As filed with the Securities and Exchange Commission on August 17, 2004
An Exhibit List can be found on page II-3.
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
--------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
WPCS INTERNATIONAL INCORPORATED
(Name of small business issuer in its charter)
- ---------------------------------------- ------------------------------------- -------------------------------------
Delaware 4899 98-0204758
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
- ---------------------------------------- ------------------------------------- -------------------------------------
140 South Village Avenue, Suite 20
Exton, PA 19341
(610) 903-0400
(Address and telephone number of principal executive offices and principal place
of business)
Andrew Hidalgo, Chief Executive Officer
140 South Village Avenue, Suite 20
Exton, PA 19341
(610) 903-0400
(Name, address and telephone number of agent for service)
Copies to:
Marc J. Ross, Esq.
Thomas A. Rose, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
Approximate date of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
======================================================= ================= ==================== ===================== ==============
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Securities Amount to be Offering Price Per Aggregate Offering Registration
to be Registered Registered Security(1) Price Fee
- ------------------------------------------------------- ----------------- -------------------- --------------------- --------------
Shares of common stock, $.0001 par value ("Common 1,963,417 $0.73 $1,433,294.41 $181.60
Stock")
Total 1,963,417 $0.73 $1,433,294.41 $181.60
======================================================= ================= ==================== ===================== ==============
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, using the
average of the high and low price as reported on the Over-The-Counter
Bulletin Board on August 12, 2004.
-----------------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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2
Preliminary Prospectus Subject To Completion, Dated August 17, 2004
The information in this prospectus is not complete and may
be changed.
WPCS International Incorporated
1,963,417 Shares of
Common Stock
This prospectus relates to the resale by the selling stockholders of
1,963,417 shares of our common stock, based on current market prices. The
selling stockholders may sell common stock from time to time in the principal
market on which the stock is traded at the prevailing market price or in
negotiated transactions. Please see the "Selling Stockholders" section in this
prospectus for a complete description of all of the selling stockholders.
We will not receive any proceeds from the sale of shares by the
selling stockholders. However, we will receive proceeds upon the exercise of any
warrants or options that may be exercised by the selling stockholders, if any.
We will pay the expenses of registering these shares.
Our common stock is listed on the Over-The-Counter Bulletin Board
under the symbol "WPCS." The last reported sales price per share of our common
stock as reported by the Over-The-Counter Bulletin Board on August 12, 2004, was
$0.75.
--------------------------------
Investing in these securities involves significant risks.
See "Risk Factors" beginning on page 3.
--------------------------------
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ______________, 2004.
3
PROSPECTUS SUMMARY
Our Business
WPCS International Incorporated is a project engineering company that
focuses on the implementation requirements of specialty communication systems,
including wireless fidelity (WiFi) deployment and fixed wireless systems. We
provide a range of specialty communication services including project
management, site design, structured cabling, product integration, network
security, and technical support. These projects may require the integration of
multiple communication components and engineering services in order to complete
the customer's requirements for the deployment of a specialty communication
system, a WiFi or fixed wireless system. We have two reportable segments,
specialty communication systems and wireless infrastructure services.
Specialty communication services include project management,
installation and network integration of voice, data, video and security systems,
including fiber optic cabling and outside plant trenching. The specialty
communication systems segment represents approximately 80% of total revenue.
We define wireless infrastructure services as the internal and
external design and installation of a wireless solution to support data, voice
or video transmission between two or more points without the utilization of
landline infrastructure. Wireless infrastructure services include site survey
and design, spectrum analysis, product integration, mounting and alignment, and
structured cabling. We also provide network security, training and technical
support. The wireless infrastructure segment represents approximately 20% of
total revenue.
We service major corporations, government agencies and educational
institutions, both domestically and internationally.
Our principal offices are located at 140 South Village Avenue, Suite
20, Exton, PA 19341, and our telephone number is (610) 903-0400. We are a
Delaware corporation.
We started our operations in December 2001. We have incurred net
losses since our inception. For the year ended April 30, 2004, we generated
revenue in the amount of $22,076,246 and a net loss of $124,187.
The Offering
Common stock offered by selling 1,963,417 shares, all of which are
stockholders.............................................................. currently issued and outstanding. This
number represents approximately 9.42% of
our common stock.
Common stock to be outstanding after the offering 20,849,976 shares.
Use of proceeds........................................................... We will not receive any proceeds from the
sale of the common stock.
Over-The-Counter Bulletin Board Symbol.................................... WPCS
4
RISK FACTORS
This investment has a high degree of risk. Before you invest you
should carefully consider the risks and uncertainties described below and the
other information in this prospectus. If any of the following risks actually
occur, our business, operating results and financial condition could be harmed
and the value of our stock could go down. This means you could lose all or a
part of your investment as a result of these risks.
Risks Related To Our Business
We have a history of operating losses and may never become profitable
We incurred a net loss of approximately $124,000 for the year ended
April 30, 2004. There can be no assurance that we will achieve or sustain
profitability or positive cash flow from operating activities in the future. If
we cannot achieve operating profitability or positive cash flow from operating
activities, we may not be able to meet our working capital requirements. If we
are unable to meet our working capital requirements, we are likely to reduce or
cease all or part of our operations.
We may be unable to obtain the additional capital required to grow our business.
We may have to curtail our business if we cannot find adequate funding.
Our ability to grow depends significantly on our ability to expand our
operations through internal growth and by acquiring other companies or assets
that require significant capital resources. We may need to seek additional
capital from public or private equity or debt sources to fund our growth and
operating plans and respond to other contingencies such as:
o shortfalls in anticipated revenues or increases in expenses;
o the development of new services; or
o the expansion of our operations, including the recruitment
of additional personnel.
We cannot be certain that we will be able to raise additional capital
in the future on terms acceptable to us or at all. If alternative sources of
financing are insufficient or unavailable, we may be required to modify our
growth and operating plans in accordance with the extent of available financing.
Our success is dependent on growth in the deployment of wireless networks, and
to the extent that such growth slows down, our business may be harmed.
The wireless industry has historically experienced a dramatic rate of
growth both in the United States and internationally. Recently, however, many
end users have been re-evaluating their network deployment plans in response to
downturns in the capital markets, changing perceptions regarding industry
growth, the adoption of new wireless technologies, increased price competition
and a general economic slowdown in the United States and internationally. It is
difficult to predict whether these changes will result in a downturn in the
wireless industry. If the rate of growth should slow down and end users continue
to reduce their capital investments in wireless infrastructure or fail to expand
their networks, our operating results may decline which could cause a decline in
our profits.
The uncertainty associated with rapidly changing wireless technologies
may also continue to negatively impact the rate of deployment of wireless
networks and the demand for our services. End users face significant challenges
in assessing their bandwidth demands and in acceptance of rapidly changing
enhanced wireless capabilities. If end users continue to perceive that the rate
of acceptance of next generation wireless products will grow more slowly than
previously expected, they may, as a result, continue to slow their deployment of
next generation wireless technologies. Any significant slowdown will reduce the
demand for our services and would result in negative net growth, net losses, and
potentially a reduction in our business operations.
5
The increase of services offered by equipment vendors could cause a reduction in
demand for our services.
Recently, the wireless equipment vendors have increased the services
they offer for their technology. This activity and the potential continuing
trend towards offering services may lead to a greater ability among equipment
vendors to provide a comprehensive range of wireless services, and may simplify
integration and installation, which could lead to a reduction in demand for our
services. Moreover, by offering certain services to end users, equipment vendors
could reduce the number of our current or potential customers and increase the
bargaining power of our remaining customers, which may result in a decline in
our net revenue and profits.
Our quarterly results fluctuate and may cause our stock price to decline.
Our quarterly operating results have fluctuated in the past and will
likely fluctuate in the future. As a result, we believe that period to period
comparisons of our results of operations are not a good indication of our future
performance. A number of factors, many of which are outside of our control, are
likely to cause these fluctuations.
The factors outside of our control include:
o Wireless market conditions and economic conditions generally;
o Timing and volume of customers' specialty communication projects;
o The timing and size of wireless deployments by end users;
o Fluctuations in demand for our services;
o Changes in our mix of customers' projects and business activities;
o The length of sales cycles;
o Adverse weather conditions, particularly during the winter season, could
effect our ability to render specialty communication services in certain
regions of the United States;
o The ability of certain customers to sustain capital resources to pay
their trade accounts receivable balances;
o Reductions in the prices of services offered by our competitors; and
o Costs of integrating technologies or businesses that we add.
- --------------------------------------------------------------------------------
The factors substantially within our control include:
o Changes in the actual and estimated costs and time to complete
fixed-price, time-certain projects that may result in revenue adjustments
for contracts where revenue is recognized under the percentage of
completion method;
o The timing of expansion into new markets, both domestically and
internationally;
o Costs incurred to support internal growth and acquisitions;
o Fluctuations in operating results caused by acquistions; and
o The timing and payments associated with possible acquisitions.
- -------------------------------------------------------------------------------
6
Because our operating results may vary significantly from quarter to
quarter, our operating results may not meet the expectations of securities
analysts and investors, and our common stock could decline significantly which
may expose us to risks of securities litigation, impair our ability to attract
and retain qualified individuals using equity incentives and make it more
difficult to complete acquisitions using equity as consideration.
Failure to keep pace with the latest technological changes could result in
decreased revenues.
The market for our services is characterized by rapid change and
technological improvements. Failure to respond in a timely and cost-effective
way to these technological developments could result in serious harm to our
business and operating results. We have derived, and we expect to continue to
derive, a substantial portion of our revenues from creating wireless networks
that are based upon today's leading technologies and that are capable of
adapting to future technologies. As a result, our success will depend, in part,
on our ability to develop and market service offerings that respond in a timely
manner to the technological advances of our customers, evolving industry
standards and changing client preferences.
Failure to properly manage projects may result in costs or claims.
Our engagements often involve large scale, highly complex projects
involving wireless networks and specialty communication systems utilizing
leading technology. The quality of our performance on such projects depends in
large part upon our ability to manage the relationship with our customers, and
to effectively manage the project and deploy appropriate resources, including
third-party contractors, and our own personnel, in a timely manner. Any defects
or errors or failure to meet clients' expectations could result in claims for
substantial damages against us. Our contracts generally limit our liability for
damages that arise from negligent acts, error, mistakes or omissions in
rendering services to our clients. However, we cannot be sure that these
contractual provisions will protect us from liability for damages in the event
we are sued. In addition, in certain instances, we guarantee customers that we
will complete a project by a scheduled date or that the network will achieve
certain performance standards. As a result, we often have to make judgments
concerning time and labor costs. If the project or network experiences a
performance problem, we may not be able to recover the additional costs we will
incur, which could exceed revenues realized from a project. Finally, if we
miscalculate the resources or time we need to complete a project with capped or
fixed fees, our operating results could seriously decline.
Potential future acquisitions could be difficult to integrate, disrupt our
business, dilute stockholder value and adversely affect our operating results.
Since November 1, 2002, we have acquired four companies and we intend
to further expand our operations through acquisitions over time. This may
require significant management time and financial resources because we may need
to integrate widely dispersed operations with distinct corporate cultures. Our
failure to manage future acquisitions successfully could seriously harm our
operating results. Also, acquisition costs could cause our quarterly operating
results to vary significantly. Furthermore, our stockholders would be diluted if
we financed the acquisitions by incurring convertible debt or issuing
securities. Although we currently only have operations within the United States,
if we were to acquire an international operation; we will face additional risks,
including:
o difficulties in staffing, managing and integrating international
operations due to language, cultural or other differences;
o Different or conflicting regulatory or legal requirements;
o foreign currency fluctuations; and
o diversion of significant time and attention of our management.
7
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 48.2% of our outstanding common stock. As a result, these
stockholders, acting together, will have the ability to control substantially
all matters submitted to our stockholders for approval, including:
- election of our board of directors;
- removal of any of our directors;
- amendment of our certificate of incorporation or bylaws; and
- adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving us.
As a result of their ownership and positions, our directors and
executive officers collectively are able to influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, sales of significant amounts of
shares held by our directors and executive officers, or the prospect of these
sales, could adversely affect the market price of our common stock. Management's
stock ownership may discourage a potential acquirer from making a tender offer
or otherwise attempting to obtain control of us, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our stock
price.
Risks Relating to our Common Stock
There are a Large Number of Shares Being Registered for Resale and the Sale of
These Shares May Cause the Price of Our Stock to Drop.
Prior to this Offering, we had 20,849,976 shares of common stock
issued and outstanding. Of those shares, 1,963,417 are being registered for
resale. As a result, the registration of these shares may result in substantial
sales of our common stock, which could cause our stock price to drop.
Our Common Stock is Subject to the "Penny Stock" Rules of the SEC and the
Trading Market in our Securities is Limited, Which Makes Transactions in our
Stock Cumbersome and May Reduce the Value of an Investment in our Stock.
Since our common stock is not listed or quoted on any exchange or on
Nasdaq, and no other exemptions currently apply, trading in our common stock on
the Over-The-Counter Bulletin Board is subject to the "penny stock" rules of the
SEC. These rules require, among other things, that any broker engaging in a
transaction in our securities provide its customers with a risk disclosure
document, disclosure of market quotations, if any, disclosure of the
compensation of the broker and its salespersons in the transaction, and monthly
account statements showing the market values of our securities held in the
customer's accounts. The brokers must provide bid and offer quotations and
compensation information before making any purchase or sale of a penny stock and
also provide this information in the customer's confirmation. Generally, brokers
may be less willing to execute transactions in securities subject to the "penny
stock" rules. This may make it more difficult for investors to dispose of our
common stock and cause a decline in the market value of our stock.
8
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling stockholders of our company.
There will be no proceeds to us from the sale of shares of common stock in this
offering.
9
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is currently traded on the OTC Electronic Bulletin
Board under the symbol "WPCS."
The following table sets forth the range of high and low closing bid
quotations for our common stock for each quarter of the last two fiscal years,
as reported on the Bulletin Board. The quotations represent inter-dealer prices
without retail markup, markdown or commission, and may not necessarily represent
actual transactions.
PERIOD HIGH LOW
Year Ended April 30, 2003:
First Quarter............... 2.55 0.07
Second Quarter.............. 1.90 1.35
Third Quarter............... 2.08 1.05
Fourth Quarter.............. 1.95 1.11
Year Ended April 30, 2004:
First Quarter............... 1.88 0.39
Second Quarter.............. 1.73 1.02
Third Quarter .............. 1.70 0.91
Fourth Quarter.............. 1.44 0.90
.
Year Ended April 30, 2005:
First Quarter............... 1.24 0.65
Second Quarter (1).......... 0.94 0.66
--------------------
(1) As of August 12, 2004
On August 12, 2004, the closing sale price for our common shares, as
reported by the Bulletin Board, was $0.75 per share.
As of August 3, 2004, there were 20,849,976 shares of common stock
outstanding and there were approximately 85 registered holders of our common
stock.
10
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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate" and "continue," or similar words. You should
read statements that contain these words carefully because they:
o discuss our future expectations;
o contain projections of our future results of operations or of our
financial condition; and
o state other "forward-looking" information.
We believe it is important to communicate our expectations. However,
there may be events in the future that we are not able to accurately predict or
over which we have no control. The risk factors listed in this section, as well
as any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. You should
be aware that the occurrence of the events described in these risk factors could
have an adverse effect on our business, results of operations and financial
condition.
Overview
We are a project engineering company that focuses on the
implementation requirements of specialty communication systems, wireless
fidelity (WiFi) deployment and fixed wireless deployment. We provide a range of
specialty communication services including project management, site design,
structured cabling, product integration, network security, and technical
support. These projects may require the integration of multiple communication
components and engineering services in order to complete the customer's
requirements.
Significant Transactions and Events
On May 17, 2002, pursuant to the agreement and plan of merger, Phoenix
Star Ventures Inc., a publicly held corporation, acquired WPCS Holdings Inc., a
Delaware corporation, by issuing 5,500,000 shares of its common stock to
shareholders of WPCS Holdings in exchange of all the outstanding shares of WPCS
Holdings. The shareholders of WPCS Holdings, after the acquisition, owned the
majority of the combined company. Accordingly, the combination has been
accounted for as a reverse acquisition, whereby, for accounting purposes, WPCS
Holdings is the accounting acquirer and Phoenix Star Ventures is the accounting
acquiree. Concurrently with the acquisition, Phoenix Star Ventures, the parent
company, changed its name to WPCS International Incorporated.
On November 13, 2002, we entered into an agreement and completed a
merger with Invisinet, Inc. Invisinet provides wireless infrastructure services
for both WiFi applications and 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, 2004, the acquisition of Invisinet increased our revenue by
approximately $2.5 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, 2004, the
acquisition of Walker increased our revenue approximately $9.7 million as
compared to the same period in the prior year. The aggregate consideration we
paid for Walker was approximately $5,113,000. To complete the merger, all of the
issued and outstanding shares of common stock of Walker were exchanged for
aggregate merger consideration consisting of $500,000 in cash and our common
stock with a value of approximately $4,574,000, or 2,486,000 shares valued at
$1.84 per share based on the average value of our common stock as of a few days
before and after the merger was announced. Based on the net assets acquired of
Walker, we recognized goodwill of approximately $4.2 million.
12
On August 22, 2003, we acquired all of the outstanding common stock of
Clayborn Contracting Group, Inc. The acquisition of Clayborn gives us additional
expertise in engineering and deployment services for specialty communication
systems and additional wireless opportunities to pursue. For the year ended
April 30, 2004, the acquisition of Clayborn increased our revenue approximately
$4.3 million as compared to the same period in the prior year. The aggregate
consideration we paid for Clayborn was approximately $2,929,000. We acquired all
of the issued and outstanding shares of Clayborn in exchange for $900,000 cash
consideration and $61,000 in transaction costs, and 826,446 newly issued shares
of our common stock with a fair value of approximately $868,000 based on the
average value of our common stock as of a few days before and after the merger
terms were agreed to and announced. An additional $1,100,000 is due by September
30, 2007, payable in quarterly distributions, by payment to the Clayborn
shareholders of 50% of the quarterly post tax profits of Clayborn. Based on the
net assets acquired of Clayborn, we recognized goodwill of approximately $1.8
million.
On April 2, 2004, we acquired all of the issued and outstanding common
stock of Heinz Corporation. Heinz is a St. Louis, Missouri based provider of
in-building wireless infrastructure services for both cellular and WiFi
applications including consulting, integration and installation services for
wireless infrastructure. The acquisition of Heinz gives us additional project
engineering expertise for wireless infrastructure services, broadens our
customer base, and expands our geographical presence in the Midwest. We acquired
all of the issued and outstanding shares of Heinz for $1,000,000, as follows:
(1) $700,000 of our common stock, based on the closing price of our common stock
on March 30, 2004 of $0.98 per share, for an aggregate of 714,286 newly issued
shares of our common stock and (2) $300,000 total cash consideration, of which
$100,000 was paid at closing and a $200,000 non-interest bearing promissory
note. Of the $200,000, $75,000 is payable on the first and second anniversaries
of the closing date and $50,000 is payable on the third anniversary of the
closing date. Based on the preliminary information currently available, we
expect to recognize goodwill of approximately $1,000,000. Upon completion of a
formal purchase price allocation there may be a decrease in the amount assigned
to goodwill and a corresponding increase in tangible or other intangible assets.
Results of Operations
Management currently considers the following events, trends and
uncertainties to be important to understand its results of operations and
financial condition:
o For the year ended April 30, 2004, revenue was approximately $22.1 million
compared to $5.4 million for the same period a year ago. The increase in
revenue for the year was primarily attributed to strategic acquisitions of
approximately $13.6 million and secondarily from organic growth of
approximately $3.1 million.
o As a result of the acquisitions of Invisinet on November 13, 2002 and
Walker on December 30, 2002, we experienced significant growth in our
overall business and commenced operations in two segments, wireless
infrastructure services and specialty communication systems.
o With the acquisition of Clayborn in the second quarter of fiscal 2004, and
Heinz in the fourth quarter of fiscal 2004, we experienced additional
expansion of the specialty communication and wireless infrastructure
segments, respectively.
o As of April 30, 2004, the specialty communication segment represents
approximately 79% of total revenue, and wireless infrastructure services
represent approximately 21% of total revenue.
o Furthermore, we plan to evaluate additional acquisition opportunities in
fiscal 2005 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 communication markets.
o As of April 30, 2004, our backlog has increased to approximately $16.5
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.
13
o Our selling, general and administrative expenses decreased as a percentage
of revenue for the year ended April 30, 2004, as compared to the same
period in the prior year.
Fiscal Year ended April 30, 2004 Compared to Fiscal Year Ended April 30, 2003
Consolidated results for the years ended April 30, 2004 and 2003 were
as follows.
Year Ended
April 30,
2004 2003
-------------- --------------
REVENUE $22,076,246 $5,422,858
-------------- --------------
COSTS AND EXPENSES:
Cost of revenue 16,076,155 73% 3,768,495 70%
Selling, general and administrative expenses 5,560,583 25% 1,860,827 34%
Provision for doubtful accounts 91,137 0% 38,779 1%
Depreciation and amortization 382,510 2% 116,501 2%
-------------- --------------
Total costs and expense 22,110,385 100% 5,784,602 107%
-------------- --------------
OPERATING LOSS (34,139) 0% (361,744) -7%
OTHER (INCOME) EXPENSE:
Interest expense, net 14,048 0% - 0%
-------------- --------------
LOSS BEFORE PROVISION FOR INCOME TAXES (48,187) 0% (361,744) -7%
Income tax provision (76,000) 0% (19,550) 0%
-------------- --------------
NET LOSS (124,187) -1% (381,294) -7%
Imputed dividends accreted on Convertible Series B
Preferred stock
- 0% (173,000) -3%
-------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
($124,187) -1% ($554,294) -10%
============== ==============
Revenue
We generate our revenue by providing project engineering and
deployment services for specialty communication systems, wireless
fidelity (WiFi) and fixed wireless systems. These projects may require
the integration of multiple communication components and engineering
services in order to complete the customer's requirements. We record
profits on these projects on a percentage-of-completion basis on the
cost-to-cost method. Contracts in process are valued at cost plus
accrued profits less earned revenues and progress payments on
uncompleted contracts.
Revenue was approximately $22,076,000 and $5,423,000 for the
years ended April 30, 2004 and 2003, respectively. The primary reasons
for the increase in revenue comparing 2004 to 2003 are attributable to
the full year effect of the Invisinet and Walker acquisitions and the
two acquisitions we made in August 2003 of Clayborn and April 2004 of
Heinz. These four acquisitions in the aggregate accounted for
approximately $13.6 million of the increase in revenue over the prior
year. Approximately $3.1 million of the increase in revenue over the
prior year was due to internal growth.
14
Total revenue from the specialty communication segment for the year
ended April 30, 2004 was approximately $17.5 million or 79% of total revenue.
Wireless infrastructure segment revenue for the year ended April 30, 2004 was
approximately $4.6 million or 21% 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 $16.1 million or 72.8% of
revenue for the year ended April 30, 2004, compared to $3.8 million or 69.5% for
the year ended April 30, 2003. 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, Walker, Clayborn and Heinz. The increase in cost of revenue as a
percentage of revenue is due to the revenue mix of the recent acquisitions.
Selling, general and administrative expenses
For the year ended April 30, 2004, selling, general and administrative
expenses were $5.6 million, or 25.2% of revenue, compared to $1.9 million, or
34.3% of revenue for the year ended April 30, 2003. The percentage decrease is
due to the management of our cost structure as we leverage our incremental
revenue dollars in fiscal 2004. For the year ended April 30, 2004, included in
selling, general and administrative expenses are $2.1 million for salaries,
commissions and payroll taxes. The increase in salaries and payroll taxes is due
to the increase in headcount as a result of the acquisition of Invisinet,
Walker, Clayborn and Heinz. In addition, Walker employs union employees for whom
it incurred $1.2 million in union benefits during the year. Professional fees
were $566,000, with the increase due primarily to an increase in investor
relations, accounting and legal fees and also includes $209,000 of non-cash
charges for the grant of stock options to non-employees. Insurance costs were
$730,000 and rent for office facilities was $250,000. Other selling, general and
administrative expenses totaled $792,000. For the year ended April 30, 2004,
total selling, general and administrative expenses for the specialty
communication segment were $3.9 million and $944,000 for the wireless
infrastructure segment.
For the year ended April 30, 2003, included in the selling, general
and administrative expenses are $714,000 paid for salaries, commissions and
payroll taxes, $374,000 for professional fees and $239,000 in union benefits.
Insurance costs amounted to $146,000 and rent for our office facilities amounted
to $100,000. Other selling, general and administrative expenses amounted to
$288,000. For the year ended April 30, 2003, total selling, general and
administrative expenses for the specialty communication segment were $967,000
and $651,000 for the wireless infrastructure segment.
For the years ended April 30, 2004 and 2003, the provision for
doubtful accounts was approximately $91,000 and $39,000, respectively. The
increase in the provision is due to the internal growth in accounts receivable
between fiscal years. The provision represents accounts receivable which we
consider uncollectible, based on a number of factors, including length of time a
customer account is past due, previous loss history, and the customer's ability
to pay its obligations.
Depreciation and amortization
Depreciation for the year ended April 30, 2004 was $228,000 as
compared to $75,000 for the prior year. The increase is due to the acquisition
of fixed assets on acquiring Invisinet, Walker, Clayborn and Heinz. The
amortization expense for the year ended April 30, 2004 was $154,000 as compared
to $41,000 in the prior year. We acquired customer lists from Invisinet, Walker
and Clayborn 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 $124,000 for the year ended
April 30, 2004. The net loss included a non-recurring non-cash charge of
approximately $209,000 for the grant of stock options to certain consultants to
purchase 1,452,000 shares of our common stock. In accordance with SFAS No. 123,
stock options granted to non-employees are required to be expensed based on the
fair value of the equity instruments or fair value of the consideration
received. The net loss also included a provision for income taxes of $76,000,
which includes income tax expenses to provide for state income taxes and certain
book-to-tax permanent differences, offset by an income tax benefit. The benefit
resulted from the reversals of certain temporary differences not being currently
taxable as the taxable loss for the current year was in excess of the reversals.
The resulting net operating losses have been fully reserved as the ultimate
realization of these losses is certain.
15
For the year ended April 30, 2003, we incurred a net loss of
approximately $381,000.
Liquidity and capital resources
At April 30, 2004, we had working capital of approximately $2.4
million, which consisted of current assets of approximately $10.4 million and
current liabilities of $8.0 million. Current assets included $2.0 million in
cash and cash equivalents, $8.0 million in accounts receivable and costs and
estimated earnings in excess of billings on uncompleted contracts, $105,000 in
inventories, $264,000 in prepaid expenses, and $60,000 in deferred income tax
assets. Current liabilities included $551,000 due on the lines of credit,
$97,000 in current lease obligations and equipment loans payable, $6.9 million
in accounts payable, accrued expenses and billings in excess of costs and
estimated earnings on uncompleted contracts, $88,000 payable to shareholders of
the Company, $224,000 in income taxes payable and $196,000 in current portion of
deferred tax liabilities. The increase in accounts receivable at April 30, 2004
compared to April 30, 2003 is due primarily to recent acquisitions and
secondarily by internal growth.
Operating activities provided $937,000 in cash during the year ended
April 30, 2004. This was mainly comprised of a $124,000 net loss for the year
ended April 30, 2004, offset by $464,000 in net non-cash charges, $2.4 million
net increase in accounts receivable, $1.4 million increase in costs and
estimated earnings in excess of billings on uncompleted contracts, $2.4 million
increase in accounts payable and accrued expenses, $1.9 million increase in
billings in excess of costs and estimated earnings on uncompleted contracts,
$200,000 increase in income taxes payable, and $63,000 increase in other assets.
Our investing activities utilized approximately $1.4 million in cash,
which consisted of $900,000 paid for the acquisition of Clayborn and $61,000 of
related acquisition costs, offset by $239,000 of cash received; and $100,000
paid for the acquisition of Heinz and $17,000 of related acquisition costs,
offset by $8,000 of cash received. We paid $485,000 in earn-out provisions
related to the Walker acquisition and an additional $12,000 in acquisition
costs. Additionally, $86,000 was paid for property and equipment additions.
Our financing activities generated cash of approximately $2.3 million
during the year ended April 30, 2004. This was comprised primarily of net
proceeds of $2.2 million received from the completion of the sale of our common
stock in a private placement. We sold 100 units (the "Units") to accredited
investors at a price of $25,000 per Unit (the "Offering"), or an offering of
$2,500,000. Each Unit consisted of (i) 44,444 shares of our common stock, and
(ii) warrants to purchase 44,444 shares of common stock, exercisable for a
period of three years at an exercise price of $0.90 per share (the "Warrants").
The Warrants may be redeemed in whole or in part at the option of the Company
for $0.01, if the closing price of our common stock is at least $1.25 per share
on average for 10 consecutive trading days, ending not earlier than 30 days
before the Warrants are called for redemption. If we decide to redeem the
Warrants, we will provide written notice to each warrant holder that the
Warrants will be redeemed at a price of $0.01 per warrant on a fixed date, not
less than thirty days from mailing of the notice. Warrant holders would have
until the end of business on the day before redemption to exercise their
Warrants at an exercise price of $0.90. Since we cannot redeem Warrants until
our stock price is trading at $1.25, which is higher than the Warrant exercise
price of $0.90, if we decide to redeem the Warrants, we believe most, if not
all, warrant holders will elect to exercise their warrants.
In connection with the Offering, the placement agent was issued
warrants to purchase 665,000 shares of our common stock at an exercise price of
$0.75 per share. Other financing activities included borrowings on the lines of
credit of $461,000, repayment of advances from officers of $100,000, net
repayment of equipment notes of approximately $237,000 related primarily to the
acquisitions of Clayborn and Heinz, and payment of capital lease obligations of
approximately $2,000.
Our capital requirements depend on numerous factors, including the
market for our services, the resources we devote to developing, marketing,
selling and supporting our products and services, the timing and extent of
establishing additional markets and other factors. To address our working
16
capital needs and growth in our revenue and customer base, on October 29, 2003,
Walker obtained a revolving line of credit facility with a commercial bank in
the amount of $750,000. The borrowing limit is up to 70% of eligible Walker
accounts receivable. As of April 30, 2004, the borrowing base was $750,000 and
the outstanding balance was $531,000. The line of credit is collateralized by
all of Walker's accounts receivable, inventory and equipment, and bears interest
at the Wall Street Journal Prime Index Rate plus 1.5% (5.50% as of April 30,
2004). In addition, the Company and certain executive officers of ours have
personally guaranteed this line of credit facility. This line is subject to
annual renewal and matures on November 5, 2004. In connection with the
acquisition of Heinz, we assumed a revolving line of credit facility with a
commercial bank in the amount of $200,000. As of April 30, 2004, the borrowing
base was $200,000 and the outstanding balance was $20,000. The line of credit is
collateralized by real estate property owned by the President of Heinz and his
personal guarantee, and bears interest at 4.0% as of April 30, 2004. We
indemnified the President of Heinz for any personal liability arising from this
line of credit facility. This line is subject to annual renewal and matures on
November 16, 2004.
We also anticipate obtaining a working capital line of credit, to
assist with working capital needs as our business and customer base expands,
however, we make no assurance that we will be able to obtain a line of credit on
acceptable terms, or at all.
At April 30, 2004, we had cash and cash equivalents of $1,985,000, and
for the year ended April 30, 2004, cash provided from operations was $937,000.
We have $950,000 in revolving lines of credit available. 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 expected payment of quarterly distributions of post tax profits to
Clayborn shareholders for the next twelve months. The total distribution to
Clayborn shareholders is $1,100,000, which is due by September 30, 2007. Our
future operating results may be affected by a number of factors including our
success in bidding on future contracts and our continued ability to manage
controllable costs effectively. To the extent we grow by future acquisitions
that involve consideration other than stock, our cash requirements may increase.
We will continue to explore opportunities to raise additional funds on
acceptable terms for a number of uses. We may not be able to obtain additional
funds on acceptable terms, or at all. Additional capital resources would be
devoted to search for, investigate and potentially acquire new companies that
have a strategic fit. In connection with a potential acquisition, we would also
expect to issue additional common stock equity or convertible debt securities,
which may result in additional dilution to our shareholders.
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.
We believe that given current facts and circumstances, it is unlikely
that applying any other reasonable judgments or estimate methodologies would
cause a material effect on the Company's consolidated results of operations,
financial position or liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
Use of Estimates
In preparing financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. The most significant estimates relate to estimation of
percentage of completion on uncompleted contracts, valuation of inventory,
allowance for doubtful accounts and estimated life of customer lists.
17
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:
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
condition
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
Our evaluation includes an analysis of estimated future discounted net
cash flows expected to be generated by the assets over their remaining estimated
useful lives. If the estimated future discounted 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 2004 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 Invisinet and Heinz within our
wireless infrastructure segment and Walker and Clayborn within our specialty
communications segment. Our estimates are consistent with the plans and
estimates that we are using to manage the underlying businesses. If we fail to
deliver products and services for these business units, or market conditions for
these businesses fail to improve, our revenue and cost forecasts may not be
achieved and we may incur charges for goodwill impairment, which could be
significant and could have a material adverse effect on our net equity and
results of operations.
Deferred Income Taxes
We determine deferred tax liabilities and assets at the end of each
period based on the future tax consequences that can be attributed to net
18
operating loss and credit carryovers and differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, using the tax rate expected to be in effect when the taxes
are actually paid or recovered. The recognition of deferred tax assets is
reduced by a valuation allowance if it is more likely than not that the tax
benefits will not be realized. The ultimate realization of deferred tax assets
depends upon the generation of future taxable income during the periods in which
those temporary differences become deductible.
We consider past performance, expected future taxable income and
prudent and feasible tax planning strategies in assessing the amount of the
valuation allowance. Our forecast of expected future taxable income is based
over such future periods that we believe can be reasonably estimated. Changes in
market conditions that differ materially from our current expectations and
changes in future tax laws in the U.S. may cause us to change our judgments of
future taxable income. These changes, if any, may require us to adjust our
existing tax valuation allowance higher or lower than the amount we have
recorded.
Revenue Recognition
We generate our revenue by providing project engineering and
installation services for specialty communication systems, including wireless
fidelity (WiFi) and fixed wireless deployment. We provide a range of specialty
communication services including project management, site design, structured
cabling, product integration, network security and technical support. These
projects may require the integration of multiple communication components and
engineering services in order to complete the project.
We record profits on these projects on a percentage-of-completion
basis on the cost-to-cost method. Contracts in process are valued at cost plus
accrued profits less earned revenues and progress payments on uncompleted
contracts. Contracts are generally considered substantially complete when
engineering is completed and/or site construction is completed. We include in
operations pass-through revenue and costs on cost-plus contracts, which are
customer-reimbursable materials, equipment and subcontractor costs, when we
determine that we are responsible for the engineering specification, procurement
and management of such cost components on behalf of the customer.
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
did not 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 No. 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
19
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 adoption of FIN No. 46 did not have a material effect on our
consolidated financial position, results of operations or cash flows.
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 changes the accounting for certain
financial instruments that, under previous guidance, issuers could account for
as equity. The new statement requires that those instruments be classified as
liabilities in statements of financial position. Most of the guidance in SFAS
No. 150 is effective for all financial instruments entered into or modified
after May 31, 2003. The adoption of this statement did not have a material
impact on our consolidated financial position, results of operations or cash
flows.
20
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 provides wireless infrastructure services
for both WiFi applications and 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, 2004, the acquisition of Invisinet increased sales by
approximately $2.5 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, 2004, the
acquisition of Walker increased sales by approximately $9.7 million as compared
to the same period in the prior year. The aggregate consideration we paid for
Walker was approximately $5,113,000. To complete the merger, all of the issued
and outstanding shares of common stock of Walker were exchanged for aggregate
merger consideration consisting of $500,000 in cash and our common stock with a
value of approximately $4,574,000, or 2,486,000 shares valued at $1.84 per share
based on the average value of our common stock as of a few days before and after
the merger was announced. Based on the net assets acquired of Walker, we
recognized goodwill of approximately $4.2 million.
On August 22, 2003, we acquired all of the outstanding common stock of
Clayborn Contracting Group, Inc. The acquisition of Clayborn gives us additional
expertise in engineering and deployment services for specialty communication
systems and additional wireless opportunities to pursue. For the year ended
April 30, 2004, the acquisition of Clayborn increased our revenue approximately
$4.3 million as compared to the same period in the prior year. The aggregate
consideration we paid for Clayborn was approximately $2,929,000. We acquired all
of the issued and outstanding shares of Clayborn in exchange for $900,000 cash
consideration and $61,000 in transaction costs, and 826,446 newly issued shares
of our common stock with a fair value of approximately $868,000 based on the
average value of our common stock as of a few days before and after the merger
terms were agreed to and announced. An additional $1,100,000 is due by September
30, 2007, payable in quarterly distributions, by payment to the Clayborn
shareholders of 50% of the quarterly post tax profits of Clayborn. Based on the
net assets acquired of Clayborn, we recognized goodwill of approximately $1.8
million.
On April 2, 2004, we acquired all of the issued and outstanding common
stock of Heinz Corporation. Heinz is a St. Louis, Missouri based provider of
in-building wireless infrastructure services for both cellular and WiFi
applications including consulting, integration and installation services for
wireless infrastructure. The acquisition of Heinz gives us additional project
engineering expertise for wireless infrastructure services, broadens our
customer base, and expands our geographical presence in the Midwest. We acquired
all of the issued and outstanding shares of Heinz for $1,000,000, as follows:
(1) $700,000 of our common stock, based on the closing price of our common stock
on March 30, 2004 of $0.98 per share, for an aggregate of 714,286 newly issued
shares of our common stock and (2) $300,000 total cash consideration, of which
21
$100,000 was paid at closing and a $200,000 non-interest bearing promissory
note. Of the $200,000, $75,000 is payable on the first and second anniversaries
of the closing date and $50,000 is payable on the third anniversary of the
closing date. Based on the preliminary information currently available, we
expect to recognize goodwill of approximately $1,000,000. Upon completion of a
formal purchase price allocation there may be a decrease in the amount assigned
to goodwill and a corresponding increase in tangible or other intangible assets.
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, wireless distribution systems, 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 79%
of total sales.
Wireless Infrastructure Services
Connecting a company's network is critical in achieving the timely
flow of information. Today, a company's network expands beyond its existing
headquarters to remote offices and remote users. The networking applications are
larger and the demand for high-speed connectivity to move data back and forth is
growing dramatically. Until recently, a company's only alternative in obtaining
high-speed connectivity was to contact the telephone company and have a
high-speed landline service installed so that connectivity could be achieved
between its locations. The issue today is that these high-speed landlines take
too much time to install, are not available in all locations, do not solve
remote application usage and are costly to use on a monthly basis. Expensive and
inflexible land line services are moving users toward cost effective high-speed
broadband wireless infrastructure services.
Wireless infrastructure services 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 21%
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
22
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, 2004, we had a backlog of
unfilled orders believed to be firm of approximately $16.5 million, representing
the uncompleted portion of services to be performed under job-specific contracts
or purchase orders. We expect these projects to be completed and the backlog
fully converted to revenue within the next twelve months.
Competition
The markets in the specialty communication systems and wireless
infrastructure services segments are relatively competitive and fragmented and
are 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 competitors. Overall, we believe that there are no dominant
competitors in 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.
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.
Management Strategy
In anticipation of internal growth and future acquisitions, we will
23
organize resources to manage our development effectively. Our Chief Executive
Officer is responsible for strategic direction, operations, corporate governance
and building shareholder value.
Our Chief Financial Officer is responsible for overall financial
management, financial reporting and corporate administration. An Executive VP,
who is also the strategic development officer, is focused on strategic issues
such as acquisition candidates, investor relations, corporate marketing and
major account opportunities.
Our other Executive VP's are 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 April 30, 2004, we employed 175 full time employees, of whom 135
are project engineers, 16 are project managers, 19 are in administration and 5
are executives. A majority of the project engineers is represented by the
International Brotherhood of Electrical Workers. We also have non-union
employees. We believe our relations with all of our employees are good.
Properties
Our principal executive offices are located in approximately 2,000
square feet of office space in Exton, Pennsylvania. The lease for such space
expires in November 2004. The aggregate annual base rental for this space is
$28,000.
In conjunction with acquisitions that occurred in fiscal 2003 and
2004, we assumed the operating leases of additional office space in the
following locations:
Location Lease Expiration Date Minimum Annual Rental
- -------------------------- --------------------- ---------------------
Fairfield, California (a) February 28, 2011 $56,000
Rocklin, California January 31, 2006 $13,000
San Leandro, California July 31, 2006 $13,000
Denville, New Jersey (b) month-to-month $11,000
Auburn, California (b) month-to-month $64,440
St. Louis, Missouri (c) August 31, 2004 $49,124
(a) The lease for our Fairfield, California location is with trusts, of which
certain officers and shareholders are the trustees.
(b) The leases for our Denville, New Jersey and Auburn, California locations are
month to month; therefore the minimum annual rental price assumes we rent the
property for the entire year.
(c) The lease for our St. Louis, Missouri location expires within the fiscal
year; 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.
Legal Proceedings
From time to time, we may become involved in various lawsuits and
legal proceedings which arise in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these
or other matters may arise from time to time that may harm our business. We are
currently not aware of any such legal proceedings or claims that we believe will
have, individually or in the aggregate, a material adverse affect on our
business, financial condition or operating results.
24
MANAGEMENT
Directors And Executive Officers
Our directors, executive officers and key executives, and their ages as of the
date hereof, are as follows.
--------------------------------- ------------ ------------------------------------------------
NAME AGE POSITION
--------------------------------- ------------ ------------------------------------------------
Andrew Hidalgo 48 Chairman, Chief Executive Officer and Director
--------------------------------- ------------ ------------------------------------------------
Donald Walker 41 Executive Vice President
--------------------------------- ------------ ------------------------------------------------
E.J. von Schaumburg 37 Executive Vice President
--------------------------------- ------------ ------------------------------------------------
James Heinz 42 Executive Vice President
--------------------------------- ------------ ------------------------------------------------
Joseph Heater 41 Chief Financial Officer
--------------------------------- ------------ ------------------------------------------------
Norm Dumbroff 43 Director
--------------------------------- ------------ ------------------------------------------------
Neil Hebenton 48 Director
--------------------------------- ------------ ------------------------------------------------
Gary Walker 49 Director
--------------------------------- ------------ ------------------------------------------------
William Whitehead 48 Director
--------------------------------- ------------ ------------------------------------------------
Set forth below is a biographical description of each director and senior
executive officer of WPCS based on information supplied by each of them.
Andrew Hidalgo, Chairman and Chief Executive Officer
Mr. Hidalgo became our Chairman of the Board and Chief Executive
Officer in June 2002. He is responsible for our operations and direction. From
September 2000 until June 2002, Mr. Hidalgo was President of Wireless
Professional Communication Services, Inc. From November 1999 to September 2000,
Mr. Hidalgo was Chairman and Chief Executive Officer of CommSpan Incorporated.
From December 1997 to November 1999, Mr. Hidalgo was Senior Vice President at
Applied Digital Solutions, a communications infrastructure company, where he was
responsible for implementing a strategic direction involving acquisitions,
business integration and sales development while managing overall operations for
the company's five core business divisions and 25 subsidiary companies. Prior to
that, Mr. Hidalgo held various positions in operations, sales and marketing with
the 3M Company, Schlumberger and General Electric. He attended Fairfield
University in Fairfield, Connecticut where he majored in Marketing and Finance.
Donald Walker, Executive Vice President
Mr. Walker has been Executive Vice President since December 2002. Mr.
Walker was the founder of Walker Comm, Inc. and its Chief Executive Officer from
November 1996 until it's acquisition by WPCS in December 2002. He has over
twenty-one years of project management experience and is a Registered
Communications Distribution Designer (RCDD). In addition, Mr. Walker is a
committee member with the National Electrical Contractors Association (NECA).
Mr. Walker began his project engineer career at General Dynamics where he
developed his engineering skills while managing large projects and coordinating
technical staff.
E.J. von Schaumburg, Executive Vice President
Mr. von Schaumburg 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 February 1989 until July 2000, Mr. von Schaumburg worked
for eight years as a Business Development Manager for AT&T and three years as a
divisional CFO for Lucent Technologies. Mr. von Schaumburg holds a B.S. in
Finance from St. Bonaventure University and an M.B.A. from Fairleigh Dickinson
University.
25
James Heinz, Executive Vice President
Mr. Heinz has been Executive Vice President since April 2004. Mr.
Heinz was the founder of Heinz Corporation and its President from January 1994
until its acquisition by WPCS in April 2004. He has over twenty years of project
engineering experience in civil and commercial construction projects with over
ten years specifically dedicated to wireless infrastructure services. He is
Chairman of the Construction Advisory Board for Southern Illinois University and
a general advisory member of the School of Engineering. He holds a B.S. degree
in construction management from Southern Illinois University.
Joseph A. Heater, Chief Financial Officer
Mr. Heater has been Chief Financial Officer since July 2003. From
November 2001 to June 2003, Mr. Heater was the Controller for Locus
Pharmaceuticals, Inc., a development stage pharmaceutical company. Prior to
that, from April 1999 to September 2001, Mr. Heater was Director of Finance and
Corporate Controller for esavio Corporation, an information technology
consulting company providing application development, network design,
integration, and managed services. Prior to that, from March 1995 to November
1998, Mr. Heater was Director of Financial Planning and Assistant Corporate
Controller for Airgas, Inc. Mr. Heater holds a B.S. from the University of
Nebraska and an M.B.A. from Villanova University.
Directors:
Norm Dumbroff
Mr. Dumbroff became a Director of WPCS in 2002. He has been the Chief
Executive Officer of Wav Incorporated since April 1990, a distributor of
wireless products in North America. Prior to Wav Incorporated, Mr. Dumbroff was
an engineer for Hughes Aircraft. He holds a B.S. degree in Computer Science from
Albright College.
Neil Hebenton
Mr. Hebenton became a director of WPCS in October 2002. Since February
2002, he has been Senior Director, Business Development, for Perceptive
Informatics, Inc. (a subsidiary of PAREXEL International Corp.), a company
offering clinical trial data management software applications to pharmaceutical
and biotechnology companies. From January 1998 to January 2002, he was the
Managing Director for the U.K. based FW Pharma Systems, a multi-million dollar
application software company serving the pharmaceutical and biotechnology
sectors. Mr. Hebenton has held a variety of operational, scientific and
marketing positions in Europe with Bull Information Systems (BULP-Paris,
Frankfurt, Zurich) and Phillips Information Systems. He received his B.S. in
Mathematics from the University of Edinburgh, Scotland.
Gary Walker
Mr. Walker has been a director of WPCS since December 2002. He is
currently the president of the Walker Comm subsidiary for WPCS International, a
position he has held since November 1996. Prior to his involvement at Walker
Comm, Mr. Walker had a distinguished career with the U.S. Navy and also held an
elected political position in Fairfield, California. He holds a B.A. in Business
Management from St. Mary's College in Moraga, California.
William Whitehead
Mr. Whitehead became a director of WPCS in October 2002. Since October
1998, he has been the Chief Financial Officer for Neutronis Incorporated, a
multi-million dollar process and safety systems manufacturer. Mr. Whitehead has
held a variety of financial management positions with Deloitte & Touche and was
Division Controller for Graphic Packaging Corporation from April 1990 to March
1998. After attending West Point, Mr. Whitehead received a B.S. in Accounting
from the Wharton School at the University of Pennsylvania and received his
M.B.A. from the Kellogg Graduate School at Northwestern University.
Board of Directors
26
All of our directors hold office until the next annual meeting of
stockholders and the election and qualification of their successors. Our
executive officers are elected annually by the Board of Directors to hold office
until the first meeting of the Board following the next annual meeting of
stockholders and until their successors are chosen and qualified.
Director and Executive Compensation
Directors serve without cash compensation and without other fixed
remuneration. Directors are entitled to receive stock options under our 2002
Stock Option as determined by the Board of Directors. We reimburse our directors
for expenses incurred in connection with attending Board meetings.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers and
directors and persons who own more than 10% of a registered class of our equity
securities to file reports of their ownership thereof and changes in that
ownership with the Securities and Exchange Commission and the National
Association of Securities Dealers, Inc. Executive officers, directors and
greater than 10% stockholders are required by SEC regulations to furnish us with
copies of all such reports they file.
Based solely upon a review of Forms 3, 4 and 5, and amendments
thereto, furnished to us during fiscal year 2004, we are not aware of any
director, officer or beneficial owner of more than ten percent of our Common
Stock that failed to file reports required by Section 16(a) of the Securities
Exchange Act of 1934 on a timely basis during fiscal year 2004.
27
EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation
received during the fiscal years ended April 30, 2004, 2003, and 2002 by the
Company's Chief Executive Officer and each of the Company's four other most
highly compensated executive officers based on salary and bonus earned during
the 2004 fiscal year:
Summary Compensation Table
Annual Compensation Long Term Compensation
--------------------------------------- --------------------------------------------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Awards Options (5) Payouts Compensation($)
- ------------------------------------ ------ --------- -------- ---------------- ----------- -------------- ---------- -------------
Andrew Hidalgo
Chairman, Chief Executive Officer 2004 154,400 17,000 - - - - -
and Director 2003 141,000 - - - - - -
- ------------------------------------ ------ --------- -------- ---------------- ----------- -------------- ---------- -------------
Stephen C. Jackson
President 2002 36,000 - - - - - -
- ------------------------------------ ------ --------- -------- ---------------- ----------- -------------- ---------- -------------
Donald Walker
Executive Vice President (1) 2004 140,000 26,962 - - 200,000 - -
2003 41,160 2,669 - - - - -
- ------------------------------------ ------ --------- -------- ---------------- ----------- -------------- ---------- -------------
Gary Walker
President-Walker and Director (2) 2004 140,000 26,962 - - 200,000 - -
2003 42,333 2,669 - - - - -
- ------------------------------------ ------ --------- -------- ---------------- ----------- -------------- ---------- -------------
E.J. von Schaumburg
Executive Vice President (3) 2004 120,000 51,000 - - 400,000 - -
- ------------------------------------ ------ --------- -------- ---------------- ----------- -------------- ---------- -------------
2003 55,000 23,375 - - - - -
Joseph Heater
Chief Financial Officer (4) 2004 95,500 8,000 - - 400,000 - -
- ------------------------------------ ------ --------- -------- ---------------- ----------- -------------- ---------- -------------
(1) Mr. Walker has served as Executive Vice President since December 30,
2002.
(2) Mr. Walker has served as President, Walker and Director since December
30, 2002.
(3) Mr. von Schaumburg has served as Executive Vice President since
November 13, 2002.
(4) Mr. Heater has served as Chief Financial Officer since July 15, 2003.
(5) The number of securities under options granted reflects the number of
WPCS shares that may be purchased upon the exercise of options. We do
not have any outstanding stock appreciation rights.
Employment Agreements
Contract with Andrew Hidalgo
On February 1, 2004, 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 $168,000 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
28
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 February 1, 2004, the Company entered into a three-year employment
contract with the Chief Financial Officer. The base salary under the agreement
is $132,000 per annum, plus benefits.
Contract with James Heinz
On April 2, 2004, the Company entered into a three-year employment
contract with James Heinz, the President of Heinz, who is also an Executive Vice
President of the Company. The base salary under the agreement is $140,000, per
annum, plus benefits.
Employee Stock Incentive Plan
The 2002 Stock Option Plan was adopted by the board of directors in
September 2002 and increased from 500,000 to 5,000,000 options on March 3, 2003,
and approved by the shareholders in April 2004. The Plan provides for the
issuance of up to 5,000,000 options.
Option Grants to the Named Executive Officers and Directors as of July 31, 2004:
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Grant Exercise
Name of Beneficial Owner Title Date Price Options
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Neil Hebenton Director 10/1/02 $1.66 25,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
William Whitehead Director 3/25/03 $1.35 50,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
E.J. von Schaumburg Executive Vice President 5/27/03 $0.45 300,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Donald Walker Executive Vice President 6/3/03 $0.75 200,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Gary Walker Director 6/3/03 $0.75 200,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
William Whitehead Director 6/3/03 $0.75 25,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Joseph Heater Chief Financial Officer 6/12/03 $0.75 250,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Joseph Heater Chief Financial Officer 8/6/03 $1.07 150,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
E.J. von Schaumburg Executive Vice President 12/10/03 $1.00 100,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Norm Dumbroff Director 3/31/04 $0.97 25,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
Neil Hebenton Director 3/31/04 $0.97 25,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
William Whitehead Director 3/31/04 $0.97 25,000
- -------------------------------------- -------------------------------- ------------ ------------ ---------------------
1,375,000
- -------------------------------------- -------------------------------- ------------ ------------ =====================
Under the plan, options may be granted which are intended to qualify
as incentive stock options, or ISOs, under Section 422 of the Internal Revenue
Code of 1986, as amended, or which are not intended to qualify as incentive
stock options thereunder, or Non-ISOs. The 2002 Stock Option Plan and the right
of participants to make purchases thereunder are intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code of
1986, as amended. The 2002 Stock Option Plan is not a qualified deferred
compensation plan under Section 401(a) of the Internal Revenue Code and is not
subject to the provisions of the Employee Retirement Income Security Act of
1974.
29
Purpose
The primary purpose of the 2002 Stock Option Plan is to attract and
retain the best available personnel for us in order to promote the success of
our business and to facilitate the ownership of our stock by employees. The
ability of a company to offer a generous stock option program has now become a
standard feature in the industry in which we operates.
Administration
The 2002 Stock Option Plan is administered by our board of directors,
as the board of directors may be composed from time to time. All questions of
interpretation of the 2002 Stock Option Plan are determined by the board, and
its decisions are final and binding upon all participants. Any determination by
a majority of the members of the board of directors at any meeting, or by
written consent in lieu of a meeting, shall be deemed to have been made by the
whole board of directors.
Notwithstanding the foregoing, the board of directors may at any time,
or from time to time, appoint a committee of at least two members of the board
of directors, and delegate to the committee the authority of the board of
directors to administer the plan. Upon such appointment and delegation, the
committee shall have all the powers, privileges and duties of the board of
directors, and shall be substituted for the board of directors, in the
administration of the plan, subject to certain limitations.
Members of the board of directors who are eligible employees are
permitted to participate in the 2002 Stock Option Plan, provided that any such
eligible member may not vote on any matter affecting the administration of the
2002 Stock Option Plan or the grant of any option pursuant to it, or serve on a
committee appointed to administer the 2002 Stock Option Plan. In the event that
any member of the board of directors is at any time not a "disinterested
person", as defined in Rule 16b-3(c)(3)(i) promulgated pursuant to the
Securities Exchange Act of 1934, the plan shall not be administered by the board
of directors, and may only by administered by a committee, all the members of
which are disinterested persons, as so defined.
Eligibility
Under the 2002 Stock Option Plan, options may be granted to key
employees, officers, directors or consultants of ours, as provided in the 2002
Stock Option Plan.
Terms Of Options
The term of each option granted under the plan shall be contained in a
stock option agreement between us and the optionee and such terms shall be
determined by the board of directors consistent with the provisions of the plan,
including the following:
(a) Purchase Price. The purchase price of the common shares subject to
each ISO shall not be less than the fair market value, or in the case of the
grant of an ISO to a principal stockholder, not less that 110% of fair market
value of such common shares at the time such option is granted. The purchase
price of the common shares subject to each Non-ISO shall be determined at the
time such option is granted, but in no case less than 85% of the fair market
value of such common shares at the time such option is granted.
(b) Vesting. The dates on which each option (or portion thereof) shall
be exercisable and the conditions precedent to such exercise, if any, shall be
fixed by the board of directors, in its discretion, at the time such option is
granted.
(c) Expiration. The expiration of each option shall be fixed by the
board of directors, in its discretion, at the time such option is granted;
however, unless otherwise determined by the board of directors at the time such
option is granted, an option shall be exercisable for ten (10) years after the
date on which it was granted (the "Grant Date"). Each option shall be subject to
earlier termination as expressly provided in the 2002 Stock Option Plan or as
determined by the board of directors, in its discretion, at the time such option
is granted.
30
(d) Transferability. No option shall be transferable, except by will
or the laws of descent and distribution, and any option may be exercised during
the lifetime of the optionee only by him. No option granted under the plan shall
be subject to execution, attachment or other process.
(e) Option Adjustments. The aggregate number and class of shares as to
which options may be granted under the plan, the number and class shares covered
by each outstanding option and the exercise price per share thereof (but not the
total price), and all such options, shall each be proportionately adjusted for
any increase decrease in the number of issued common shares resulting from
split-up spin-off or consolidation of shares or any like capital adjustment or
the payment of any stock dividend.
Except as otherwise provided in the 2002 Stock Option Plan, any option
granted hereunder shall terminate in the event of a merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation of
us. However, the optionee shall have the right immediately prior to any such
transaction to exercise his option in whole or in part notwithstanding any
otherwise applicable vesting requirements.
(f) Termination, Modification and Amendment. The 2002 Stock Option
Plan (but not options previously granted under the plan) shall terminate ten
(10) years from the earlier of the date of its adoption by the board of
directors or the date on which the plan is approved by the affirmative vote of
the holders of a majority of the outstanding shares of our capital stock
entitled to vote thereon, and no option shall be granted after termination of
the plan. Subject to certain restrictions, the plan may at any time be
terminated and from time to time be modified or amended by the affirmative vote
of the holders of a majority of the outstanding shares of our capital stock
present, or represented, and entitled to vote at a meeting duly held in
accordance with the applicable laws of the State of Delaware.
Stock Appreciation Rights
The 2002 Stock Option Plan also permits the granting of one or more
stock appreciation rights to eligible participants. Such stock appreciation
rights may be granted either independent of or in tandem with options granted to
the same participant. Stock appreciation rights granted in tandem with options
may be granted simultaneously with, or, in the case of Non-ISOs, subsequent to,
the grant to the participant of the related options; provided, however, that:
(i) any option shall expire and not be exercisable upon the exercise of any
stock appreciation right with respect to the same share, (ii) any stock
appreciation right shall expire and not be exercisable upon the exercise of any
option with respect to the same share, and (iii) an option and a stock
appreciation right covering the same share of common stock may not be exercised
simultaneously. Upon exercise of a stock appreciation right with respect to a
share of common stock, the participant shall be entitled to receive an amount
equal to the excess, if any, of (A) the fair market value of a share of common
stock on the date of exercise over (B) the exercise price of such stock
appreciation right.
Federal Income Tax Aspects Of The 2002 Stock Option Plan
The following is a brief summary of the effect of federal income
taxation upon the participants and us with respect to the purchase of shares
under the 2002 Stock Option Plan. This summary does not purport to be complete
and does not address the federal income tax consequences to taxpayers with
special tax status. In addition, this summary does not discuss the provisions of
the income tax laws of any municipality, state or foreign country in which the
participant may reside, and does not discuss estate, gift or other tax
consequences other than income tax consequences. We advise each participant to
consult his or her own tax advisor regarding the tax consequences of
participation in the 1999 option plan and for reference to applicable provisions
of the code.
The 2002 Stock Option Plan and the right of participants to make
purchases thereunder are intended to qualify under the provisions of Sections
421, 422 and 423 of the Code. Under these provisions, no income will be
recognized by a participant prior to disposition of shares acquired under the
2002 Stock Option Plan.
If the shares are sold or otherwise disposed of (including by way of
gift) more than two years after the first day of the offering period during
which shares were purchased (the "Offering Date"), a participant will recognize
as ordinary income at the time of such disposition the lesser of (a) the excess
of the fair market value of the shares at the time of such disposition over the
purchase price of the shares or (b) 15% of the fair market value of the shares
on the first day of the offering period. Any further gain or loss upon such
disposition will be treated as long-term capital gain or loss. If the shares are
31
sold for a sale price less than the purchase price, there is no ordinary income
and the participant has a capital loss for the difference.
If the shares are sold or otherwise disposed of (including by way of
gift) before the expiration of the two-year holding period described above, the
excess of the fair market value of the shares on the purchase date over the
purchase price will be treated as ordinary income to the participant. This
excess will constitute ordinary income in the year of sale or other disposition
even if no gain is realized on the sale or a gift of the shares is made. The
balance of any gain or loss will be treated as capital gain or loss and will be
treated as long-term capital gain or loss if the shares have been held more than
one year.
In the case of a participant who is subject to Section 16(b) of the
Securities Exchange Act of 1934, the purchase date for purposes of calculating
such participant's compensation income and beginning of the capital gain holding
period may be deferred for up to six months under certain circumstances. Such
individuals should consult with their personal tax advisors prior to buying or
selling shares under the 2002 Stock Option Plan.
The ordinary income reported under the rules described above, added to
the actual purchase price of the shares, determines the tax basis of the shares
for the purpose of determining capital gain or loss on a sale or exchange of the
shares.
We are entitled to a deduction for amounts taxed as ordinary income to
a participant only to the extent that ordinary income must be reported upon
disposition of shares by the participant before the expiration of the two-year
holding period described above.
Restrictions On Resale
Certain officers and directors may be deemed to be our "affiliates" as
that term is defined under the Securities Act. The Common stock acquired under
the 2002 Stock Option Plan by an affiliate may be reoffered or resold only
pursuant to an effective registration statement or pursuant to Rule 144 under
the Securities Act or another exemption from the registration requirements of
the Securities Act.
Aggregated Option Exercises in Last Fiscal Year And Fiscal Year-end Option
Values
The following table provides information related to employee options
exercised by the named executive officers during the 2004 fiscal year and number
and value of such options held at fiscal year-end.
Number of Securities Underlying Value of Unexercised
Unexercised Options at Fiscal In-the-Money Options at Fiscal
Year- End (#) Year- End ($) (1)
Name Shares Acquired Value -------------------------------- --------------------------------
on Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ------------------- -------------- --------------- ---------------- -------------- -----------------
Andrew Hidalgo - - - - - -
Donald Walker - - - 200,000 - 78,000
Gary Walker - - - 200,000 - 78,000
E.J. von Schaumburg - - 150,000 150,000 103,500 103,500
E.J. von Schaumburg - - 100,000 - 14,000 -
Joseph Heater - - 85,000 165,000 33,150 64,350
Joseph Heater - - 150,000 - 10,500 -
(1). Value based on the closing price of $1.14 per share on April 30, 2004,
less the option exercise price.
32
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. Through April 30, 2004, $485,088 was paid and $14,912 was
payable to the Walker Comm shareholders against this earn-out provision.
In connection with the acquisition of Walker Comm, we assumed a lease
with trusts, of which, certain of our officers are the trustees, for a building
and land located in Fairfield, California, which is occupied by our Walker Comm
subsidiary. The lease calls for monthly rental payments of $4,642, with annual
increases, calculated using the San Francisco-Oakland-San Jose Consolidated
Metropolitan Statistical Area Consumer Price Index. For the year ended April 30,
2004, $56,000 was paid as rent for this lease.
On August 22, 2003, we acquired all of the outstanding shares of
Clayborn Contracting Group, Inc. in exchange for an aggregate $900,000 cash
consideration and 826,446 newly issued shares of our common stock. An additional
$1,100,000 is due by September 30, 2007, payable in quarterly distributions, by
payment to the Clayborn shareholders of 50% of the quarterly post tax profits of
Clayborn.
On April 2, 2004, we acquired all of the issued and outstanding common
stock of Heinz. We acquired all of the issued and outstanding shares of Heinz
for $1,000,000, as follows: (1) $700,000 of our common stock, based on the
closing price of our common stock on March 30, 2004 of $0.98 per share, for an
aggregate of 714,286 newly issued shares of the Company's common stock and (2)
$300,000 total cash consideration, of which $100,000 was paid at closing and a
$200,000 non-interest bearing promissory note. Of the $200,000, $75,000 is
payable on the first and second anniversaries of the closing date and $50,000 is
payable on the third anniversary of the closing date.
33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of our common stock as of August 3, 2004 (i) by each person
who is known by us to beneficially own more than 5% of our common stock; (ii) by
each of our officers and directors; and (iii) by all of our officers and
directors as a group.
Name and Address of Beneficial Amount and Nature of Percent of
Title of Class Owner Beneficial Ownership Class **
- --------------------- ---------------------------------- ----------------------------- --------------
Common stock Andrew Hidalgo 5,255,000 25.2%
608 Perimeter Drive
Downingtown, PA 19335
Common Stock Donald Walker (1) 1,216,645 5.8%
521 Railroad Avenue
Fairfield, CA 94533
Common Stock E.J. von Schaumburg (1) 476,000 2.3%
15 Manor Drive
Morristown, NJ 07960
Common Stock James Heinz 714,286 3.4%
1 West Waters Edge Drive
Belleville, IL 62221
Common Stock Joseph Heater (1) 235,000 1.1%
109 Brookhollow Drive
Downingtown, PA 19335
Common Stock Gary Walker (1) 1,130,759 5.4%
521 Railroad Avenue
Fairfield, CA 94533
Common stock Norm Dumbroff (2) (1) 875,000 4.2%
245 West Roosevelt Road
West Chicago, IL 60185
Common Stock Neil Hebenton (1) 37,500 *
404 Cumberland Lane
Chester Springs, PA 19425
Common stock William Whitehead (1) 108,000 *
609 Portland Drive
Downingtown, PA 19335
Common stock All directors and executive (1) 10,048,190 48.2%
officers as a group (9 persons)
Common stock Barron Partners LP (2) 2,848,150 13.7%
730 Fifth Avenue, 9th Floor
New York, NY 10019
* Less than 1% of the outstanding common stock
** Percentage is based on 20,849,976 shares of common stock outstanding.
Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options or warrants currently exercisable or convertible, or exercisable
or convertible within 60 days of August 3, 2004 are deemed outstanding for
computing the percentage of the person holding such option or warrant but
are not deemed outstanding for computing the percentage of any other
person. Percentages are based on a total of 20,849,976 shares of common
stock outstanding on August 3, 2004, and the shares issuable upon the
exercise of options and warrants exercisable on or within 60 days of August
3, 2004, as described below.
(1) Includes the following number of shares of common stock which may be
acquired by certain executive officers and directors through the exercise
of stock options which were exercisable as of August 3, 2004 or become
exercisable within 60 days of that date: Donald Walker, 200,000 shares;
34
E.J. von Schaumburg, 325,000 shares; Joseph Heater, 235,000 shares; Gary
Walker, 200,000 shares; Norm Dumbroff, 25,000 shares; Neil Hebenton, 37,500
shares; William Whitehead, 100,000 shares; and all officers and directors
as a group, 1,122,500 shares.
(2) Includes 1,424,075 shares of common stock which may be acquired through
the exercise of warrants.
35
DESCRIPTION OF SECURITIES
The following description of our capital stock is a summary and is
qualified in its entirety by the provisions of our articles of incorporation,
with amendments, all of which have been filed as exhibits to our registration
statement of which this prospectus is a part.
Common Shares
We are authorized to issue up to 75,000,000 shares of Common Stock,
par value $.0001. As of August 3, 2004, there were 20,849,976 shares of common
stock issued and outstanding and 5,000,000 shares reserved for issuance pursuant
to our stock option plans. The holders of common stock are entitled to one vote
for each share held of record on all matters to be voted on by the shareholders.
The holders of common stock are entitled to receive dividends ratably, when, as
and if declared by the board of directors, out of funds legally available. In
the event of a liquidation, dissolution or winding-up of us, the holders of
common stock are entitled to share equally and ratably in all assets remaining
available for distribution after payment of liabilities and after provision is
made for each class of stock, if any, having preference over the common stock.
The holders of shares of common stock, as such, have no conversion, preemptive,
or other subscription rights and there are no redemption provisions applicable
to the common stock. All of the outstanding shares of common stock are validly
issued, fully-paid and nonassessable.
Preferred Shares
We are authorized to issue up to 5,000,000 shares of preferred stock,
par value $.0001. The shares of preferred stock may be issued in series, and
shall have such voting powers, full or limited, or no voting powers, and such
designations, preferences and relative participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions providing for the issuance
of such stock adopted from time to time by the board of directors. The board of
directors is expressly vested with the authority to determine and fix in the
resolution or resolutions providing for the issuances of preferred stock the
voting powers, designations, preferences and rights, and the qualifications,
limitations or restrictions thereof, of each such series to the full extent now
or hereafter permitted by the laws of the State of Delaware.
Series B Convertible Preferred Stock
On May 15, 2002, our Board of Directors adopted and created a series
of preferred stock consisting of 1,000 shares designated as Series B Convertible
Preferred Stock. Each share of Series B Convertible Preferred Stock has a
liquidation preference of $1,000 and does not accrue any dividends. The Series B
Convertible Preferred Stock is convertible into our common stock, at the option
of the holder, at any time after the 30th calendar day we receive payment in
full. Each share of Series B Convertible Preferred Stock is convertible at a
basis of $1,000 per share at a conversion price equal to 75% of the average
market price of the common stock for ten days prior to the date of conversion.
Among other provisions, the number of shares issuable upon conversion may not be
less than 1,000 shares or greater than 4,000 shares of common stock. As of the
date hereof, there are no issued and outstanding shares of Series B Convertible
Preferred Stock.
Series C Convertible Preferred Stock
On November 10, 2002, our Board of Directors adopted and created a
series of preferred stock consisting of 1,000 shares designated as Series C
Convertible Preferred Stock. The Series C Convertible Preferred Stock is
convertible into our common stock, at the option of the holder, at any time
after the day we receive payment in full. Each share of Series C Convertible
Preferred Stock is convertible into 800 shares of our common stock. Each share
of Series C Convertible Preferred Stock has a liquidation preference of $1,000
and does not accrue any dividends.
On August 13, 2003, all 1,000 Series C Preferred shares were converted
into 1,786,000 shares of our common stock.
36
Warrants and Options
As of August 3, 2004, we had outstanding warrants and options to
acquire approximately 7,867,875 shares of common stock, exercisable at prices
ranging between $0.45 and $1.66.
In connection with the sale of 100 units in a private placement during
July and August 2003, each unit had 44,444 warrants, with each warrant
representing the right to purchase one share of our common stock at an exercise
price of $.90 per share until June 24, 2006. The exercise price and the number
of shares issuable upon exercise of the warrants will be adjusted upon the
occurrence of certain events, including the issuance of common stock as a
dividend on shares of common stock, subdivisions, reclassifications or
combinations of the common shares or similar events. The warrants do not contain
provisions protecting against dilution resulting from the sale of additional
shares of common shares for less than the exercise price of the warrants or the
current market price of our securities and do not entitle warrant holders to any
voting or other rights as a shareholder until such warrants are exercised and
common shares are issued.
Warrants may be redeemed in whole or in part at our option, upon 30
days' notice, at a redemption price equal to $.01 per share of common stock
issuable upon exercise of the warrants, if the closing price of the common
shares is at least $1.25 per share on average for 10 consecutive trading days,
ending not earlier than 30 days before the warrants are called for redemption.
Additionally, in connection with the sale of the 100 units, we issued
the placement agent three-year warrants to purchases 665,000 shares of our
common stock at an exercise price of $0.75 per share.
Transfer Agent
Interwest Transfer Co., Inc., 1981 E. Murray Holladay Road, Suite 100,
Salt Lake City Utah 84117, is the transfer agent and registrar for our
securities.
37
PLAN OF DISTRIBUTION
The selling stockholders and any of their respective non-sale
pledgees, non-sale donees, non-sale assignees and other non-sale
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus. The selling
stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The selling stockholders may pledge their shares to their brokers
under the margin provisions of customer agreements. If a selling stockholders
defaults on a margin loan, the broker may, from time to time, offer and sell the
pledged shares.
The selling stockholders may also engage in short sales against the
box, puts and calls and other transactions in our securities or derivatives of
our securities and may sell or deliver shares in connection with these trades.
The selling stockholders or their respective non-sale pledgees,
non-sale donees, non-sale transferees or other non-sale successors in interest,
may also sell the shares directly to market makers acting as principals and/or
broker-dealers acting as agents for themselves or their customers. Such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and/or the purchasers of shares for
whom such broker-dealers may act as agents or to whom they sell as principal or
both, which compensation as to a particular broker-dealer might be in excess of
customary commissions. Market makers and block purchasers purchasing the shares
will do so for their own account and at their own risk. It is possible that a
selling stockholder will attempt to sell shares of common stock in block
transactions to market makers or other purchasers at a price per share which may
be below the then market price. The selling stockholders cannot assure that all
or any of the shares offered in this prospectus will be issued to, or sold by,
the selling stockholders. The selling stockholders and any brokers, dealers or
agents, upon effecting the sale of any of the shares offered in this prospectus,
may be deemed to be "underwriters" as that term is defined under the Securities
Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or
the rules and regulations under such acts. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
We are required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
selling stockholders, but excluding brokerage commissions or underwriter
discounts.
The selling stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No selling
stockholder has entered into any agreement with a prospective underwriter and
there is no assurance that any such agreement will be entered into.
The selling stockholders and any other persons participating in the
sale or distribution of the shares will be subject to applicable provisions of
38
the Securities Exchange Act of 1934, as amended, and the rules and regulations
under such act, including, without limitation, Regulation M. These provisions
may restrict certain activities of, and limit the timing of purchases and sales
of any of the shares by, the selling stockholders or any other such person.
Furthermore, under Regulation M, persons engaged in a distribution of securities
are prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time prior
to the commencement of such distributions, subject to specified exceptions or
exemptions. In regards to short sells, the selling stockholder can only cover
its short position with the securities they receive from us upon conversion. All
of these limitations may affect the marketability of the shares.
We have agreed to indemnify the selling stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act of 1933, as amended, or to contribute to payments the
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such liabilities.
If the selling stockholders notify us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholders and the broker-dealer.
PENNY STOCK
The Securities and Exchange Commission has adopted Rule 15g-9 which
establishes the definition of a "penny stock," for the purposes relevant to us,
as any equity security that has a market price of less than $5.00 per share or
with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require:
o that a broker or dealer approve a person's account for transactions in
penny stocks; and
o the broker or dealer receive from the investor a written agreement to
the transaction, setting forth the identity and quantity of the penny
stock to be purchased.
In order to approve a person's account for transactions in penny stocks,
the broker or dealer must
o obtain financial information and investment experience objectives of
the person; and
o make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge
and experience in financial matters to be capable of evaluating the
risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a
penny stock, a disclosure schedule prescribed by the Commission relating to the
penny stock market, which, in highlight form:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o that the broker or dealer received a signed, written agreement from
the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny
stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and the rights and remedies available to
an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
39
SELLING STOCKHOLDERS
The table below sets forth information concerning the resale of the
shares of common stock by the selling stockholder. We will not receive any
proceeds from the resale of the common stock by the selling stockholder.
Assuming all the shares registered below are sold by the selling stockholder,
none of the selling stockholders will continue to own any shares of our common
stock.
The following table also sets forth the name of each person who is
offering the resale of shares of common stock by this prospectus, the number of
shares of common stock beneficially owned by each person, the number of shares
of common stock that may be sold in this offering and the number of shares of
common stock each person will own after the offering, assuming they sell all of
the shares offered.
For the table set forth below, Brian Earl is the control person for
Delta Realty Limited and Keith Burant is the control person for Jetco Holdings
Ltd.
Beneficial Ownership Beneficial Ownership
Prior to Offering (1) After Offering (1)
Name of Selling Security Holder Shares Percentage (2) Shares Offered Shares
Percentage (2)
- ---------------------------------------- ----------------- ----------------- ------------------------ ----------------- ------------
- ---------------------------------------- ----------------- ----------------- ------------------------ ----------------- ------------
Delta Realty Limited 691,643 3.3% 691,643 0 0%
- ---------------------------------------- ----------------- ----------------- ------------------------ ----------------- ------------
Jetco Holdings Ltd. 557,488 2.7% 557,488 0 0%
- ---------------------------------------- ----------------- ----------------- ------------------------ ----------------- ------------
James Heinz 714,286 3.4% 714,286 0 0%
- ---------------------------------------- ----------------- ----------------- ------------------------ ----------------- ------------
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of August 3, 2004 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Percentages based on 20,849,976 shares of common stock outstanding.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be
passed upon for us by Sichenzia Ross Friedman Ference LLP, New York, New York.
EXPERTS
The consolidated financial statements of WPCS International
Incorporated as of and for the years ended April 30, 2004 and April 30, 2003,
included in this prospectus, have been included herein in reliance on the report
of J.H. Cohn LLP, Independent Registered Public Accounting Firm, given on the
authority of that firm as experts in accounting and auditing.
The financial statements of Clayborn Contracting Group, Inc. for the years
ended September 30, 2002 and 2001 included in this Prospectus have been audited
by Burnett + Company LLP, Independent Accountants, to the extent and for the
periods set forth in their report appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Heinz Corporation for the years ended December
31, 2003 and 2002 included in this Prospectus have been audited by Michael N.
Fitzgerald, Ph.D, Certified Public Accountant, Independent Public Accountant, to
the extent and for the periods set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of said firm as experts in accounting and auditing.
40
AVAILABLE INFORMATION
We have filed a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, relating to the shares of common stock being
offered by this prospectus, and reference is made to such registration
statement. This prospectus constitutes the prospectus of WPCS International
Incorporated, filed as part of the registration statement, and it does not
contain all information in the registration statement, as certain portions have
been omitted in accordance with the rules and regulations of the Securities and
Exchange Commission.
We are subject to the informational requirements of the Securities
Exchange Act of 1934, which requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Such reports,
proxy statements and other information may be inspected at public reference
facilities of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C.
20549. Copies of such material can be obtained from the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549 at
prescribed rates. Because we file documents electronically with the SEC, you may
also obtain this information by visiting the SEC's Internet website at
http://www.sec.gov.
41
WPCS INTERNATIONAL INCORPORATED
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The Financial Statements required by Item 304 of Regulation S-B are stated in
U.S. dollars and are prepared in accordance with U.S. Generally Accepted
Accounting Principles.
Fiscal Year Ended April 30, 2004
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of April 30, 2004 and 2003 F-2
Consolidated Statements of Operations for the years ended April 30, 2004 and 2003 F-4
Consolidated Statements of Shareholders' Equity for the years ended April 30, 2004 and 2003 F-5
Consolidated Statements of Cash Flows for the years ended April 30, 2004 and 2003 F-7
Notes to Consolidated Financial Statements F-10
Audited Financial Statements of Clayborn Contracting Group, Inc. for the years ended September 30,
2002 and 2001 F-24
Audited Financial Statements of Heinz Corporation for years ended December 31, 2003 and 2002 F-36
Pro Forma Unaudited Consolidated Statement of Operations - "WPCS" for the fiscal
year ended April 30, 2004 F-47
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of WPCS International Incorporated
We have audited the accompanying consolidated balance sheets of WPCS
International Incorporated and Subsidiaries as of April 30, 2004 and 2003, and
the related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Overnight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 consolidated 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, 2004 and 2003, and
their consolidated results of operations and cash flows for the years 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
July 28, 2004
F-1
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, APRIL 30,
ASSETS 2004 2003
------------------- -------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,984,636 $ 167,547
Accounts receivable, net of allowance of $61,779
and $11,779 at April 30, 2004 and 2003,
respectively 5,909,879 2,397,236
Costs and estimated earnings in excess of billings
on uncompleted contracts 2,123,031 408,194
Inventory 104,799 77,775
Prepaid expenses 264,076 143,113
Deferred income taxes 60,000 70,000
------------------- -------------------
Total current assets 10,446,421 3,263,865
PROPERTY AND EQUIPMENT, net 1,005,760 647,951
CUSTOMER LISTS 603,333 499,000
GOODWILL 8,681,870 5,388,882
OTHER ASSETS 144,713 21,528
------------------- -------------------
Total assets $ 20,882,097 $ 9,821,226
=================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, APRIL 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2003
------------------- -------------------
CURRENT LIABILITIES:
Borrowings under lines of credit $ 551,000 $ -
Current maturities of capital lease obligation 2,534 2,294
Current maturities of loans payable 94,056 21,268
Accounts payable and accrued expenses 4,732,200 1,278,443
Billings in excess of costs and estimated earnings on
uncompleted contracts 2,162,452 215,819
Due to officer - 100,000
Due to shareholders 88,157 58,207
Income taxes payable 223,753 23,700
Deferred income taxes 196,100 129,000
------------------- -------------------
Total current liabilities 8,050,252 1,828,731
Capital lease obligation, net of current portion 2,073 4,608
Loans payable, net of current portion 170,362 -
Due to shareholders, net of current portion 1,026,755 -
Deferred income taxes 344,900 527,000
------------------- -------------------
Total liabilities 9,594,342 2,360,339
------------------- -------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock - $0.0001 par value, 5,000,000 shares
authorized, none issued - -
Common Stock - $0.0001 par value, 75,000,000 shares
authorized, 20,849,976 shares and
13,078,844 shares issued and outstanding, respectively 2,085 1,308
Additional paid-in capital 11,991,476 8,002,639
Unearned consulting services (38,559) -
Accumulated deficit (667,247) (543,060)
------------------- -------------------
Total shareholders' equity 11,287,755 7,460,887
------------------- -------------------
Total liabilities and shareholders' equity $ 20,882,097 $ 9,821,226
=================== ===================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
April 30,
2004 2003
-------------- ---------------
REVENUE $22,076,246 $5,422,858
-------------- ---------------
COSTS AND EXPENSES:
Cost of revenue 16,076,155 3,768,495
Selling, general and administrative expenses 5,560,583 1,860,827
Provision for doubtful accounts 91,137 38,779
Depreciation and amortization 382,510 116,501
-------------- ---------------
Total costs and expenses 22,110,385 5,784,602
-------------- ---------------
OPERATING LOSS (34,139) (361,744)
OTHER EXPENSE:
Interest expense 14,048 -
-------------- ---------------
LOSS BEFORE PROVISION FOR INCOME TAXES (48,187) (361,744)
Income tax provision (76,000) (19,550)
-------------- ---------------
NET LOSS (124,187) (381,294)
Imputed dividends accreted on Convertible Series B Preferred stock - (173,000)
-------------- ---------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS ($124,187) ($554,294)
============== ===============
Basic net loss per common share ($0.01) ($0.05)
============== ===============
Basic weighted average number of common shares outstanding 18,260,359 10,376,685
============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Additional Unearned Total
Preferred Stock Common Stock Paid-In Consulting Shareholders' Accumulated
Shares Amount Shares Amount Capital Services Equity Deficit
-------- ------- ----------- -------- ---------- ---------- ------------ -----------
BALANCE, MAY 1, 2002 - $0 5,500,000 $550 $4,450 $0 $11,234 $ 16,234
Effect 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
accounts payable 64 0 - - 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 upon
acquisition of Invisinet, Inc. - - 1,000,000 100 1,749,900 - - 1,750,000
Issuance of common stock upon
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)
-------- ------- ----------- -------- ---------- ---------- ------------ -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
Additional Unearned Total
Preferred Stock Common Stock Paid-In Consulting Shareholders' Accumulated
Shares Amount Shares Amount Capital Services Equity Deficit
------- ------- ----------- ------- ------------ ---------- ------------ ------------
BALANCE, APRIL 30, 2003 1,000 $0 13,078,844 $1,308 $ 8,002,639 $0 ($543,060) $ 7,460,887
Conversion of Series C
Preferred Stock to common stock (1,000) - 1,786,000 179 (179) - - -
Issuance of common stock through
private placement - - 4,444,400 444 2,173,824 - - 2,174,268
Issuance of common stock,
acquisition of Clayborn
Contracting Group, Inc. - - 826,446 83 867,685 - - 867,768
Issuance of common stock,
acquisition of Heinz
Corporation - - 714,286 71 699,929 - - 700,000
Fair value of stock options
granted to nonemployees - - - - 196,166 - - 196,166
Issuance of stock options for
consulting services - - - - 51,412 (51,412) - 0
Amortization of unearned
consulting services - - - - - 12,853 - 12,853
Net loss - - - - - - (124,187) (124,187)
------- ------- ----------- ------- ------------ ---------- ------------ ------------
BALANCE, APRIL 30, 2004 0 $0 20,849,976 $2,085 $11,991,476 ($38,559) ($667,247) $11,287,755
======= ======= =========== ======= ============ ========== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
April 30,
2004 2003
---------------- ----------------
OPERATING ACTIVITIES :
Net loss ($124,187) ($381,294)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 382,510 116,501
Provision for doubtful accounts 91,137 38,779
Gain on disposition of fixed assets - (2,085)
Fair value of stock options granted 209,019 -
Deferred income taxes (218,800) -
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (2,422,541) (676,341)
Costs and estimated earnings in excess of billings on uncompleted contracts (1,379,816) (10,087)
Inventory 11,976 2,428
Prepaid expenses (51,319) (99,789)
Other assets (24,032) (75)
Accounts payable and accrued expenses 2,354,024 182,614
Billings in excess of costs and estimated earnings on uncompleted contracts 1,908,541 (155,539)
Income taxes payable 200,053 19,550
---------------- ----------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 936,565 (965,338)
---------------- ----------------
INVESTING ACTIVITIES:
Proceeds from disposition of fixed assets - 41,607
Acquisition of property and equipment (86,011) (3,065)
Proceeds from repayment of note receivable - 172,514
Acquisition of Clayborn, net of cash received (722,177) -
Acquisition of Heinz, net of cash received (109,194) -
Acquisition earn-out and other transaction costs (497,677) (375,993)
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (1,415,059) (164,937)
---------------- ----------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended
April 30,
2004 2003
---------------- ----------------
FINANCING ACTIVITIES:
Cash received in reverse acquisition - 3,257
Restricted cash - (200,000)
Proceeds from advances from officers - 100,000
Repayment of advances from officers (100,000) (20,743)
Proceeds from sale of preferred stock - 1,455,000
Proceeds from sale of common stock 2,174,268 -
Borrowings on line of credit 461,000 -
Repayment of equipment loans payable (237,390) (53,169)
Payments of capital lease obligations (2,295) (2,077)
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,295,583 1,282,268
---------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,817,089 151,993
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 167,547 15,554
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $1,984,636 $ 167,547
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
CONSOLIDATING STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended
April 30,
2004 2003
---------------- ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 15,770 $ 8,131
================ ================
Income taxes $ 105,193 $ 1,380
================ ================
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for net noncash assets received in acquisitions $1,567,768 $6,324,249
================ ================
Earn-out consideration unpaid relating to acquisitions $1,114,912 $ 58,207
================ ================
Issuance of note for net noncash assets received in acquisition $ 182,648 $ -
================ ================
Issuance of note for property and equipment $ 32,339 $ -
================ ================
Equipment acquired under capital lease $ - $ 9,468
================ ================
Issuance of 64 shares of Series B preferred stock as payment of advances from
shareholder and accounts payable $ - $ 64,000
================ ================
Imputed Series B preferred stock dividend attributable to a beneficial conversion
feature $ - $ 173,000
================ ================
Conversion of Series A preferred stock to common stock $ - $ 300
================ ================
Conversion of Series B preferred stock to common stock $ - $ 56
================ ================
Conversion of Series C preferred stock to common stock $ 179 $ -
================ ================
Stock options issued related to an acquisition $ - $ 63,513
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of WPCS
International Incorporated ("WPCS") and its wholly owned subsidiaries, WPCS
Incorporated , Invisinet Inc. ("Invisinet") from November 13, 2002 (date of
acquisition), Walker Comm Inc. ("Walker") from December 30, 2002 (date of
acquisition), Clayborn Contracting Group, Inc. from August 22, 2003 (date of
acquisition), and Heinz Corporation ("Heinz") from April 2, 2004 (date of
acquisition), collectively the "Company".
The Company is a project engineering company that focuses on the implementation
requirements of specialty communication systems, wireless fidelity ("WiFi")
deployment and fixed wireless deployment. The Company provides a range of
specialty communication services including project management, site design,
structured cabling, product integration, network security and technical support.
On May 17, 2002, Phoenix Star Ventures, Inc. ("PSVI") a publicly held "shell
company", became the legal acquirer of WPCS Holdings, Inc. ("Holdings") by
issuing 5,500,000 shares of its common stock to the shareholders of Holdings in
exchange for all of the outstanding common shares of Holdings. The former
shareholders of Holdings, immediately after the business combination, owned the
majority of the combined companies. Accordingly, the business combination has
been accounted for as a reverse acquisition, whereby, for accounting purposes,
Holdings is the accounting acquirer and PSVI is the accounting acquiree. The
consolidated financial statements of the Company include the accounts of PSVI
since its acquisition. The cost of the acquisition approximated the fair value
of the net assets of PSVI that were acquired and accordingly, assets,
liabilities and the outstanding preferred stocks of PSVI were initially recorded
at historical carrying values.
On May 24, 2002, PSVI's principal shareholder returned 500,000 shares of its
common stock to the Company, without compensation. Subsequently, these common
shares were retired and cancelled.
On November 13, 2002, the Company acquired all of the outstanding shares of
Invisinet from its shareholders in exchange for an aggregate of 1,000,000 newly
issued shares of the Company's common stock. An additional 150,000 shares of the
Company's common stock were to be issued to a shareholder, provided Invisinet
achieved certain financial targets over a two year period beginning on the first
anniversary date of the merger. On May 27, 2003, the Company and the shareholder
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.
On December 30, 2002, the Company acquired all of the outstanding shares of
Walker in exchange for an aggregate of 2,486,000 newly issued shares of the
Company's common stock and $500,000 cash consideration. An additional $500,000
is payable contingent upon Walker achieving certain net profits, to be paid in
quarterly distributions equal to 75% of net income, which would increase the
purchase price. At April 30, 2004, $500,000 has been charged to goodwill
relating to this earn-out provision.
On August 22, 2003, the Company acquired all of the outstanding shares of
Clayborn in exchange for an aggregate of 826,446 newly issued shares of the
Company's common stock and $900,000 cash consideration. An additional $1,100,000
is due by September 30, 2007, payable in quarterly distributions, by payment to
the Clayborn shareholders of 50% of the quarterly post-tax profits of Clayborn.
On April 2, 2004, the Company acquired all of the issued and outstanding common
stock of Heinz. The Company acquired all of the issued and outstanding shares of
Heinz for $1,000,000, as follows: (1) $700,000 of the Company's common stock,
based on the closing price of our common stock on March 30, 2004 of $0.98 per
share, for an aggregate of 714,286 newly issued shares of the Company's common
stock and (2) $300,000 total cash consideration, of which $100,000 was paid at
closing and a $200,000 non-interest bearing promissory note. Of the $200,000,
$75,000 is payable on the first and second anniversaries of the closing date and
$50,000 is payable on the third anniversary of the closing date.
F-10
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
All significant intercompany transactions and balances have been eliminated in
these consolidated financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include all cash and highly-liquid investments with an
original maturity of three months or less.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and 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 $561,288 which is expected to be collected
within one year.
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.
F-11
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2004. 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. The fair value of the Company's reporting units derived
using discounted cash flow models exceeded the carrying values of the reporting
units. Accordingly, step two was unnecessary and no impairment was recognized in
the consolidated statement of operations for the years ended April 30, 2004 and
2003. On an ongoing basis, the Company expects to perform its annual impairment
test during the fourth quarter absent any interim impairment indicators.
Goodwill through the year ended April 30, 2004 consisted of the following:
Beginning balance, May 1, 2003 $5,388,882
Clayborn acquisition 1,772,806
Heinz acquisition 1,065,799
Walker earn out provision 441,793
Transaction costs 12,590
-----------------
Ending balance, April 30, 2004 $8,681,870
=================
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
F-12
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date. The recognition of deferred tax assets is reduced by a valuation allowance
if it is more likely than not that the tax benefits will not be realized. The
ultimate realization of deferred tax assets depends upon the generation of
future taxable income during the periods in which those temporary differences
become deductible.
Earnings (Loss) Per Share
Earnings (loss) per common share is computed pursuant to SFAS No. 128, "Earnings
Per Share" ("EPS"). Basic income (loss) per 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, 2004, the Company had 3,478,475 stock options and 5,109,400 warrants
outstanding. At April 30, 2003, 77,000 stock options were 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
antidilutive.
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."
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 years ended April 30, 2004 and 2003 would have been as follows:
2004 2003
---------------- -----------------
Net loss attributable to common shareholders, as reported ($124,187) ($554,294)
Deduct: total stock-based employee compensation expense determined under the
fair value based method for all awards, net of tax (141,109) (9,992)
---------------- -----------------
Net loss attributable to common shareholders, pro forma ($265,296) ($564,286)
================ =================
Net loss per share attributable to common shareholders
As reported ($0.01) ($0.05)
Pro forma ($0.01) ($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: Risk-free
interest rate ranging from 2% to 3.6%, dividend yield of 0%, expected life of 5
years and volatility of 73.2% in 2004 and 71.6% in 2003.
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
F-13
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 did not 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 ended April 30, 2004. The adoption of SFAS No. 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 after 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 adoption of
FIN No. 46 did not have a material effect on the Company's 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. The adoption of this statement did not have a material
impact on the Company's consolidated financial position, results of operations
or cash flows.
F-14
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS
Clayborn
On August 22, 2003, the Company completed a merger with Clayborn Contracting
Group, Inc, a California corporation ("Clayborn"). The acquisition of Clayborn
gives the Company expertise in engineering and deployment services for specialty
communication systems and additional wireless opportunities to pursue.
The aggregate consideration paid by the Company for Clayborn was approximately
$2,929,000. The Company acquired all of the issued and outstanding shares of
Clayborn in exchange for $900,000 cash consideration and $61,000 of transaction
costs, and 826,446 newly issued shares of the Company's common stock with a fair
value of approximately $868,000 based on the average value of the Company's
common stock as of a few days before and after the merger terms were agreed to
and announced. An additional $1,100,000 is due by September 30, 2007, payable in
quarterly distributions, by payment to the Clayborn shareholders of 50% of the
quarterly post tax profits of Clayborn.
The acquisition of Clayborn was accounted for under the purchase accounting
method of accounting in accordance with SFAS No. 141, "Business Combinations."
Under the purchase method of accounting, assets acquired and liabilities assumed
are recorded at their estimated fair values. Goodwill and (or) other intangible
assets are recorded to the extent the merger consideration, including certain
acquisition and closing costs, exceeds the fair value of the net identifiable
assets acquired at the date of the merger.
A valuation of certain assets was completed, including property and equipment,
backlog, list of major customers, and the Company internally determined the fair
value of its other assets and liabilities. In determining the fair value of
acquired assets, standard valuation techniques were used including the market
and cost approaches. The initial purchase price allocation has been adjusted as
a result of final valuation, with fixed assets increasing in value by $74,000,
customer lists being valued at $245,000, inventory being valued at $39,000 and
backlog being valued at $13,500, resulting in a decrease in goodwill by these
combined amounts. The aggregate changes resulted in goodwill being decreased to
$1,772,806 as of the acquisition date.
The purchase price allocation has been determined as follows:
Assets purchased:
Cash $ 134,218
Accounts receivable 575,804
Costs in excess of billings 231,562
Income tax refunds receivable 104,765
Inventory 39,000
Fixed assets 444,126
Backlog 13,500
Customer list 245,000
Other assets 97,669
Goodwill 1,772,806
------------------
3,658,450
------------------
Liabilities assumed:
Accounts payable (294,992)
Accrued expenses (136,119)
Notes payable (184,611)
Deferred tax liability (113,800)
------------------
(729,522)
------------------
Purchase price $ 2,928,928
==================
F-15
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Heinz
On April 2, 2004, the Company acquired all of the issued and outstanding common
stock of Heinz Corporation ("Heinz"). The Company acquired all of the issued and
outstanding shares of Heinz for $1,000,000, as follows: (1) $700,000 of the
Company's common stock, based on the closing price of our common stock on March
30, 2004 of $0.98 per share, for an aggregate of 714,286 newly issued shares of
the Company's common stock and (2) $300,000 total cash consideration, of which
$100,000 was paid at closing and a $200,000 non-interest bearing promissory
note. Of the $200,000, $75,000 is payable on the first and second anniversaries
of the closing date and $50,000 is payable on the third anniversary of the
closing date. The purchase price includes the present value of the note totaling
$182,648, discounted at 5%. The current and long-term discounted maturity of
this note is $71,429 and $111,219, respectively. Based on the preliminary
information currently available, the acquisition resulted in goodwill of
approximately $1,066,000. Upon completion of a formal purchase price allocation
there may be a decrease in the amount assigned to goodwill and a corresponding
increase in tangible or other intangible assets.
Heinz is a St. Louis, Missouri based provider of in-building wireless
infrastructure services for both cellular and WiFi applications, including
consulting, integration and installation services for wireless infrastructure.
In addition, Heinz has performed fixed wireless services, structured cabling,
and cellular base station equipment installation and testing. The acquisition of
Heinz gives the Company additional project engineering expertise for wireless
infrastructure services, broadens its customer base, and expands its
geographical presence in the Midwest.
The acquisition of Heinz was accounted for under the purchase accounting method
of accounting in accordance with SFAS No. 141, "Business Combinations." Under
the purchase method of accounting, assets acquired and liabilities assumed are
recorded at their estimated fair values. Goodwill and (or) other intangible
assets are recorded to the extent the merger consideration, including certain
acquisition and closing costs, exceeds the fair value of the net identifiable
assets acquired at the date of the merger.
The preliminary purchase price allocation has been determined as follows:
Assets purchased:
Cash $ 8,052
Accounts receivable 605,435
Costs in excess of billings 103,459
Fixed assets 23,676
Other assets 71,128
Goodwill 1,065,799
------------------
1,877,549
------------------
Liabilities assumed:
Accounts payable (546,293)
Accrued expenses (130,694)
Line of credit (90,000)
Notes payable (80,942)
Billings in excess of cost (29,223)
------------------
(877,152)
------------------
Purchase price $ 1,000,397
==================
The following unaudited pro forma consolidated financial information for the
years ended April 30, 2004 and 2003, present the combined results of operations
of the Company, as if the acquisitions of Clayborn and Heinz had occurred on May
1, 2003
F-16
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and 2002, after giving effect to certain adjustments, including the issuance of
the Company's common stock to Clayborn and Heinz as part of the purchase price.
In addition, the unaudited pro forma consolidated financial information for the
year ended April 30, 2003 includes the combined results of the Company, as if
the acquisitions of Invisinet and Walker had occurred on May 1, 2002, including
issuance of the Company's common stock to Invisinet and Walker. The pro forma
financial information does not necessary reflect the results of operations that
would have occurred had the Company, Clayborn, Heinz, Invisinet and Walker been
a single entity during such periods.
Year ended April 30,
2004 2003
-------------- ------------
Revenue $27,236,503 $22,716,562
Net loss attributable to common shareholders ($439,519) ($1,862,417)
Weighted average number of shares used in calculations of basic loss per share 19,229,804 14,112,206
Basic net loss per share ($0.02) ($0.13)
For all acquisitions, customer lists are being amortized over a period of 5
years. The Company recorded amortization expense of $154,000 and $41,000 for the
years ended April 30, 2004 and April 30, 2003, respectively. The minimum
amortization of customer lists is $603,000 over the next five years. Any future
goodwill impairments are not deductible for income tax purposes.
NOTE 4 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the following
at April 30, 2004:
Costs incurred on uncompleted contracts $17,574,035
Estimated contract profit 4,699,280
--------------
22,273,315
Less: billings to date 22,312,736
--------------
Net costs in excess ($39,421)
==============
Costs and estimated earnings in excess of billings $2,123,031
Billings in excess of costs and estimated earnings
on uncompleted contracts (2,162,452)
--------------
Net costs in excess ($39,421)
==============
F-17
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at April 30, 2004:
Estimated
useful life
(years) Amount
-------------- ---------------
Furniture and fixtures 5 - 7 $163,778
Vehicles 5 - 7 624,304
Machinery and equipment 5 559,256
Leasehold improvements 3 - 10 192,349
---------------
1,539,687
Less accumulated depreciation and
amortization 533,927
---------------
$1,005,760
===============
Depreciation expense for property and equipment for the years ended April 30,
2004 and 2003 was approximately $228,300 and $75,500, respectively.
Property and equipment under capital leases totaled approximately $11,000 and
accumulated depreciation on such property and equipment aggregated approximately
$4,600 at April 30, 2004.
NOTE 6 - LINE OF CREDIT
On October 29, 2003, Walker obtained a revolving line of credit facility with a
commercial bank in the amount of $750,000. The borrowing limit is up to 70% of
eligible Walker accounts receivable. As of April 30, 2004, the borrowing base
was $750,000 and the outstanding balance was $531,000. The line of credit is
collateralized by all of Walker's accounts receivable, inventory and equipment
and bears interest at the Wall Street Journal Prime Index Rate plus 1.5% (5.50%
as of April 30, 2004). In addition, the Company and certain executive officers
of the Company have personally guaranteed this line of credit facility. This
line is subject to annual renewal and matures on November 5, 2004. Accrued
interest is payable monthly.
In connection with the acquisition of Heinz, the Company assumed a revolving
line of credit facility with a commercial bank in the amount of $200,000. As of
April 30, 2004, the borrowing base was $200,000 and the outstanding balance was
$20,000. The line of credit is collateralized by real estate property owned by
the President of Heinz and his personal guarantee, and bears interest at 4.0% as
of April 30, 2004. The Company has indemnified the President of Heinz for any
personal liability arising from this line of credit facility. This line is
subject to annual renewal and matures on November 16, 2004. Accrued interest is
payable monthly.
NOTE 7 - RELATED PARTY TRANSACTIONS
In connection with the acquisition of Walker, an additional $500,000 is payable
to the Walker shareholders, provided Walker achieves certain net profits, to be
paid in quarterly distributions equal to 75% of net income. At April 30, 2004,
$500,000 has been charged to goodwill relating to this earn-out provision and
the total remaining payable to the Walker shareholders under this earn-out
provision was $14,912.
In connection with the acquisition of Walker, the Company assumed a ten-year
lease with trusts, of which, certain officers of the Company are the trustees,
for a building and land located in Fairfield, California, which is occupied by
its Walker subsidiary. For the year ended April 30, 2004, $56,000 was paid as
rent for this lease.
In connection with the acquisition of Clayborn, an additional $1,100,000 is due
by September 30, 2007, payable in quarterly distributions to the Clayborn
shareholders, by payment of 50% of the quarterly post tax profits of Clayborn.
F-18
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - RETIREMENT PLANS
Walker and Clayborn participate 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 and Clayborn are made at the discretion of the Board of
Directors. There were $4,000 in contributions made for the year ended April 30,
2004 and none for 2003.
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 $1,200,000 and $239,000 for
such costs for the years ended April 30, 2004 and 2003, respectively.
NOTE 9 - INCOME TAXES
The provision or income taxes for the years ended at April 30, 2004 and 2003 is
summarized as follows:
2004 2003
----------------- -------------------
Current
Federal $177,000 $ -
State 117,800 19,550
Deferred
Federal (49,000) -
State (169,800) -
----------------- -------------------
Totals $76,000 $19,550
================= ===================
The actual provisions for income taxes reflected in the consolidated statements
of operations for the years ended April 30, 2004 and 2003 differ from the
amounts computed at the federal statutory tax rates. The principal differences
between the statutory income tax expense and the effective provision for income
taxes are summarized as follows:
2004 2003
------------------- ------------------
Expected tax benefit at statutory rate (34%) ($16,000) ($122,000)
State and local taxes, net of federal tax benefit 76,000 19,550
Increase in valuation allowance 16,000 122,000
------------------- ------------------
$76,000 $19,550
=================== ==================
F-19
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences which give rise to deferred tax assets
and liabilities at April 30, 2004 is summarized as follows:
2004
------------------
Deferred tax assets:
Net operating loss carryforward $60,000
Allowance for doubtful accounts 26,000
Federal benefit of deferred state tax liabilities 34,000
Valuation allowance (60,000)
------------------
Net deferred tax assets - current 60,000
------------------
Deferred tax liabilities:
Sec 481(a) adjustment for cash to accrual basis accounting
- current (106,000)
- long term (106,000)
Non-deductible amortization of purchase price
Inventory - current (29,000)
Fixed assets - long term (132,000)
Customer lists - long term (168,000)
------------------
Total (541,000)
------------------
Net deferred tax liabilities ($481,000)
==================
The Company has net operating loss carryforwards for State tax purposes
approximating $678,000 expiring through 2011. Due to the uncertainty of
recognizing a tax benefit on these losses, the Company has provided a full
valuation allowance against these deferred tax assets.
NOTE 10 - 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, 2004, there were 1,521,525 shares available for grant under the 2002
Plan.
F-20
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of activity with respect to stock options granted
under the 2002 Plan at April 30, 2004:
Options outstanding Options exercisable
Weighted-average
remaining
Shares life in Exercise
Exercise prices under option years Shares price
- --------------------- ----------------- ------------- ------------- -------------
$1.35 50,000 3.90 50,000 $1.35
$1.37 2,000 3.61 1,300 $1.37
$1.66 25,000 3.42 15,000 $1.66
$1.50 50,000 1.00 50,000 $1.50
$1.25 25,000 4.01 12,500 $1.25
$1.00 350,000 0.07 350,000 $1.00
$0.45 700,000 0.07 700,000 $0.45
$0.45 300,000 2.07 133,333 $0.45
$0.75 634,000 4.09 581,167 $0.75
$0.75 250,000 4.12 54,688 $0.75
$1.07 150,000 4.27 150,000 $1.07
$1.55 100,000 4.27 100,000 $1.55
$2.33 100,000 4.27 100,000 $2.33
$1.20 137,475 4.34 22,913 $1.20
$1.00 265,000 4.61 109,665 $1.00
$1.25 150,000 1.61 150,000 $1.25
$0.97 75,000 4.92 75,000 $0.97
$0.91 115,000 4.92 2,396 $0.91
----------------- -------------
Total 3,478,475 2,657,962
================= =============
The weighted-average fair value of options on the grant date was $0.36 and
$1.06, respectively, for options granted during the years ended April 30, 2004
and 2003.
NOTE 11 - SHAREHOLDERS' EQUITY
On June 25, 2003, (and amended July 24, 2003), the Company offered in a private
placement, up to 100 units (the "Units") for sale to accredited investors at a
price of $25,000 per Unit (the "Offering"). Each Unit consists of (i) 44,444
shares of the Company's common stock and (ii) warrants to purchase 44,444 shares
of common stock, exercisable for a period of three years at an exercise price of
$0.90 per share (the "Warrants"). The Company sold all 100 Units from the
Offering and received proceeds of $2,174,268 net of the placement agent
commissions and other issuance costs. The Warrants may be redeemed in whole or
in part at the option of the Company for $0.01, 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 April 30, 2003, all 1,000 Series C Preferred shares were converted into
1,786,000 shares of the Company's common stock.
For the fiscal year ended April 30, 2004, the Company granted options to
purchase 1,452,000 shares of its common stock to certain consultants. The
options have exercise prices ranging from $0.45 to $2.33, and vesting periods of
one to five years. The Company has valued these options using the Black-Scholes
Option pricing model and recorded $209,000 of expense for the year ended April
30, 2004.
On April 21, 2004, a majority of the shareholders of the Company approved an
increase in the total number of authorized common shares from 30,000,000 to
75,000,000.
F-21
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - 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, 2004 and 2003 are as follows:
Year ended April 30, 2004 Year ended April 30, 2003
Wireless Specialty Wireless Specialty
Corporate Infrastructure Communication Total Corporate Infrastructure Communication Total
--------- -------------- ------------- ----------- --------- -------------- ------------- ----------
Revenue $ - $4,568,714 $17,507,532 $22,076,246 $ - $1,850,300 $3,572,558 $5,422,858
Depreciation
and
Amortization $98 40,054 342,358 382,510 $ - 21,544 94,957 116,501
(Loss)
income
before
income taxes ($924,625) $372,308 $504,130 ($48,187) ($223,211) ($61,185) ($77,348) ($361,744)
Goodwill $ - $2,698,343 $5,983,527 $8,681,870 $ - $1,627,044 $3,761,838 $5,388,882
Total assets $803,082 $6,387,166 $13,691,849 $20,882,097 $136,963 $2,753,206 $6,931,057 $9,821,226
NOTE 13 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company has entered into employment contracts ranging from two to four years
with its executive officers. The aggregate base salary commitments under these
contracts at April 30, 2004 are approximately $1,600,000.
Litigation
From time to time, the Company may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm the Company's business. The
Company is currently not aware of any such legal proceedings or claims that we
believe will have, individually or in the aggregate, a material adverse affect
on our business, consolidated financial condition or operating results.
F-22
WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lease Commitments
The Company leases its office facilities pursuant to non-cancelable operating
leases expiring through February 2011. The Company also has non-cancelable
vehicle leases. The minimum rental commitments under these non-cancelable leases
at April 30, 2004 are summarized as follows:
Year ending April 30,
2005 $215,720
2006 165,799
2007 125,814
2008 107,481
2009 102,854
Thereafter 196,421
-------------------
Total minimum lease payments $914,089
===================
Rent expense for all operating leases was approximately $260,000 and $100,000 in
2004 and 2003, 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. Through April 30,
2004, $485,088 was paid and $14,912 was payable to the Walker shareholders
against this earn-out provision. Accordingly, goodwill was increased by
$500,000.
In connection with the acquisition of Walker, the Company assumed a ten-year
lease with trusts, of which, certain officers of the Company are the trustees,
for a building and land located in Fairfield, California, which is occupied by
its Walker subsidiary. For the year ended April 30, 2004, $56,000 was paid as
rent for this lease.
Clayborn Contracting Group, Inc. Acquisition
In connection with the acquisition of Clayborn, an additional $1,100,000 is due
by September 30, 2007, payable in quarterly distributions to the Clayborn
shareholders, by payment of 50% of the quarterly post tax profits of Clayborn.
F-23
To the Board of Directors
CLAYBORN CONTRACTING GROUP, INC.
Auburn, California
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheets of CLAYBORN CONTRACTING GROUP,
INC. as of September 30, 2002 and 2001, and the related statements of income and
retained earnings, cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial positions of CLAYBORN CONTRACTING GROUP,
INC. as of September 30, 2002 and 2001, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles generally accepted in the United States of America.
/s/ Burnett + Company LLP
Rancho Cordova, California
September 15, 2003
F-24
CLAYBORN CONTRACTING GROUP, INC.
BALANCE SHEETS
September 30, 2002 and 2001
ASSETS 2002 2001
---------------- -----------------
CURRENT ASSETS
Cash and cash equivalents $ 459,580 $ 33,702
Cash held in lieu of retentions 19,170 66,209
Contract receivables 678,284 756,901
Costs and estimated earnings
in excess of billings 319,726 198,938
Prepaid expenses 48,329 27,536
Prepaid income tax 15,224 30,405
---------------- -----------------
Total current assets 1,540,313 1,113,691
EQUIPMENT,
net of accumulated depreciation of $458,242
and $331,695, for 2002 and 2001, respectively 368,918 453,905
OTHER ASSETS 55,265 37,150
---------------- -----------------
Total assets $ 1,964,496 $ 1,604,746
================ =================
The accompanying notes are an integral part of these financial statements.
F-25
CLAYBORN CONTRACTING GROUP, INC.
LIABILITIES AND STOCKHOLDERS' EQUITY
For the Year Ended September 30, 2002 and 2001
2002 2001
---------------- ----------------
CURRENT LIABILITIES
Accounts payable $ 517,688 $ 404,997
Accrued expenses 176,036 50,431
Current maturity of long-term debt 47,735 49,890
Billings in excess of costs and
estimated earnings 8,092 34,382
Income taxes payable 13,882 0
Deferred income taxes 76,000 94,500
---------------- ----------------
Total current liabilities 839,433 634,200
LONG-TERM LIABILITIES
Long-term debt, net of current maturity 123,604 150,450
Deferred income taxes 44,000 19,500
---------------- ----------------
Total long-term liabilities 167,604 169,950
---------------- ----------------
Total liabilities 1,007,037 804,150
---------------- ----------------
STOCKHOLDERS' EQUITY
Common stock, no par value,
50,000 shares authorized,
1,000 shares issued and outstanding 100,000 100,000
Retained earnings 857,459 700,596
---------------- ----------------
Total stockholders' equity 957,459 800,596
---------------- ----------------
Total liabilities and stockholders' equity $ 1,964,496 $ 1,604,746
================ ================
The accompanying notes are an integral part of these financial statements.
F-26
CLAYBORN CONTRACTING GROUP, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
For the Year Ended September 30, 2002 and 2001
2002 2001
------------ ------------
CONTRACT REVENUE $ 6,059,117 $ 5,059,214
COST OF SALES . 4,612,703 3,917,962
------------ ------------
Gross profit from contracting 1,446,414 1,141,252
GENERAL AND ADMINISTRATIVE EXPENSES 1,178,827 888,840
------------ ------------
Income from operations 267,587 252,412
------------ ------------
OTHER INCOME (EXPENSE)
Loss on sale of assets . (3,311) (6,986)
Interest income 5,117 22,192
Interest expense (12,717) (10,416)
------------ ------------
Total other income (expenses) (10,911) 4,790
------------ ------------
Income before taxes 256,676 257,202
PROVISION FOR INCOME TAXES 99,813 105,000
------------ ------------
NET INCOME 156,863 152,202
RETAINED EARNINGS, beginning of year 700,596 548,394
------------ ------------
RETAINED EARNINGS, end of year $ 857,459 $ 700,596
============ ============
The accompanying notes are an integral part of these financial statements.
F-27
CLAYBORN CONTRACTING GROUP, INC.
STATEMENTS OF CASH FLOWS
For the Year Ended September 30, 2002 and 2001
CASH FLOWS FROM OPERATING ACTIVITIES 2002 2001
----------------- ----------------
Net income $ 156,863 $ 152,202
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 136,633 122,822
Loss on sale of assets 3,311 6,986
Appreciation in cash surrender
value of life insurance (6,115) (10,902)
(Increase) decrease in assets:
Contract receivables 66,617 (327,315)
Costs and estimated earnings in
excess of billings (120,788) (63,313)
Prepaid expenses (20,793) (5,342)
Prepaid income tax 15,181 (30,405)
Increase (decrease) in liabilities:
Accounts payable 112,691 136,254
Accrued expenses 125,605 (24,812)
Billings in excess of costs and
estimated earnings (26,290) 28,838
Income taxes payable 13,882 (22,200)
Deferred income taxes 6,000 53,000
Other assets 0 2,687
---------------- ----------------
Net cash provided by operating activities 462,797 18,500
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment (41,064) (158,215)
Proceeds from sale of assets 25,075 13,000
Decrease (increase) in cash held in lieu of retentions 47,039 (66,209)
Proceeds from employee receivable 0 1,900
---------------- ----------------
Net cash provided by (used in) investing activities 31,050 (209,524)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (67,969) (56,545)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH 425,878 (247,569)
CASH, beginning of year 33,702 281,271
---------------- ----------------
CASH, end of year $ 459,580 $ 33,702
================ ================
SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Cash paid for interest $ 12,717 $ 10,416
================ ================
Cash paid for income taxes $ 64,750 $ 104,605
================ ================
The accompanying notes are an integral part of these financial statements.
F-28
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company's Activities - Clayborn Contracting Group, Inc. ("the Company") is
engaged in electrical and heavy construction primarily in the public works
sector. The work is performed under fixed price bid contracts. The Company
performs the majority of their work in Northern and Central California.
Estimates and Assumptions - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Accounting Basis for Recording Income - The Company records income on
construction contracts using the percentage-of-completion method of accounting
based on the proportion of costs incurred on the contract to total estimated
contract costs, except that material estimated losses which are apparent prior
to completion are provided for in their entirety. No profit is taken into income
until a contract has reached a stage of completion sufficient to reasonably
determine, in the opinion of management, the ultimate realizable profit. Base
percentages which range from 1% to 5%, depending on the type of contract, are
generally used to determine when a sufficient stage of completion has been
reached. Claims for additional contract compensation due the Company are not
reflected in the accounts until the year in which such claims are allowed. As
contracts extend over one or more periods, revisions in estimated costs and
profits are reflected in the accounting period in which the facts which require
the revisions become known.
Cost of sales includes all direct labor and labor costs, materials,
subcontractors, equipment costs and other costs related to contract performance,
such as indirect labor, supplies, tools and repairs. General and administrative
costs are charged to expense as incurred.
The asset, "Costs and estimated earnings in excess of billings," represents
revenues recognized in excess of amounts billed on construction contracts in
progress. The liability, "Billings in excess of costs and estimated earnings,"
represents billings in excess of revenues recognized on construction contracts
in progress.
Financial Statement Classification - In accordance with normal practice in the
construction industry, the Company includes in current assets and liabilities
amounts realizable and payable over a period in excess of one year. Consistent
with this practice, asset and liability accounts relating to construction
contracts, including related deferred income taxes, are classified as current.
The lives of the contracts entered into by the Company generally range from
three to eighteen months.
Cash and Cash Equivalents - For financial statement purposes, the Company
considers all highly liquid investments with original maturities of three months
or less to be cash equivalents.
F-29
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Concentration of Credit Risk - The Company maintains cash balances in excess of
Federal Deposit Insurance Corporation insurable limits.
The Company performed a significant amount of work for one customer, comprising
approximately 75% of outstanding contract receivables as of September 30, 2002.
The Company performed a significant amount of work for two customers, comprising
approximately 82% of outstanding contract receivables as of September 30, 2001.
Contract revenue earned from one customer was approximately 62% and 56% of total
contract revenue for the years ended September 30, 2002 and 2001, respectively.
Contract Receivables - The Company writes off contract receivables when
uncollectible and payments subsequently received on such receivables are
credited to revenue. Included in contract receivables is retainage receivable of
$107,579 and $164,551 for the years ended September 30, 2002 and 2001,
respectively, which is expected to be collected within one year.
Equipment - Equipment is recorded at cost and includes improvements that
significantly add to its productivity or extend its useful life. Costs of
maintenance and repairs are charged to expense. Upon retirement or disposal of
equipment, the costs and related depreciation are removed from the accounts, and
gain or loss, if any, is reflected in the earnings for both financial statement
and income tax reporting purposes. Depreciation is provided for using the
straight-line method. The estimated useful lives used for calculating
depreciation for equipment classifications are as follows:
Lives
-----------
Automotive equipment 5-7 Years
Construction equipment 5-7 Years
Office equipment 7-10 Years
Income Taxes - For income tax purposes, the Company reports income on the
completed contract method of accounting. Under this method, billings and costs
are accumulated during the period of construction, but profits or losses are not
recorded until completion of the contracts.
Straight-line and accelerated depreciation are used for tax reporting purposes.
Assets purchased after December 31, 1986, are subject to modified ACRS rules
under the guidelines of the Tax Reform Act of 1986 (TRA 86).
Deferred income taxes are recorded using the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amount of
existing assets and liabilities and their respective tax basis. Significant
differences between the financial statement amounts and the tax basis for the
Company arise from the recording of depreciation and the recognition of income
from construction contracts. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period of enactment.
F-30
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
2. CASH HELD IN LIEU OF RETENTIONS
In exchange for the early release of retentions on various contracts, escrow
accounts have been established in the amounts of $19,170 and $66,209 at
September 30, 2002 and 2001, respectively.
3. COSTS AND ESTIMATED EARNINGS ON CONSTRUCTION CONTRACTS IN PROGRESS
Costs and estimated earnings on construction contracts in progress contrast
related billings at September 30, 2002 and 2001 as follows:
2002 2001
---------------- ----------------
Cost of sales to date $ 928,866 $ 868,308
Gross profit to date 219,809 269,333
---------------- ----------------
Earned contract revenue 1,148,675 1,137,641
Contract billings to date 837,041 973,085
---------------- ----------------
Net under billings $ 311,634 $ 164,556
================ ================
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings $ 319,726 $ 198,938
Billings in excess of costs and estimated earnings (8,092) (34,382)
---------------- ----------------
Net under billings $ 311,634 $ 164,556
================ ================
F-31
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
4. EQUIPMENT
Equipment consists of the following as of September 30:
2002 2001
---------------- ----------------
Automotive equipment $ 409,409 $ 397,659
Construction equipment 382,594 351,030
Office equipment 35,157 36,911
---------------- ----------------
Subtotals 827,160 785,600
Less accumulated depreciation 458,242 331,695
---------------- ----------------
Totals $ 368,918 $ 453,905
================ ================
Depreciation charged to equipment costs and general and administrative expenses
amounted to $121,789 and $14,844, respectively, for the year ended September 30,
2002, and $106,337 and $16,485 respectively, for the year ended September 30,
2001.
5. LINES OF CREDIT
The Company has an unsecured revolving line of credit with Wells Fargo Bank, due
on demand with interest at prime plus 1.00% per annum, which expired March 10,
2003 and was subsequently renewed until March 10, 2004. The line of credit
available with Wells Fargo Bank is $250,000. As of September 30, 2002 and 2001,
there was no balance due.
The Company has a second line of credit with Wells Fargo Bank to finance
equipment purchases. Upon the use of this line of credit, equipment purchases
are financed in separate term notes (Note 6). The amounts financed under this
credit facility bear interest at the bank's current fixed or variable rate in
effect when the individual equipment is financed. The line of credit available
annually is $200,000. Balances of $161,032 and $182,407 were available on the
line of credit as of September 30, 2002 and 2001, respectively. The line of
credit expired on March 5, 2003 and was subsequently renewed until March 5,
2004.
F-32
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
6. LONG-TERM DEBT
Long-term debt consists of the following:
Interest
Rate 2002 2001
---------------- ------------------ ----------------
General Motors Acceptance Corporation,
secured by automotive equipment, aggregate 6.90%
monthly principal and interest payments to
of $834, due through January 2005 8.49% $ 13,916 $ 27,853
Wells Fargo Bank, secured by equipment, 6.65%
aggregate monthly principal and interest to
payments of $4,252, due through September 2007 8.90% 141,593 151,751
Chrysler Financial Corporation, secured by
automotive equipment, monthly principal and
interest payments of $423, due November 2005 0.90% 15,830 20,736
------------------ ----------------
Current maturity of long-term debt 47,735 49,890
------------------ ----------------
Long-term debt, net of current maturity $ 123,604 $ 150,450
================== ================
Aggregate maturities on long-term debt are as follows:
Year Ending September 30: 2002 2001
------------------------ ------------------ ----------------
2002 $ 0 $ 49,890
2003 47,735 45,153
2004 48,913 46,175
2005 43,415 40,477
2006 22,274 18,645
2007 9,002 0
------------------- ----------------
$ 171,339 $ 200,340
=================== ================
F-33
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
7. PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following for the year ended
September 30:
2002 2001
---------------- ----------------
Current tax expense $ 93,813 $ 52,000
Deferred tax expense 6,000 53,000
---------------- ----------------
Total provision for income taxes $ 99,813 $ 105,000
================ ================
The September 30, 2002 and 2001 income tax expense differed from the amounts
computed by applying the federal statutory income tax rate of 34% to the pre-tax
net income as a result of the following:
2002 2001
---------------- ----------------
Federal tax at the statutory rate $ 87,300 $ 87,400
State income taxes, net of federal tax benefit 15,000 15,000
Utilization of tax credits (5,500) 0
Permanent differences 4,400 2,800
Other (1,387) (200)
---------------- ----------------
$ 99,813 $ 105,000
================ ================
The components of the temporary differences that give rise to significant
portions of the deferred tax liabilities are as follows:
2002 2001
---------------- ---------------
Contract revenue recognition $ 79,500 $ 98,300
Depreciation 44,000 19,500
Other (3,500) (3,800)
---------------- ---------------
Net deferred tax liabilities $ 120,000 $ 114,000
================ ===============
F-34
CLAYBORN CONTRACTING GROUP, INC.
NOTES TO THE FINANCIAL STATEMENTS
8. EMPLOYEE PROFIT SHARING PLAN
The Company has an employee profit sharing plan under Section 401(k) covering
eligible employees. The Company matches 25% of employee deferrals up to 3% of
wages. The Company's contribution for the year ended September 30, 2002 and 2001
amounted to $7,256 and $7,814, respectively, and is included in employee
benefits in general and administrative expenses.
9. LITIGATION
From time to time, the Company may become involved in various lawsuits and legal
proceedings, which arise in the ordinary course of business. However, litigation
is subject to inherent uncertainties, and an adverse result in these or other
matters may arise from time to time that may harm the Company. The Company's
management is currently not aware of any such legal proceedings or claims that
they believe will have, individually or in the aggregate, a material adverse
affect on the Company's financial condition or operating results.
10. SUPPLEMENTAL DISCLOSURES REGARDING CASH FLOWS
Non-cash investing and financing activities for the years ended September 30,
2002 and 2001 consisted of the acquisition of equipment through long-term debt
totaling $38,968 and $170,805, respectively.
11. SUBSEQUENT EVENT
In August 2003, the Board of Directors of the Company approved an Agreement and
Plan of Merger with WPCS International Incorporated ("WPCS"). The merger closed
effective August 22, 2003. The change in ownership resulting from the merger
constitutes an event of default under the line of credit agreement with the Bank
referred to in Note 5. WPCS acquired all of the issued and outstanding shares of
the Company in exchange for $900,000 cash consideration and 826,446 newly issued
shares of WPCS common stock. An additional $1,100,000 is payable by delivery to
the Company shareholders of 50% of the post tax profits of the Company, payable
in quarterly distributions.
F-35
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder of Heinz Corporation
I have audited the accompanying balance sheets of Heinz Corporation, a Missouri
Corporation, as of December 31, 2003 and 2002, and the related statements of
income, retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with auditing standards generally accepted in
the United States of America. Those standards require that I plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. And audit includes, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Heinz Corporation as of December
31, 2003 and 2002, and the results of its operations and its cash flow for the
years then ended in conformity with generally accepted accounting principles.
/s/ Michael N. Fitzgerald
Fenton, Missouri
March 5, 2004
F-36
HEINZ CORPORATION
BALANCE SHEET
DECEMBER 31, 2003 and 2002
ASSETS
2003 2002
---- ----
Current Assets
Cash and cash equivalents $ 30,308 $ 167,187
Contract receivable, net of allowance
for doubtful accounts of $0 for 2003 and
2002 395,159 1,079,593
Billings below cost and estimated
earnings on uncompleted
contracts 57,962 269,340
Prepaid assets 14,353 -
-------------- --------------
497,782 1,516,120
Equipment and vehicles at cost
Equipment and vehicles 290,246 290,246
Accumulated depreciation (261,276) (237,488)
-------------- --------------
28,970 52,758
Other Assets
Deposits 18,342 14,515
Life insurance - CSV 42,970 -
-------------- --------------
61,312 14,515
-------------- --------------
TOTAL ASSETS $ 588,064 $ 1,583,393
============== ==============
See accompanying notes.
F-37
HEINZ CORPORATION
BALANCE SHEET
DECEMBER 31, 2003 and 2002
LIABILITIES AND STOCKHOLDERS EQUITY
2003 2002
----- ----
Current Liabilities
Accounts payable $ 466,553 $ 829,453
Current portion long term debt 92,114 203,049
Billings in excess of cost and
estimated earnings on
uncompleted contracts 56,638 20,516
------------ ------------
615,305 1,053,018
Long Term Debt 3,677 21,133
Stockholders Equity
Common stock - $1 par value,
30,000 shares authorized
2,500 shares issued and out-
standing, including 1,500 shares held
as treasury stock 2,500 2,500
Capital in excess of par 99,500 99,500
Retained earnings 1,115,598 1,655,758
Treasury stock (1,248,516) (1,248,516)
----------- ----------
(30,918) 509,242
TOTAL LIABILITIES AND
----------- ----------
STOCKHOLDERS EQUITY $ 588,064 $1,583,393
=========== ==========
See accompanying notes.
F-38
HEINZ CORPORATION
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 2003 and 2002
2003 2002
---- ----
Contract revenues - net of allowances $4,152,922 $6,940,260
Contract costs - net of allowances 3,954,653 6,245,480
-------------- ------------
Gross profit 198,269 694,780
General & administrative expenses 766,309 1,165,338
Depreciation 23,788 38,660
Interest expense 13,289 30,791
------------- ------------
803,386 1,234,789
Other income 67,456 1,165
------------- ------------
Net income $ (537,661) $ (538,844)
============== =============
See accompanying notes.
F-39
HEINZ CORPORATION
STATEMENT OF RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 2003 and 2002
2003 2002
---- ----
Retained earnings
- beginning of year $1,655,758 $2,564,602
Stockholder distribution (2,499) (370,000)
Net income (537,661) (538,844)
Retained earning
----------------- -----------------
- end of year $1,115,598 $1,655,758
================= =================
See accompanying notes.
F-40
HEINZ CORPORATION
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 and 2002
2003 2002
---- ----
Cash Flows from Operating Activities
Net income/(loss) $ (537,661) $(538,844)
Adjustment to reconcile net
income to net cash provided
by operating activities
Depreciation 23,788 38,660
(Increase)/ decrease in
Contract receivable 684,434 2,013,475
Prepaid assets (14,353) -
Billings below cost and
estimated earnings 211,378 (58,412)
Deposits (3,827) (5,000)
Cash surrender value (42,970) -
Increase/(decrease) in
Accounts payable (362,900) (213,590)
Profit sharing payable - (28,109)
Billing over cost and
estimated earnings 36,122 (303,869)
---------------- ----------------
(5,989) 904,311
Cash Flow from Investing Activities
Acquisition of equipment - (18,966)
Disposition of equipment - -
---------------- ----------------
- (18,966)
Cash Flow from Financing Activities
Distribution to stockholders (2,499) (370,000)
New borrowings - -
Debt reduction (128,391) (446,115)
---------------- ----------------
(130,890) (816,115)
---------------- ----------------
Net Change in Cash (136,879) $ 69,230
================ ================
Cash and cash equivalents
Beginning of year $ 167,187 $ 97,957
End of year $ 30,308 $ 167,187
================ ================
Supplemental information
Interest paid $ 13,289 $ 30,791
Income taxes paid $ 0 $ 0
See accompanying notes.
F-41
HEINZ CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 and 2002
NOTE A. SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying consolidated financial statements follows:
Accounts receivable are due within contractual payment terms and are stated at
amounts due from customers net of an allowance for doubtful accounts. Credit is
extended based on evaluation of a customer's financial condition. Accounts
outstanding longer than the contractual payment terms are considered past due.
The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Company's previous loss history, the customer's current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes off accounts receivable when they become
uncollectible, and payment subsequently received on such receivables are
credited to the allowance for doubtful accounts.
Contract receivables are recorded when invoices are issued and are presented in
the balance sheet net of the allowance for doubtful accounts. Contract
receivables are written off when they are determined to be uncollectible.
Property and equipment are stated at cost, normal repairs and maintenance are
expensed as incurred. When properties are retired or otherwise disposed of, the
related cost and accumulated depreciation are removed from the accounts and
gains or losses on the disposition are reflected in operations.
Depreciation of property and equipment is computed over their estimated useful
lives. The Company uses an accelerated method of depreciation. The Company also
has elected to expense certain equipment items purchased during the year.
The Company recognizes revenues from fixed-price and modified fixed-price
construction contracts on the percentage-of-completion method, measured by the
percentage of cost incurred to date to estimated total cost for each contract.
That method is used because management considers total cost to be the best
available measure of progress on the contracts. Because of inherent uncertain-
ties in estimating costs, it is at least reasonably possible that the estimates
used will change within the near term.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools
and repairs. Selling, general, and administrative costs are charged to expense
as incurred. Provisions for estimated losses on uncompleted contracts are made
in the period
F-42
HEINZ CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 and 2002
in which such losses are determined. Changes in job performance, job conditions,
and estimated profitability may result in revisions to costs and income, which
are recognized in the period in which the revisions are determined. Changes in
estimated job profitability resulting from job performance, job conditions,
contract penalty provisions, claims, change orders, and settlements, are
accounted for as changes in estimates in the current period.
The asset, "Billings below cost and estimated earnings on uncompleted contracts"
represents revenues recognized in excess of amounts billed. The liability,
"Billings in excess of costs and earnings on uncompleted contracts," represents
billings in excess of revenues recognized.
Management uses estimates and assumptions in preparing these financial
statements in accordance with accounting principles generally accepted in the
United States of America. Those estimates and assumptions affect the reported
amounts of assets and liabilities and the reported revenues and expenses. Actual
results could vary from the estimates that were used.
For purposes of the statements of cash flows, the Company considers all highly
liquid investments available for current use with an initial maturity of three
months or less to be cash equivalents.
NOTE B. ORGANIZATION
The Company was incorporated in Missouri on December 6, 1993 and began business
on January 1, 1994. The Company is authorized to issue 30,000 shares of $1.00
par value stock. As of December 31, 2000, 2,500 shares were issued and and
outstanding. James J. Heinz owns 1,000 shares. The Company has repurchased the
remaining 1,500 shares. See Note F.
The Company is engaged in consulting, engineering, integration and
implementation services relating to wireless infrastructure, including macro
wireless networks, in building antenna systems, low voltage installations, and
cell site construction. The Company operates on a nationwide basis.
The Company has made an election under Subchapter "S" of the Internal Revenue
Code to be treated as an S-Corporation for income tax purposes. The Company
received notification of acceptance as an S-Corporation on March 14, 1994. As an
S-Corporation the Company does not pay any federal or state income tax on income
that it earns; those taxes are paid by the stockholders. Consequently, there are
no accruals for income taxes.
F-43
HEINZ CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 and 2002
NOTE C. LINE OF CREDIT
The Company negotiated a $200,000 line of credit with First National Bank on
September 16, 2003 The note matures on September 16, 2004 interest. The rate is
First National Bank's prime rate. The line was secured by a first lien on
contract receivable, business equipment and general intangibles and the personal
guarantee and assets of the stockholder. The Company had a balance of $0 and $0
as of December 31, 2003 and 2002 respectively.
NOTE D. PROFIT SHARING PLAN
The Company adopted a regional prototype standardized profit sharing and trust
from Retirement Plan Services, Inc. effective for the year beginning January 1,
1997. The plan is designed to generally exclude any employee covered by a
collectively bargained union contract. Contributions to the plan amounted to $0
and $0 in 2003 and 2002 respectively.
NOTE E. COLLECTIVELY BARGAINED AGREEMENTS
The Company, through its participation in the Associated General Contractors of
St. Louis, has a labor agreement with Laborers' Local Unions Nos. 42, 53 and 110
affiliated with the Eastern Missouri Laborers' District Council. The agree- ment
covers the period March 1, 1999 through March 1, 2004.
The Company also has agreements with the Southern Illinois District Council of
Carpenters covering the period August 1, 2003 through July 31, 2008.
The Company, through its participation in the St. Louis Area Building
Contractors, has a labor agreement with Carpenters' District Council of Greater
St. Louis affiliated with the United Brotherhood of Carpenters and Joiners of
America, AFL-CIO. The current agreement covers the period May 5, 1999 through
May 3, 2004.
The Company, through its participation in the Associated General Contractors of
Missouri has a labor agreement with the Western Missouri and Kansas Laborer's
District Council and their affiliated local unions. The current agreement covers
the period May 1, 2002 through April 30, 2006.
F-44
HEINZ CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 and 2002
The Company negotiated additional agreements with the Electrical Insurance
Trustees in Chicago, Illinois which automatically renews yearly; the Mason
Tenders District of Greater New York from 2002 through 2005; and the
Construction and General Laborers' District Council of Chicago Illinois and
vicinity which renews annually.
The Company has a labor agreement with the International Brotherhood of
Electrical Workers, Local Union No. 1, AFL-CIO, effective January 10, 2000. The
agreement expires March 10, 2004.
NOTE F. TREASURY STOCK
On January 1, 1998 the Company entered into a contract to repurchase 1,000
shares of stock held/owned by a stockholder representing that stockholder's 100%
interest in the Company. The purchase price was $1,044,316 and was
collateralized by a promissory note carrying an interest rate of 8.5%. The note
is for a term of 84 months with monthly payments of $16,117.38 which includes
principal and interest. The payments began on February 1, 1998.
On August 25, 2000 the Company entered into a contract to repurchase 250 shares
of stock held/owned by a stockholder representing that stockholder's 100%
interest in the Company. The purchase price was $134,200 consisting of cash of
$2,701, forgiveness of stock subscription agreement note of $50,000 and a
promissory note of $81,499. The note is payable in 36 monthly payments and
carries on interest rate of 8.5%. Monthly payments are $2,572.72.
On December 30, 2000 the Company entered into a contract to repurchase 250
shares of stock held/owned by a stockholder representing that stockholder's 100%
interest in the Company. The purchase price was $170,000 consisting of cash of
$70,000, forgiveness of a stock subscription agreement note of $50,000 and a
promissory note of $50,000. The note was paid in two equal installments during
2001.
NOTE G. CONCENTRATION OF BUSINESS
As noted earlier, the Company is engaged in the construction of cellular towers
for a number of telecommunications companies. This is a highly competitive
industry and the Company must operate in numerous mid-western geographical
venues.
F-45
HEINZ CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 and 2002
NOTE H. SCHEDULE OF WORK IN PROCESS (OVER)/UNDER BILLED
The following Schedule of Work in Process (Over)/Under Billed reflects the
following:
2003 2002
-------- ---------
Billings below cost and estimated earnings on
on uncompleted contracts $ 57,962 $263,940
Billings in excess of costs and estimated
earnings on uncompleted contracts $ 56,638 $ 20,516
========= =========
Where a loss on a contract is anticipated, the full amount of the loss has been
recognized in the financial statements.
NOTE I. SUBSIDIARY-HEINZ TOWER SERVICES, INC.
Heinz Tower Services, Inc., is a wholly owned subsidiary of Heinz Corporation.
Heinz Tower provides tower erection, antenna erection, and cable communication
installation services to Heinz Corporation.
NOTE J. LEASE OBLIGATIONS-VEHICLES
The Company has annual lease obligations for vehicles as follows:
2003 2002
---- ----
YEAR $ AMOUNT YEAR $ AMOUNT
---- -------- ---- --------
2003 $101,581
2004 $ 32,589 2004 $ 31,839
2005 $ 11,762 2005 $ 3,357
2006 $ 4,266 2006 $ -
2007 $ - 2007 $ -
2008 $ -
F-46
WPCS INTERNATIONAL INCORPORATED and SUBSIDIARIES
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
We are providing the following unaudited pro forma condensed consolidated
statement of operations of WPCS International Incorporated (the "Company") and
its acquisition of Clayborn Contracting Group, Inc. ("Clayborn") and Heinz
Corporation ("Heinz"), in order to present the results of operations of the
Company as if the acquisitions of Clayborn and Heinz had occurred on May 1,
2003.
On August 22, 2003, the Company acquired all of the issued and outstanding
common stock of Clayborn. The acquisition of Clayborn gives the Company
additional expertise in engineering and deployment services for specialty
communication systems and additional wireless opportunities to pursue. The
Company acquired all of the issued and outstanding shares of Clayborn in
exchange for $900,000 cash and 826,446 newly issued shares of our common stock
with a fair value of approximately $868,000 based on the average value of the
Company's common stock as of a few days before and after the merger terms were
agreed to and announced. An additional $1,100,000 is due by September 3, 2007,
payable in quarterly distributions, by payment to the Clayborn shareholders of
50% of the post tax profits of Clayborn. Based on the historical net assets
acquired from Clayborn, the Company recognized goodwill of approximately $1.8
million.
On April 2, 2004, the Company acquired all of the issued and outstanding common
stock of Heinz. Heinz is a St. Louis, Missouri based provider of in-building
wireless infrastructure services for both cellular and WiFi applications
including consulting, integration and installation services for wireless
infrastructure. The acquisition of Heinz gives the Company additional project
engineering expertise for wireless infrastructure services, broadens our
customer base and expands our geographical presence in the Midwest. WPCS
acquired all of the issued and outstanding shares of Heinz for $1,000,000, as
follows: (1) $700,000 of its common stock, based on the closing price of its
common stock on March 30, 2004 or $0.98 per share, for an aggregate of 714,286
newly issued shares of WPCS common stock and (2) $300,000 total cash
consideration, of which $100,000 was paid at closing and a $200,000 non-interest
bearing promissory note. Of the $200,000, $75,000 is payable on the first and
second anniversaries of the closing date and $50,000 is payable on the third
anniversary of the closing date. Based on the preliminary information currently
available, we expect to recognize goodwill of $1,000,000. Upon completion of a
formal purchase price allocation there may be a decrease in the amount assigned
to goodwill and a corresponding increase in tangible or other intangible assets.
The following unaudited pro forma condensed consolidated financial information
is presented for informational purposes only and is not necessarily indicative
of (i) the results of operations of the Company that actually would have
occurred had the transactions been consummated on the dates indicated or (ii)
the results of operations of the Company that may occur or be attained in the
future. The following information is qualified in its entirety by reference to
and should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations", WPCS's audited consolidated
financial statements, including the notes thereto contained herein for the year
ended April 30, 2004, and other historical financial information appearing
elsewhere herein.
F-47
WPCS INTERNATIONAL INC AND SUBSIDIARIES
Unaudited Pro Forma Consolidated Statement of Operations for the
Year Ended April 30, 2004
FOR THE YEAR FOR THE FOUR FOR THE ELEVEN
ENDED MONTHS ENDED MONTHS ENDED PRO FORMA
APRIL 30, AUGUST 31, MARCH 31, CONSOLIDATED
2004 2003 2004 PRO FORMA AFTER
WPCS CLAYBORN HEINZ ADJUSTMENTS ACQUISITIONS
----------------- ----------------- ----------------- --------------- -----------------
Revenue $ 22,076,246 $ 1,532,979 $ 3,627,278 $ - $ 27,236,503
Costs and expenses:
Cost of revenue 16,076,155 1,092,206 3,183,658 - 20,352,019
Selling, general and administrative expenses 5,560,583 605,512 571,668 - 6,737,763
Provision for doubtful accounts 91,137 - 14,997 - 106,134
Depreciation and amortization 382,510 47,610 27,646 16,333 474,099
----------------- ----------------- ----------------- --------------- -----------------
Total costs and expenses 22,110,385 1,745,328 3,797,969 16,333 27,670,015
----------------- ----------------- ----------------- --------------- -----------------
Operating Loss (34,139) (212,349) (170,691) (16,333) (433,512)
Interest expense 14,048 - - - 14,048
----------------- ----------------- ----------------- --------------- -----------------
Loss before provision for income taxes
(48,187) (212,349) (170,691) (16,333) (447,560)
Income tax provision (76,000) 84,041 - - 8,041
----------------- ----------------- ----------------- --------------- -----------------
Net loss $ (124,187) $ (128,308) $ (170,691) (16,333) $ (439,519)
================= ================= ================= =============== =================
Basic net loss per common share $ (0.01) $ (0.02)
================= =================
Basic weighted average number of
common shares outstanding 18,260,359 19,229,804
================= =================
F-48
WPCS INTERNATIONAL INCORPORATED and SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS for the year ended April 30, 2004
NOTE 1. WPCS International Incorporated (the "Company") completed the
following transactions during its fiscal year ended April 30, 2004:
(a) on August 22, 2003, acquired Clayborn Contracting Group, Inc.
("Clayborn"), and (b) on April 2, 2004, acquired Heinz Corporation (
"Heinz"). For accounting purposes, each of these transactions 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 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.
NOTE 2. The unaudited pro forma consolidated statement of operations for the
fiscal year ended April 30, 2004 presented herein has been prepared as
if the merger of the Company, Clayborn and Heinz had been consummated
as of May 1, 2003. The unaudited pro forma consolidated results for
the fiscal year ended April 30, 2004 have been prepared utilizing (a)
the audited financial statements of the Company included herein for
the fiscal year ended April 30, 2004; (b) the unaudited financial
statements of Clayborn for the four months ended August 31, 2003; and
(c) the unaudited financial statements of Heinz for the eleven months
ended March 31, 2004. Pro forma adjustments for the twelve months
ended April 30, 2004 have been made for the following.
(a) To record a full year of amortization for the fair value of customer
lists acquired related to the Clayborn acquisition, as if the
acquisition had been consummated as of May 1, 2003. Accordingly,
additional amortization of $16,333 is included as a pro forma
adjustment.
F-49
- ---------------------------------------------------------- ----------------------------------------------------------
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information
different from the information contained in this prospectus. This
document may only be used where it is legal to sell the securities.
The information in this document may only be accurate on the date of
this document.
1,963,417 SHARES
OF OUR
OF COMMON STOCK
TABLE OF CONTENTS
Page
Prospectus Summary 2
Risk Factors 3
Use of Proceeds 7
Market for Common Equity and Related
Stockholder Matters 8 WPCS International Incorporated
Dividend Policy 9
Management's Discussion and Analysis 10
Business 19
Management 24
Executive Compensation 27
Certain Relationships and Related Transactions 32
Security Ownership of Certain Beneficial
Owners and Management 33
Description of Securities 35
Plan of Distribution 37
Selling Stockholders 39 ________________
Legal Matters 40
Experts 40 PROSPECTUS
Available Information 41 ________________
Index to Financial Statements 42
________, 2004
- ---------------------------------------------------------- ----------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Our Articles of Incorporation limit, to the maximum extent permitted
by Delaware law, the personal liability of directors for monetary damages for
breach of their fiduciary duties as a director. Our Bylaws provided that we
shall indemnify our officers and directors and may indemnify our employees and
other agents to the fullest extent permitted by Delaware law.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party to
an action by reason of that fact that he or she was a director, officer employee
or agent of the corporation or was serving at the request of the corporation
against expenses actually and reasonably incurred by him or her in connection
with such action if he or she acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
corporation and with respect to any criminal action, had no reasonable cause to
believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, we have been advised that in the opinion
of the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated
expenses, all of which we will pay, in connection with the issuance and
distribution of the securities being registered:
Nature of Expense Amount
----------------
SEC Registration fee $ 181.60
Accounting fees and expenses *5,000.00
Legal fees and expenses *35,000.00
Printing and related expenses *5,000.00
----------------
TOTAL *$45,181.60
* Estimated.
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Item 26. Recent Sales of Unregistered Securities.
Except as set forth below, there were no sales of unregistered
securities by WPCS during the past three (3) years:
On May 17, 2002, we issued 5,500,000 shares of our common stock in
exchange for all of the issued and outstanding shares of WPCS Holdings, Inc. The
shares were issued to one accredited investor in a transaction exempt under Rule
506 of Regulation D promulgated under Section 4(2) of the Securities Act of
1933, as amended.
Between May 24, 2002 and June 11, 2002, we sold 455 shares of Series B
Preferred Stock through a private placement and received proceeds of $455,000.
Additionally, we issued 64 shares of Series B Preferred Stock to one of our
shareholders as payment for advances from shareholder and accounts payable
totaling $64,000. Each share of Series B Convertible Preferred Stock was
convertible at a basis of $1,000 per share at a conversion price equal to 75% of
the average market price of our common stock for ten days prior to the date of
conversion. On December 13, 2002, all Series B Preferred Stock was converted to
567,212 shares of the Company's common stock. The shares were issued to three
accredited investors in a transaction exempt under Section 4(2) of the
Securities Act of 1933, as amended.
On November 13, 2002, we issued 1,000,000 shares of our common stock
in exchange for all of the issued and outstanding shares of Invisnet, Inc. The
shares were issued to two accredited investors in a transaction exempt under
Section 4(2) of the Securities Act of 1933, as amended.
On December 6, 2002, we issued 1,000 shares of Series C Preferred
Stock in a private placement and received proceeds of $1,000,000. Each share of
Series C Convertible Preferred Stock is convertible into 800 shares of our
common stock, subject to certain reset provisions. On August 13, 2003, all
Series C Preferred Stock was converted to 1,786,000 shares of the Company's
common stock. The shares were issued to three accredited investors in a
transaction exempt under Section 4(2) of the Securities Act of 1933, as amended.
On December 30, 2002, we issued 2,486,000 shares of our common stock
in exchange for all of the issued and outstanding shares of Walker Comm, Inc.
The shares were issued to three accredited investors in a transaction exempt
under Section 4(2) of the Securities Act of 1933, as amended.
During July, August and September 2003, we sold an aggregate of 100
units to 40 accredited investors in a private placement for aggregate proceeds
of $2,500,000. Each Unit consists of (i) 44,444 shares of our common stock, and
(ii) warrants to purchase 44,444 shares of common stock, exercisable for a
period of three years at an exercise price of $0.90 per share. The shares were
issued in a transaction exempt under Rule 506 of Regulation D promulgated under
Section 4(2) of the Securities Act of 1933, as amended.
On August 22, 2003, we issued 826,446 shares of our common stock in
exchange for all of the issued and outstanding shares of Clayborn Contracting
Group, Inc. The shares were issued to one accredited investor in a transaction
exempt under Rule 506 of Regulation D promulgated under Section 4(2) of the
Securities Act of 1933, as amended.
On April 2, 2004, we issued 714,286 shares of our common stock in
exchange for all of the issued and outstanding shares of Heinz Corporation. The
shares were issued to one accredited investor in a transaction exempt under Rule
506 of Regulation D promulgated under Section 4(2) of the Securities Act of
1933, as amended.
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Item 27. Exhibits.
The following exhibits are included as part of this Form SB-2.
References to "us" in this Exhibit List mean WPCS International Incorporated, a
Delaware corporation.
Exhibit No. Description
3.1 Certificate of Incorporation of Internet International Communications
Ltd., incorporated by reference to Exhibit 3.1 of wowtown.com, Inc.'s
Form SB-2, filed June 8, 2000.
3.2 Bylaws of Internet International Communications Ltd., incorporated by
reference to Exhibit 3.2 of wowtown.com, Inc.'s Form SB-2, filed June
8, 2000.
4.1 Certificate of Designation of Series A Preferred Stock, incorporated
by reference to Exhibit 4.1 of wowtown.com, Inc.'s Form SB-2, filed
June 8, 2000.
4.2 Certificate of Designation of Series B Preferred Stock, incorporated
by reference to Exhibit 4.2 of WPCS International Incorporated's
Annual Report on Form 10-KSB, filed July 29, 2002.
4.3 Certificate of Designation of Series C Preferred Stock, incorporated
by reference to Exhibit 4.3 of WPCS International Incorporated's
Annual Report on Form 10-KSB, filed August 14, 2003.
4.4 2002 Employee Stock Option Plan, incorporated by reference to Exhibit
4.4 of WPCS International Incorporated's Annual Report on Form 10-KSB,
filed August 14, 2003.
4.5 Form of 2003 Warrant, incorporated by reference to Exhibit 4.5 of WPCS
International Incorporated's Annual Report on Form 10-KSB, filed
August 14, 2003.
5.1 Sichenzia Ross Friedman Ference LLP Opinion and Consent (filed
herewith).
10.1 Andrew Hidalgo Employment Agreement, dated as of February 1, 2004,
incorporated by reference to Exhibit 10.1 of WPCS International
Incorporated's registration statement on Form SB-2/A, filed April 30,
2004.
10.2 E.J. von Schaumburg Employment Agreement, incorporated by reference to
Exhibit 10.2 of WPCS International Incorporated's Annual Report on
Form 10-KSB, filed August 14, 2003.
10.3 Donald Walker Employment Agreement, incorporated by reference to
Exhibit 10.3 of WPCS International Incorporated's Annual Report on
Form 10-KSB, filed August 14, 2003.
10.4 Gary Walker Employment Agreement, incorporated by reference to Exhibit
10.4 of WPCS International Incorporated's Annual Report on Form
10-KSB, filed August 14, 2003.
10.5 Joseph Heater Employment Agreement, dated as of February 1, 2004,
incorporated by reference to Exhibit 10.5 of WPCS International
Incorporated's registration statement on Form SB-2/A, filed April 30,
2004.
10.6 Agreement and Plan of Merger by and among Phoenix Star Ventures, Inc.,
WPCS Acquisition Corp., a Delaware corporation, WPCS Holdings, Inc., a
Delaware corporation, and Andy Hidalgo, dated as of May 17, 2002,
incorporated by reference to Exhibit 1 of WPCS International
Incorporated's Current Report on Form 8-K/A, filed June 12, 2002.
10.7 Agreement and Plan of Merger by and among WPCS International
Incorporated, Invisinet Acquisitions Inc., Invisinet, Inc., J. Johnson
LLC and E. J. von Schaumburg made as of the 13th day of November,
2002, incorporated by reference to Exhibit 3 of WPCS International
Incorporated's Current Report on Form 8-K, filed November 27, 2002.
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10.8 Amendment to Invisinet Bonus Agreement, dated as of May 27, 2003,
incorporated by reference to Exhibit 10.8 of WPCS International
Incorporated's Annual Report on Form 10-KSB, filed August 14, 2003.
10.9 Agreement and Plan of Merger by and among WPCS International
Incorporated, Walker Comm Merger Corp., Walker Comm, Inc., Donald C.
Walker, Gary R. Walker, and Tanya D. Sanchez made as of the 30th day
of December, 2002, incorporated by reference to Exhibit 3 of WPCS
International Incorporated's Current Report on Form 8-K, filed January
14, 2003.
10.10 Agreement and Plan of Merger by and among WPCS International
Incorporated, Clayborn Contracting Acquisition Corp., Clayborn
Contracting Group, Inc., David G. Gove and Sharon Gove made as of the
22nd day of August, 2003, incorporated by reference to Exhibit 3 of
WPCS International Incorporated's Current Report on Form 8-K, filed
August 29, 2003.
10.11 Agreement and Plan of Merger by and among WPCS International
Incorporated, Heinz Acquisition Corp., Heinz Corporation and James
Heinz made as of the 2nd day of April, 2004, incorporated by reference
to Exhibit 3 of WPCS International Incorporated's Current Report on
Form 8-K, filed April 9, 2004.
10.12 James Heinz Employment Agreement, dated as of April 1, 2004,
incorporated by reference to Exhibit 10.12 of WPCS International
Incorporated's registration statement on Form SB-2/A, filed April 30,
2004.
23.1 Consent of J. H. Cohn LLP (filed herewith).
23.2 Consent of Burnett & Company LLP regarding the audited financial
statements of Clayborn Contracting Group, Inc. (filed herewith).
23.3 Consent of Michael N. Fitzgerald regarding the audited financial
statements of Heinz Corporation (filed herewith).
23.4 Consent of legal counsel (see Exhibit 5).
Item 28. Undertakings.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of the
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) under the Securities Act if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement, and
(iii) Include any additional or changed material information
on the plan of distribution.
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(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities
Act, treat the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this registration statement as of the
time it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2/A and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of Exton,
State of Pennsylvania, on August 17, 2004.
WPCS INTERNATIONAL INCORPORATED
By: /s/ Andrew Hidalgo
----------------------
Andrew Hidalgo, Chairman, Chief Executive Officer
and Director
By: /s/ Joseph Heater
----------------------
Joseph Heater, Chief Financial Officer (Principal
Financial Officer) and Principal Accounting
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of WPCS International
Incorporated, a Delaware corporation, do hereby constitute and appoint Andrew
Hidalgo the lawful attorney in-fact and agent with full power and authority to
do any and all acts and things and to execute any and all instruments which said
attorney and agent, determine may be necessary or advisable or required to
enable said corporation to comply with the Securities Act of 1933, as amended,
and any rules or regulations or requirements of the Securities and Exchange
Commission in connection with this Registration Statement. Without limiting the
generality of the foregoing power and authority, the powers granted include the
power and authority to sign the names of the undersigned officers and directors
in the capacities indicated below to this Registration Statement, and to any and
all instruments or documents filed as part of or in conjunction with this
Registration Statement or amendments or supplements thereof, and each of the
undersigned hereby ratifies and confirms that said attorney and agent, shall do
or cause to be done by virtue thereof. This Power of Attorney may be signed in
several counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney and pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed below by the following
persons in the capacities on August 17, 2004.
Signature Title
--------- -----
/s/ Andrew Hidalgo Chairman, Chief Executive Officer
- --------------------- and Director
Andrew Hidalgo
/s/ Norm Dumbroff Director
- ---------------------
Norm Dumbroff
/s/ Neil Hebenton Director
- ---------------------
Neil Hebenton
/s/ Gary Walker Director
- ---------------------
Gary Walker
/s/ William Whitehead Director
- ---------------------
William Whitehead
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