors of the Company adopted and created a
series of preferred stock consisting of 1,000 shares designated as Series B
Convertible Preferred Stock ("Series B Preferred Stock"). Each share of Series B
Preferred Stock has a liquidation preference of $1,000 and does not accrue any
dividends. The Series B Preferred Stock is convertible into the Company's common
stock, at the option of the holder, at any time after the 30th calendar day the
Company receives payment in full. Each share of preferred stock is convertible
at a basis of $1,000 per share at a conversion price equal to 75% of the average
market price of the common stock for ten days prior to the date of conversion.
Among other provisions, the number of shares issuable upon conversion may not be
less than 1,000 shares or greater than 4,000 shares of common stock.
Between May 24, 2002 and June 11, 2002, the Company sold 455 shares of Series B
Preferred Stock through a private placement and received proceeds of $455,000.
Additionally, the Company issued 64 shares to a shareholder of the Company as
payment for advances from shareholder and accounts payable totaling $64,000.
Based on the conversion price of 75% of market value, the Company recorded a
beneficial conversion feature of $173,000 for the 519 Series B Preferred Stock
issued as an imputed preferred stock dividend.
F-25
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - SHAREHOLDERS' EQUITY (continued)
Preferred Stock (continued)
On December 13, 2002, all Series B Preferred Stock was converted to 567,212
shares of the Company's common stock.
Series C Convertible Preferred Stock
On November 10, 2002, the Board of Directors of the Company adopted and created
a series of preferred stock consisting of 1,000 shares designated as Series C
Convertible Preferred Stock (" Series C Preferred Stock"). The Series C
Preferred Stock is convertible into the Company's common stock, at the option of
the holder, at any time after the day the Company receives payment in full. Each
share of Series C Preferred Stock is convertible into 800 shares of the
Company's common stock. Each share of Series C Preferred Stock has a liquidation
preference of $1,000 and does not accrue any dividends.
In addition, the Company may repurchase the outstanding Series C Preferred Stock
within one year following the date on which the Company issues and receives
payment in full, at a price of $1,200 per share.
On December 6, 2002, the Company issued 1,000 shares of Series C Preferred Stock
in a private placement and received proceeds of $1,000,000. At April 30, 2003,
the Company has not repurchased any of this Series C Preferred Stock.
As an inducement for the subscribers to purchase the Series C Preferred Stock, a
majority shareholder who is the Company's Chairman and Chief Executive Officer
agreed to: (1) refrain from selling any of the Company's common stock held by
him until November 13, 2003, and (2) to return to treasury up to 2,690,000
shares of the Company's common stock held by him if certain financial covenants
were not by the Company for the fiscal year ended April 30, 2003. The Company
complied with all such financial covenants at April 30, 2003 and none of the
shares were returned to treasury.
In the event the Company issues shares of its common stock during the two
calendar years following the Issuance Date in a private placement for cash
consideration of less than $1.25 per share, each share of Series C Preferred
Stock is convertible into the number of shares of common stock equal to $1,000
divided by the price per share at which the Company issued common stock in the
private placement. On June 25, 2003, as described in Note 15, the Company
offered shares of its common stock in a private palcement at $.56 per share.
Accordingly, the Series C Preferred Stock is convertible into 1,786,000 common
shares of the Company.
Common Stock
On December 1, 2001, the Company issued 5,500,000 common shares to its sole
shareholder and received proceeds of $5,000.
On May 23, 2002, all of the 250 shares of Series A preferred stock, which had
been issued by PSVI prior to the reverse acquisition, were converted into
3,000,000 shares of the Company's common stock.
F-26
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - SEGMENT REPORTING
The Company's reportable segments are determined based upon the nature of the
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:
WIRELESS SPECIALTY
CORPORATE INFRASTRUCTURE COMMUNICATIONS Total
-------------------- -------------------- -------------------- --------------------
For the year ended April 30, 2003
Revenue $ - $ 1,850,300 $ 3,572,558 $ 5,422,858
Net loss before income taxes $ (223,211) $ (61,185) (77,348) (361,744)
Goodwill $ 1,627,044 $ 3,761,838 $ 5,388,882
Total assets $ 136,963 $ 2,753,206 $ 6,931,057 $ 9,821,226
Depreciation and amortization $ - $ 21,543 $ 94,958 $ 116,501
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-27
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - COMMITMENTS AND CONTINGENCIES (continued)
Employment Agreements (continued)
On November 13, 2002, the Company entered into a two-year employment contract
with an option to renew for an additional year, with the President of Invisinet,
who is also an Executive Vice President of the Company. The base salary under
the agreement is $120,000 per annum, plus benefits.
On December 30, 2002, the Company entered into a four-year employment contract
with an option to renew for an additional year, with the President of Walker,
who is also an Executive Vice President of the Company. The base salary under
the agreement is $140,000 per annum, plus benefits.
On December 30, 2002, the Company entered into a four-year employment contract
with an option to renew for an additional year, with the Chief Operating Officer
of Walker, who is also a Director of the Company. The base salary under the
agreement is $140,000 per annum, plus benefits.
On July 15, 2003, the Company entered into a three-year employment agreement
with the Chief Financial Officer of the Company. The base salary under the
agreement is $120,000, per annum, plus benefits.
Litigation
The Company from time to time is subject to certain legal proceedings and claims
which have arisen in the ordinary course of its business. These actions when
ultimately concluded will not, in the opinion of management, have a material
adverse effect upon the financial position, results of operations or cash flows
of the Company.
Lease Commitments
The Company leases its office (see Note 8) facilities pursuant to non-cancelable
operating leases expiring through February 2011. The minimum rental commitments
under these non-cancelable leases, at April 30, 2003 are summarized as follows:
Year ending April 30,
2004 $ 154,000
2005 107,000
2006 94,000
2007 97,000
2008 100,000
Thereafter 299,000
-------------
Total minimum lease payments $ 851,000
=============
Rent expense for all operating leases was approximately $100,000 and $10,000 in
2003 and 2002, respectively.
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-28
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - SUBSEQUENT EVENTS
On May 1, 2003 and May 27, 2003, the Company granted options to purchase
1,350,000 shares of its common stock to certain consultants. The options have
exercise prices ranging from $0.45 to $1.50. Of this, 50,000 options expire on
May 1, 2005 and the remaining 1,300,000 options expire on May 27, 2004. The
Company has valued these options at approximately $129,000 and will charge the
general and administrative expenses for the year ended April 30, 2004.
On June 24, 2003, the Company announced that it had entered into a letter of
intent to acquire Clayborn Contracting Group in a cash and stock transaction
valued at approximately $3 million. The proposed terms of the acquisition
include:
o the payment of $900,000 at closing;
o the issuance at closing of such number of shares of our common
stock as equals $1,000,000, based on the market price of the
stock at the time of closing; and
o $1,100,000, payable by the delivery to the Clayborn shareholders
of 50% of the post tax net income of Clayborn, payable on a
quarterly basis.
A definitive agreement with respect to acquisition has not been executed to date
and there can be no assurance that such acquisition will be completed on the
foregoing terms, or at all. The 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
F-29
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
(FORMERLY PHOENIX STAR VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-30
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
WPCS dismissed its independent public accountant, Leonard Friedman,
effective as of August 19, 2002. WPCS's Board of Directors approved such
decision. Leonard Friedman's report for the period November 15, 2001 (date of
inception) to April 30, 2002, did not contain any adverse opinion or disclaimer
of opinion, nor was it qualified or modified as to uncertainty, audit scope or
accounting principles. Furthermore, during such period from November 15,
2001(date of incorporation) through April 30, 2002, and the subsequent interim
period preceding August 19, 2002, there were no disagreements with Leonard
Friedman within the meaning of Instruction 4 to Item 304 of Regulation S-B under
the Securities Exchange Act of 1934 on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Leonard Friedman, would
have caused him to make reference in connection with his opinion to the subject
matter of the disagreement in connection with any report he might have issued.
On August 19, 2002, the Company, dismissed N.I. Cameron, Inc., Chartered
Accountants ("N.I. Cameron"), as the Company's independent public accountants,
effective as of that date. The Company's Board of Directors approved such
decision.
N.I. Cameron's opinion in its reports on the Company's financial statements
for the years ended April 30, 2001 and April 30, 2002 (prior to the Company's
merger with WPCS Holdings, Inc.), each expressed substantial doubt with respect
to the Company's ability, at that time, to continue as a going concern. During
the year ended April 30, 2002, and the period from June 9, 1999 (date of
30
incorporation) to April 30, 2001, N.I. Cameron did not issue any other report on
the financial statements of the Company which contained any adverse opinion or
disclaimer of opinion, or was qualified or modified as to uncertainty, audit
scope or accounting principles. Furthermore, during such period from June 9,
1999 (date of incorporation) through April 30, 2002, and the subsequent interim
period preceding August 19, 2002, there were no disagreements with N.I. Cameron
within the meaning of Instruction 4 to Item 304 of Regulation S-B under the
Securities Exchange Act of 1934 on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of N.I. Cameron, would have
caused them to make reference in connection with their opinion to the subject
matter of the disagreement in connection with any report they might have issued.
On August 19, 2002, the Company and WPCS engaged J.H. Cohn LLP, as their
independent public accountants. Neither the Company nor WPCS previously
consulted with J.H. Cohn regarding any matter, including but not limited to:
o the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial
statements; or
o any matter that was either the subject matter of a disagreement
(as defined in Item 304(a)(1)(iv) of Regulation S-B and the
related instructions) or a reportable event (as defined in Item
304(a)(1)(v) of Regulation S-B).
ITEM 9 - DIRECTORS AND OFFICERS OF THE REGISTRANT
The following persons are our executive officers and directors as of the
date hereof:
NAME AGE OFFICES HELD
- ---- --- ------------
Andrew Hidalgo 47 Chairman, Chief Executive Officer and Director
Donald Walker 40 Executive Vice President
E.J. von Schaumburg 36 Executive Vice President
31
Joseph Heater 40 Chief Financial Officer
Norm Dumbroff 42 Director
Neil Hebenton 47 Director
Gary Walker 48 Director
William Whitehead 47 Director
Andrew Hidalgo, Chairman and Chief Executive Officer
Mr. Hidalgo became Chairman of the Board and Chief Executive Officer of the
Company in June 2002. He is responsible for the Company's operations and
direction. From September 2000 until June 2002, Mr. Hidalgo was President of
Wireless Professional Communication Services, Inc. From November 1999 to
September 2000, Mr. Hidalgo was Chairman and Chief Executive Officer of CommSpan
Incorporated. From December 1997 to 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.
32
E.J. von Schaumburg, Executive Vice President
Mr. von Schaumburg has been Executive Vice President since November 2002.
He is responsible for the strategic development of WPCS including major accounts
and corporate marketing. From July 2000 until November 2002, Mr. Von Schaumburg
was President of Invisinet, Inc. He is a twelve-year veteran of the wireless
industry and founding member of the Wireless Ethernet Compatibility Alliance
(WECA). From Februaru 1989 until July 2000, Mr. von Schaumburg worked for eight
years as a Business Development Manager for AT&T and three years as a divisional
CFO for Lucent Technologies. Mr. von Schaumburg holds a B.S. in Finance from St.
Bonaventure University and an M.B.A. from Fairleigh Dickinson University.
Joseph 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.
33
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.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation received by the
Company's Chief Executive Officer for the fiscal years ended April 30, 2003 and
2002.
Name and Principal Position Fiscal Year Salary
--------------------------------------- ------------ --------------------
Andrew Hidalgo 2003 $141,000
Chairman and Chief Executive Officer
--------------------------------------- ------------ --------------------
Stephen C. Jackson 2002 $36,000
President, Secretary and Treasurer
34
No other compensation was received by the above named officers during the fiscal
years ended April 30, 2003 and 2002, respectively.
EMPLOYMENT AGREEMENTS
Contract with Andrew Hidalgo
On August 2, 2002, the Company entered into a three-year employment contract
with a shareholder who is the Chairman and Chief Executive Officer of the
Company. Upon each one year anniversary of the agreement, the agreement will
automatically renew for another three years from the anniversary date. The base
salary under the agreement is $150,000 per annum plus benefits.
Contract with E.J. von Schaumburg
On November 13, 2002, the Company entered into a two-year employment contract
with an option to renew for an additional year, with the President of Invisinet,
who is also an Executive Vice President of the Company. The base salary under
the agreement is $120,000 per annum, plus benefits.
Contract with Donald Walker
On December 30, 2002, the Company entered into a four-year employment contract
with an option to renew for an additional year, with the President of Walker,
who is also an Executive Vice President of the Company. The base salary under
the agreement is $140,000 per annum, plus benefits.
Contract with Gary Walker
On December 30, 2002, the Company entered into a four-year employment contract
with an option to renew for an additional year, with the Chief Operating Officer
of Walker, who is also a Director of the Company. The base salary under the
agreement is $140,000 per annum, plus benefits.
Contract with Joseph Heater
On July 15, 2003, the Company entered into a three-year employment contract with
the Chief Financial Officer. The base salary under the agreement is $120,000 per
annum, plus benefits.
35
DIRECTOR 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.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information about the shares of the Company's
common Stock that may be issued upon the exercise of options under the 2002
Stock Option Plan which were approved by the Board of Directors.
(c)
(a) Number of securities Number of
securities to (b) remaining available
be issued upon Weighted-average for future issuance
exercise of exercise price of under equity compensation plans
outstanding options, outstanding options, excluding securities reflected
Plan Category warrants and rights warrants and rights in column (a))(1)
- --------------------------- --------------------------- --------------------------- ---------------------------
Equity
compensation plans
approved by
security holders
Equity
compensation plans
not approved by
security holders (1) 77,000 $ 1.46 4,923,000
- --------------------------- --------------------------- --------------------------- ---------------------------
Total 77,000 $ 4,923,000
(1) The Company established a nonqualified stock option plan pursuant to which
options to acquire a maximum of 5,000,000 shares of the Company's common stock
were reserved for grant.
36
Code of Ethics
WPCS adopted a Code of Ethics for its officers, directors and employees. A
copy of the Code of Ethics is attached hereto as an exhibit.
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information, according to
information supplied to the Company regarding the number and percentage of the
Company's common stock beneficially owned by (i) each person who is beneficial
owner of more than 5% of the common stock; (ii) by each director; (iii) by each
executive officer named in the Summary Compensation Table; and (iv) by all
directors and executive officers as a group. Unless otherwise indicated, the
stockholders listed possess sole voting and investment power with respect to the
shares listed.
Title of Class Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
(1)
------------------------- ------------------------------- ------------------------ --------------
Common stock Andrew Hidalgo 5,380,000 41.1%
608 Perimeter Drive
Downingtown, PA 19335
------------------------- ------------------------------- ------------------------ --------------
Common stock Donald Walker 1,217,145 9.3%
521 Railroad Avenue
Fairfield, CA 94533
------------------------- ------------------------------- ------------------------ --------------
Common stock Gary Walker 930,759 7.1%
521 Railroad Avenue
Fairfield, CA 94533
------------------------- ------------------------------- ------------------------ --------------
Common stock J. Johnson LLC (2) 850,000 6.5%
245 West Roosevelt Road
West Chicago, IL 60185
------------------------- ------------------------------- ------------------------ --------------
F-37
Common Stock William Whitehead 8,000 *
609 Portland Drive
Downingtown, PA 19335
------------------------- ------------------------------- ------------------------ --------------
Common Stock All directors and executive 8,536,904 65.3%
officers as a group (8
persons)
* Less than 1% of the outstanding common stock
(1) None of these security holders has right to acquire any amount of common
stock of the Company within sixty (60) days from options, warrants, rights, or
similar obligations.
(2) J. Johnson LLC is a Delaware corporation controlled by Norm Dumbroff, a
director of the Company. J. Johnson LLC owned 85% of Invisinet, Inc.
(Invisinet). On November 13, 2002, the Company acquired all of the outstanding
shares of Invisinet, and were exchanged for 1,000,000 shares of commons stock of
the Company. In connection with this acquisition, J. Johnson LLC was issued
850,000 shares of the Company's common stock.
ITEM 12. 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.
38
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.
Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
Exhibits:
Number Exhibit
3.1 Certificate of Incorporation, with amendments (1)
3.2 By-Laws (1)
4.1 Certificate of Designation - Series A Preferred Stock (1)
4.2 Certificate of Designation - Series B Preferred Stock (2)
4.3 Certificate of Designation - Series C Preferred Stock
4.4 2002 Employee Stock Option Plan
4.5 Form of 2003 Warrant
10.1 Andrew Hidalgo Employment Agreement
10.2 E.J. von Schaumburg Employment Agreement
10.3 Donald Walker Employment Agreement
10.4 Gary Walker Employment Agreement
10.5 Joseph Heater Employment Agreement
10.6 Agreement and Plan of Merger by and among Phoenix Star Ventures, Inc.,
WPCS Acquisition Corp., a Delaware corporation, WPCS Holdings, Inc., a
Delaware corporation, and Andy Hidalgo, dated as of May 17, 2002 (3)
10.7 Agreement and Plan of Merger by and among WPCS International
Incorporated, Invisinet Acquisitions Inc., Invisinet, Inc., J.
Johnson LLC and E. J. von Schaumburg made as of the 13th day of
November, 2002 (4)
10.8 Amendment to Invisinet Bonus Agreement, dated as of May 27, 2003
39
10.9 Agreement and Plan of Merger by and among WPCS International
Incorporated, Walker Comm Merger Corp., Walker Comm, Inc., Donald C.
Walker, Gary R. Walker, and Tanya D. Sanchez made as of the 30th day
of December, 2002 (5)
14 Code of Ethics
31 Certifications required by Rule 13a-15(e) and 15d-15(e)
32. Section 1350 Certifications
- ---------------------------------
1. Incorporated by reference from the Company's registration statement on Form
SB-2 (Commission File # 333-38802).
2. Incorporated by reference to the Company Annual Report on Form 10-KSB for the
year ended April 30, 2002.
3. Incorporated by reference to the Company Current Report on Form 8-K, dated as
of May 24, 2002.
4. Incorporated by reference to the Company Current Report on Form 8-K, dated as
of November 13, 2002.
5. Incorporated by reference to the Company Current Report on Form 8-K, dated as
of December 30, 2002.
Reports on Form 8-K:
None.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosures. The Company maintains disclosure controls
and procedures designed to provide reasonable assurance that
information required to be disclosed in the reports filed with the SEC
is recorded, processed, summarized and reported within the time
periods specified in the rules of the SEC. As of April 30, 2003, an
evaluation, was completed under the supervision and participation of
management, including the Chief Executive Officer and Chief Financial
Officer, of the design and operation of this disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in
timely alerting them to material information relating to the company
(including the Company's consolidated subsidiaries) required to be
included in the periodic SEC filings.
(b) Changes in internal controls. There were no changes in the Company's
internal controls over financial reporting that occurred during the
period covered by this report that has materially affected, or is
likely reasonably to materially effect, the Company's internal control
over financial reporting.
40
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees. The aggregate fees billed by our auditors, for professional services
rendered for the audit of the Company's annual financial statements for the year
ended April 30, 2003 and for the period from November 15, 2001 (date of
inception) to April 30, 2002, and for the reviews of the financial statements
included in the Company's Quarterly Reports on Form 10-QSB during that fiscal
year were $28,860, and $2,254, respectively.
Audit Related Fees. The Company incurred fees to auditors of $21,918 for audit
related fees during the fiscal year ended April 30, 2003.
All Other Fees. The aggregate fees billed by auditors for services rendered to
the Company, other than the services covered in "Audit Fees" and for the fiscal
year ended April 30, 2003 were $1,170, which fees primarily related to the
Company's tax returns.
The Audit Committee has considered whether the provision of non-audit services
is compatible with maintaining the principal accountant's independence.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WPCS INTERNATIONAL INCORPORATED
/s/ ANDREW HIDALGO
------------------
Andrew Hidalgo,
Chief Executive Officer
(principal executive officer)
/s/ JOSEPH HEATER
----------------
Joseph Heater,
Chief Financial Officer
(principal accounting officer)
Date: May 4, 2004
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities as on May 4, 2004.
/s/ ANDREW HIDALGO
------------------
Andrew Hidalgo,
Chairman of the Board
--------------
Norm Dumbroff,
Director
--------------
Neil Hebenton,
Director
/s/ GARY WALKER
---------------
Gary Walker,
Director
/s/ WILLIAM WHITEHEAD
---------------------
William Whitehead,
Director
42