UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant To Section 13 Or 15(D) of The Securities Exchange Act of 1934 Date of report (date of earliest event reported): November 24, 2004 WPCS INTERNATIONAL INCORPORATED (Exact name of registrant as specified in its charter) Delaware 0-26277 98-0204758 (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification No.) 140 South Village Avenue, Suite 20, Exton, Pennsylvania 19341 (Address of principal executive offices) Registrant's telephone number, including area code: (610) 903-0400 Copy of correspondence to: Marc J. Ross, Esq. Sichenzia Ross Friedman Ference LLP 1065 Avenue of the Americas New York, New York 10018 Tel: (212) 930-9700 Fax: (212) 930-9725 ITEM 1.01 Entry Into a Material Definitive Agreement; and ITEM 2.01 Completion of Acquisition or Disposition of Assets On November 24, 2004, WPCS International Incorporated (the "Company"), acquired Quality Communications & Alarm Company, Inc., a New Jersey corporation ("Quality"), for $6,700,000 in cash, subject to adjustment. Quality was acquired pursuant to a Stock Purchase Agreement among WPCS International Incorporated, Richard Schubiger, Matthew Haber and Brian Fortier, dated as of November 24, 2004 (the "Agreement"). In connection with the acquisition, Quality entered into employment agreements with Messrs. Schubiger, Haber and Fortier, each for a period of two years. Quality is a provider of wireless infrastructure services and has established a strong presence in the public safety sector and gaming industry with well-known clients such as Nextel, New Jersey Transit, Motorola, The Seminole Tribe of Florida, Mohegan Sun Casino, Bally's Park Place Hotel & Casino, Resorts International, Taj Mahal Casino and The Hard Rock Cafe. ITEM 9.01 Financial Statements and Exhibits. (a) Financial statements of businesses acquired. 1. Audited Financial Statements of Quality for the years ended December 31, 2003 and 2002- Filed herewith. 2. Unaudited Financial Statements of Quality for the nine month period ended September 30, 2004 and 2003- filed herewith. (b) Pro forma financial information. Pro forma financial information- filed herewith. (c) Exhibits. 10.01 Stock Purchase Agreement among WPCS International Incorporated, Richard Schubiger, Matthew Haber and Brain Fortier, dated as of November 24, 2004 (previously filed). 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. WPCS INTERNATIONAL INCORPORATED Date: December 30, 2004 /s/ ANDREW HIDALGO ----------------- -------------- Andrew Hidalgo, Chairman, Chief Executive Officer and Director 3 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. INDEX TO FINANCIAL STATEMENTS
Page Report of Independent Certified Public Accountant F-2 Balance Sheets as of December 31, 2003 and 2002 F-3 - F-4 Statements of Operations for the years ended December 31, 2003 and 2002 F-5 Statements of Stockholders' Equity for the years ended December 31, 2003 and 2002 F-6 Statements of Cash Flows for the years ended December 31, 2003 and 2002 F-7 - F-8 Notes to Financial Statements F-9 - F-14
F-1 LEONARD FRIEDMAN CERTIFIED PUBLIC ACCOUNTANT 385 Old Westbury Road East Meadow, New York 11554 Tel: (516) 735-0824 Fax: (516) 735-6301 E-mail: lenmar@optonline.net INDEPENDENT AUDITOR'S REPORT Board of Directors and Shareholders of Quality Communications & Alarm Company, Inc. I have audited the accompanying balance sheets of Quality Communications & Alarm Company, Inc., as of December 31, 2003 and 2002, and the related statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Quality Communications & Alarm Company, Inc. as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ Leonard Friedman CPA East Meadow, New York December 22, 2004 F-2 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. BALANCE SHEETS DECEMBER 31,
ASSETS 2003 2002 -------------- ------------ CURRENT ASSETS Cash and cash equivalents $ 38,642 $ 67,420 Accounts receivable 1,856,030 1,254,591 Inventories 131,629 43,286 Prepaid expenses and other current assets 24,593 35,591 -------------- ------------ Total current assets 2,050,894 1,400,888 PROPERTY AND EQUIPMENT, NET 509,960 491,340 OTHER ASSETS, security deposits 5,200 2,700 -------------- ------------ Total Assets $ 2,566,054 $ 1,894,928 ============== ============
The accompanying notes are an integral part of these statements. F-3 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. BALANCE SHEETS DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002 -------------- ------------- CURRENT LIABILITIES Bank line of credit $ 250,000 $ 200,000 Accounts payable and accrued expenses 490,610 434,784 Accrued pension payable 87,610 138,205 Deferred revenue 248,662 105,976 Current maturities of equipment loans payable 116,242 153,790 Current maturities of promissory note payable - 14,479 Deferred income taxes 19,968 10,731 -------------- ------------ Total current liabilities 1,213,092 1,057,965 -------------- ------------ EQUIPMENT LOANS PAYABLE, less current maturities 112,400 219,890 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock - no par value; 2,500 shares authorized; 1,500 shares issued and outstanding 500 500 Treasury stock, 1,000 shares at cost (105,000) (105,000) Retained earnings 1,345,062 721,573 -------------- ------------ Total Shareholders' Equity 1,240,562 617,073 -------------- ------------ Total Liabilities and Shareholders' Equity $ 2,566,054 $ 1,894,928 ============== ============
The accompanying notes are an integral part of these statements. F-4 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31,
2003 2002 ------------- ------------- Revenue $ 8,339,060 $ 5,863,152 Cost of revenue 4,649,710 3,420,015 -------------- -------------- Gross profit 3,689,350 2,443,137 -------------- -------------- Operating expenses Selling, general and administrative 2,869,537 2,350,229 Depreciation and amortization 160,597 142,602 -------------- -------------- 3,030,134 2,492,831 -------------- -------------- Operating profit (loss) 659,216 (49,694) Other income/(expense) Interest income 1,841 4,190 Interest expense (26,795) (27,720) Loss on disposition of fixed assets - (17,350) -------------- -------------- (24,954) (40,880) -------------- -------------- Earnings (loss) before income taxes 634,262 (90,574) Income tax provision 10,773 985 -------------- -------------- NET INCOME (LOSS) $ 623,489 $ (91,559) ============== ==============
The accompanying notes are an integral part of these statements. F-5 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. STATEMENTS OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 2003 AND 2002
CAPITAL TREASURY RETAINED STOCK STOCK EARNINGS TOTAL ----- ----- -------- ----- Balance January 1, 2002 $ 500 $ (105,000) $ 813,132 $ 708,632 Net (loss) for the year - - (91,559) (91,559) ---------- ------------ ------------ ------------ Balance December 31, 2002 500 (105,000) 721,573 617,073 Net Income for the year - - 623,489 623,489 ---------- ------------ ------------ ------------ Balance December 31, 2003 $ 500 $ (105,000) $ 1,345,062 $ 1,240,562 ========== ============ ============ ============
The accompanying notes are an integral part of these statements. F-6 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
2003 2002 ------------ ------------ Cash flows from operating activities Net income (loss) $ 623,489 $ (91,559) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 160,597 142,602 Loss on disposition of assets - 17,350 Deferred taxes payable 9,237 (745) Changes in operating assets and liabilities: Accounts receivable (601,439) (101,863) Inventories (88,343) 2,664 Prepaid expenses 3,498 (14,690) Other assets (2,500) - Accounts payable and accrued expenses 55,826 126,012 Deferred revenue 142,686 16,312 Accrued pension payable (50,595) 5,482 ------------ ------------ Net cash provided by operating activities 252,456 101,565 ------------ ------------ Cash flows from investing activities Proceeds from disposition of fixed assets - 32,500 Acquisition of customer list - (15,000) Acquisition of property and equipment (151,417) (76,014) ------------ ------------ Net cash used in investing activities (151,417) (58,514) ------------ ------------ Cash flows from financing activities Borrowings on line of credit 50,000 150,000 Repayment of equipment loans payable (165,338) (150,655) Repayment of promissory note payable (14,479) (13,117) ------------ ------------ Net cash used in financing activities (129,817) (13,772) ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (28,778) 29,279 Cash and cash equivalents, beginning of year 67,420 38,141 ------------ ------------ Cash and cash equivalents, end of year $ 38,642 $ 67,420 ============ ============
The accompanying notes are an integral part of these statements. F-7 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31,
2003 2002 ---- ---- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 15,384 $ 25,094 ========= ======== Income taxes $ 985 $ 2,640 ========= ======== SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Equipment purchased through bank loans $ 20,300 $ 91,887 ========= ========
The accompanying notes are an integral part of these statements. F-8 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. NOTES TO FINANCIAL STATEMENTS December 31, 2003 and 2002 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Quality Communications & Alarm Company, Inc. (the "Company") is engaged in the business of providing wireless communication infrastructure services, sales of equipment and maintenance including consulting, initial design and installation, engineering, integration and acceptance testing throughout the United States serving the needs for the public safety, commercial and the gaming industry. The Company was incorporated in 1994 in the State of New Jersey and is headquartered in Lakewood, New Jersey. A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements follows: 1. Cash and Cash Equivalents Cash and cash equivalents include all cash and highly liquid investments with an original maturity of three months or less. 2. Concentration 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. 3. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided for, using straight-line and accelerated methods, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leased property under capital leases is amortized over the shorter of the service lives of the assets or the term of the lease. Repairs and maintenance are charged to operations as incurred. 4. Revenue recognition Revenue is recognized based upon contract terms and completion of the sales process. Revenue is generated from delivery of equipment, installation of wireless devices and annual maintenance fees billed to enterprises and consumers. Revenues are recognized when equipment is delivered or the installation is completed. For annual maintenance contracts, revenue is recognized over the service period and any revenue that relates to more than one service period is recognized ratably over those service periods. F-9 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE 1 (continued) 5. Cost of Revenue Cost of revenue includes all direct labor costs, materials, subcontractors, equipment costs and other costs related to contract performance such as supplies, tools and repairs. General and administrative costs are charged to expense as incurred. 6. Inventory Inventory consists of parts and supplies and is stated using the average cost method. 7. Income Taxes The Company has elected to be treated as an "S" Corporation under the applicable sections of the Internal Revenue Code. In general, corporate income or loss of an "S" Corporation is allocated to the Stockholders for inclusion in their personal Federal Income tax returns. Accordingly, there is no provision for Federal income tax in the accompanying financial statements. The Company has also elected to be treated as an "S" Corporation for New Jersey state income tax purposes. However, the State of New Jersey does impose a tax on "S" Corporation income at a reduced rate and, accordingly, a provision for such tax is included in the accompanying financial statements. 8. Uses of Estimates and Fair Value of Financial Instruments In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Management of the Company believes that the fair value of financial instruments, consisting of cash, accounts receivable and debt, approximates carrying value due to the immediate or short-term maturity associated with its cash and accounts receivable and the interest rates associated with its debt. F-10 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31:
Estimated useful life (years) 2003 2002 ----------- ---------- ---------- Furniture and equipment 5 - 7 $ 421,656 $ 324,303 Automobiles 5 - 7 621,182 593,218 Leasehold improvements 3 - 10 39,782 39,782 ---------- ---------- 1,082,620 957,303 Less accumulated depreciation and amortization 572,660 465,963 ---------- ---------- $ 509,960 $ 491,340 ========== ==========
Depreciation and amortization expense for property and equipment for the years ended December 31, 2003 and 2002 was approximately $153,097 and $136,977, respectively. NOTE 3 - LINE OF CREDIT On May 17, 2004, the Company renewed its line of credit agreement with a major bank that provided for a borrowing facility not to exceed $1,000,000. The borrowing limit is up to 70% of eligible accounts receivable other than Nextel, plus 25% of Nextel receivables. At December 31, 2003 and at December 31, 2002, the borrowing base was $750,000 and the outstanding balance was $250,000 and $200,000 respectively. The line of credit is collateralized by all of Company's accounts receivable, inventory and equipment and bears interest at the Bank's Prime Rate plus 0.25% (4.25% and 4.50% as of December 31, 2003 and 2002 respectively). In addition, the Company and all shareholders of the Company have personally guaranteed this line of credit facility. This line is subject to annual renewal by the bank. Accrued interest is payable monthly. In addition, the Company renewed its revolving term loan agreement with the same bank to finance equipment purchases that provided for a borrowing facility not to exceed $200,000. The Note calls for monthly payments of interest only for the first year at the Bank's Prime Rate plus 0.25%, with any balance remaining as of the anniversary date converting into a term loan of sixty (60) equal monthly payments of principal and interest combined at the Bank's Prime Rate plus 2.25%. The line is collateralized by all current and future assets of the Company and personally guaranteed by all shareholders of the Company. At December 31, 2003 and at December 31, 2002, the outstanding balance was $50,075 and $63,397 respectively (Note 4). F-11 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE 4 - EQUIPMENT LOANS PAYABLE Equipment loans payable at December 31, 2003 and 2002 consist of the following:
2003 2002 ---- ---- Equipment loans payable to banks and other financing agencies with principal and interest due monthly through October 2007, interest rates, fixed and variable, ranging from 0% to 8.7%, collateralized by vehicles $ 228,642 $ 388,159 Less: current maturities 116,242 168,269 ---------- --------- Long-term debt $ 112,400 $ 219,890 ========== ========= Aggregate maturities on equipment loans payable are as follows: Year ended December 31, 2003 2002 ---- ---- 2003 $ 0 $ 168,269 2004 116,242 113,337 2005 64,483 56,989 2006 34,555 32,407 2007 13,362 17,157 ---------- --------- $ 228,642 $ 388,159 ========== ========= Related interest expense for the years ended December 31, 2003 and 2002 was $15,384 and $25,094, respectively. NOTE 5 - INCOME TAXES The provision for income taxes for the years ended at December 31, 2003 and 2002 is summarized as follows: 2003 2002 ---- ---- Current: Federal - - State $ 1,536 $ 1,730 Deferred: Federal - - State $ 9,237 $ (745) ------------ ---------- Total $ 10,773 $ 985 ============ ==========
F-12 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE 6 - RELATED PARTY TRANSACTIONS On November 5, 2002, the Company sold a fixed asset to one of its shareholders. The Company received $32,500 from this shareholder and recorded a loss of $17,350 on disposition of this asset. NOTE 7 - EMPLOYEE PROFIT SHARING PLAN The Company has an employee profit sharing plan under Section 401(k) of the Internal Revenue Code covering eligible employees. Pursuant to the plan eligible employees may elect to defer a portion of their annual salary by contributing to the plan. The Company makes a matching contribution of up to 3% of the employees' annual wages. Contributions to the profit sharing plan are made at the discretion of the Board of Directors. The Company's contribution for the year ended December 31, 2003 and 2002 amounted to $149,609 and $171,950, respectively, and is included in employee benefits in general and administrative expenses. NOTE 8 - COMMITMENTS AND CONTINGENCIES Litigation The Company from time to time is subject to certain legal proceedings and claims which have arisen in the ordinary course of its business. These actions when ultimately concluded will not, in the opinion of management, have a material adverse effect upon the financial position, results of operations or liquidity of the Company. Lease Commitments The Company leases its main office facilities pursuant to non-cancelable operating leases expiring through August 31, 2007. The minimum rental commitments under these non-cancelable leases, at December 31, 2003, are summarized as follows: Year ending December 31, 2004 $ 60,000 2005 60,000 2006 60,000 2007 40,000 ----------- Total minimum lease payments $ 220,000 =========== Rent expense for all operating leases was $60,620 and $43,331 in 2003 and 2002, respectively. F-13 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (continued) December 31, 2003 and 2002 NOTE 9 - SUBSEQUENT EVENT On November 24, 2004, the shareholders of the Company approved a Stock Purchase Agreement with WPCS International Incorporated ("WPCS"). Pursuant to the terms of the agreement, WPCS acquired 100% of the Company's issued and outstanding common stock in exchange for $6,700,000 in cash, subject to adjustment. In connection with the acquisition, the outstanding loan balances on the line of credit and the revolving term loan agreement, referred to in Note 3, were repaid and the loans were not renewed with the Bank. F-14 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. INDEX TO FINANCIAL STATEMENTS
Page Condensed Balance Sheets as of September 30, 2004 and 2003 F-16 - F-17 Condensed Income Statements for the nine months ended September 30, 2004 and 2003 F-18 Condensed Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 F-19 - F-20 Notes to Condensed Financial Statements F-21 - F-24
F-15 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. CONDENSED BALANCE SHEETS
(UNAUDITED) September 30, December 31, ASSETS 2004 2003 --------------- -------------- CURRENT ASSETS Cash and cash equivalents $ 48,099 $ 38,642 Accounts receivable, net of allowance of $14,000 at September 30, 2004 and $0 at December 31, 2003 1,864,003 1,856,030 Inventories 403,648 131,629 Prepaid expenses and other current assets 94,882 24,593 --------------- -------------- Total current assets 2,410,632 2,050,894 PROPERTY AND EQUIPMENT, NET 534,348 509,960 OTHER ASSETS, security deposits 5,200 5,200 --------------- -------------- Total Assets $ 2,950,180 $ 2,566,054 =============== ==============
The accompanying notes are an integral part of these statements. F-16 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. CONDENSED BALANCE SHEETS
(UNAUDITED) September 30, December 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003 ------------- -------------- CURRENT LIABILITIES Bank line of credit $ 250,000 $ 250,000 Accounts payable and accrued expenses 574,855 490,610 Accrued pension payable - 87,610 Deferred revenue 155,522 248,662 Current maturities of equipment loans payable 97,331 116,242 Deferred income taxes 25,874 19,968 --------------- --------------- Total current liabilities 1,103,582 1,213,092 --------------- --------------- EQUIPMENT LOANS PAYABLE, less current maturities 119,584 112,400 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock - no par value; 2,500 shares authorized; 1,500 shares issued and outstanding 500 500 Treasury stock, 1,000 shares at cost (105,000) (105,000) Retained earnings 1,831,514 1,345,062 --------------- --------------- Total Shareholders' Equity 1,727,014 1,240,562 --------------- --------------- Total Liabilities and Shareholders' Equity $ 2,950,180 $ 2,566,054 =============== ===============
The accompanying notes are an integral part of these statements. F-17 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. CONDENSED INCOME STATEMENTS (UNAUDITED)
Nine months ended September 30, 2004 2003 -------------- --------------- Revenue $ 7,733,309 $ 5,845,961 Cost of revenue 4,809,621 3,386,168 --------------- ----------------- Gross profit 2,923,688 2,459,793 --------------- ----------------- Operating expenses Selling, general and administrative 2,264,726 1,844,179 Depreciation and amortization 136,875 119,625 Provision for doubtful debts 14,000 - --------------- ----------------- 2,415,601 1,963,804 --------------- ----------------- Operating profit 508,087 495,989 Other income/(expense) Interest income 952 1,478 Interest expense (15,290) (19,986) --------------- ----------------- (14,338) (18,508) --------------- ----------------- Earnings before income taxes 493,749 477,481 Income tax provision 7,296 8,205 --------------- ----------------- NET INCOME $ 486,453 $ 469,276 =============== =================
The accompanying notes are an integral part of these statements. F-18 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, 2004 2003 ------------ ---------- Cash flows from operating activities Net income $ 486,453 $ 476,523 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 136,875 119,625 Provision for doubtful accounts 14,000 - Deferred taxes payable 5,906 7,247 Changes in operating assets and liabilities: Accounts receivable (21,973) 117,389 Inventories (272,019) (57,995) Prepaid expenses (72,164) (20,686) Other assets - (2,500) Accounts payable and accrued expenses 84,245 85,806 Deferred revenue (93,140) 2,328 Accrued pension payable (87,610) (138,205) ------------ ------------ Net cash provided by operating activities 180,573 582,285 ------------ ------------ Cash flows from investing activities Acquisition of property and equipment (59,950) (100,878) ------------ ------------ Net cash used in investing activities (59,950) (100,878) ------------ ------------ Cash flows from financing activities Repayment of borrowings on line of credit - (200,000) Repayment of promissory note payable - (14,479) Repayment of equipment loans payable (111,166) (128,493) ------------ ------------ Net cash used in financing activities (111,166) (342,972) ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 9,457 138,435 Cash and cash equivalents, beginning of year 38,642 67,420 ------------ ------------ Cash and cash equivalents, end of year $ 48,099 $ 205,855 ============ ============
The accompanying notes are an integral part of these statements. F-19 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. CONDENSED STATEMENTS OF CASH FLOWS (continued) (UNAUDITED)
Nine months ended September 30, 2004 2003 ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 12,127 $ 15,384 ============ =========== Income taxes $ 1,538 $ 985 ============ =========== SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Equipment purchased through bank loans $ 99,439 $ 20,300 ============ ===========
The accompanying notes are an integral part of these statements. F-20 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation - The accompanying unaudited condensed interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America. Accordingly, the unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended December 31, 2003. Operating results for the nine month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the full year. Company's activities - Quality Communications & Alarm Company, Inc. (the "Company") is engaged in the business of providing wireless communication infrastructure services, sales of equipment and maintenance including consulting, initial design and installation, engineering, integration and acceptance testing throughout the United States serving the needs for the public safety, commercial and the gaming industry. The Company was incorporated in 1994 in the State of New Jersey and is headquartered in Lakewood, New Jersey. Uses 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. Actual results could differ from those estimates. Revenue recognition - Revenue is recognized based upon contract terms and completion of the sales process. Revenue is generated from delivery of equipment, installation of wireless devices and annual maintenance fees billed to enterprises and consumers. Revenues are recognized when equipment is delivered or the installation is completed. For annual maintenance contracts, revenue is recognized over the service period and any revenue that relates to more than one service period is recognized ratably over those service periods. Cost of Revenue - Cost of revenue includes all direct labor costs, materials, subcontractors, equipment costs and other costs related to contract performance such as supplies, tools and repairs. General and administrative costs are charged to expense as incurred. Inventory - Inventory consists of parts and supplies and is stated using the average cost method. Income Taxes - The Company has elected to be treated as an "S" Corporation under the applicable sections of the Internal Revenue Code. In general, corporate income or loss of an "S" Corporation is allocated to the Stockholders for inclusion in their personal Federal Income tax returns. Accordingly, there is no provision for Federal income tax in the accompanying financial statements. The Company has also elected to be treated as an "S" Corporation for New Jersey state income tax purposes. However, the State of New Jersey does impose a tax on "S" Corporation income at a reduced rate and, accordingly, a provision for such tax is included in the accompanying financial statements. F-21 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (continued) NOTE 2 - PROPERTY AND EQUIPMENT Property and equipment consist of the following at September 30, 2004 and December 31, 2003:
Estimated useful life September 30, December 31, (years) 2004 2003 ------- ------------- ------------- Furniture and equipment 5 - 7 $ 454,615 $ 421,656 Automobiles 5 - 7 642,607 621,182 Leasehold improvements 3 - 10 39,782 39,782 ------------- ------------- 1,137,004 1,082,620 Less accumulated depreciation and amortization 602,656 572,660 ------------- ------------- $ 534,348 $ 509,960 ============= =============
Depreciation and amortization expense for property and equipment for the nine months ended September 30, 2004 and 2003 was approximately $135,000 and $114,000, respectively. NOTE 3 - LINE OF CREDIT On May 17, 2004, the Company renewed its line of credit agreement with a major bank that provided for a borrowing facility not to exceed $1,000,000. The borrowing limit is up to 70% of eligible accounts receivable other than Nextel, plus 25% of Nextel receivables. At September 30, 2004 and at December 31, 2003, the borrowing base was $1,000,000 and $750,000, respectively and the outstanding balance was $250,000. The line of credit is collateralized by all of Company's accounts receivable, inventory and equipment and bears interest at the Bank's Prime Rate plus 0.25% (4.75% and 4.25% as of September 30, 2004 and December 31, 2003 respectively). In addition, the Company and all shareholders of the Company have personally guaranteed this line of credit facility. This line is subject to annual renewal by the bank. Accrued interest is payable monthly. In addition, the Company renewed its revolving term loan agreement with the same bank to finance equipment purchases that provided for a borrowing facility not to exceed $200,000. The Note calls for monthly payments of interest only for the first year at the Bank's Prime Rate plus 0.25%, with any balance remaining as of the anniversary date converting into a term loan of sixty (60) equal monthly payments of principal and interest combined at the Bank's Prime Rate plus 2.25%. The line is collateralized by all current and future assets of the Company and personally guaranteed by all shareholders of the Company. At September 30, 2004 and at December 31, 2003, the outstanding balance was $39,275 and $50,075 respectively (Note 4). F-22 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (continued) NOTE 4 - EQUIPMENT LOANS PAYABLE Equipment loans payable at September 30, 2004 and December 31, 2003 consist of the following:
September 30, December 31, 2004 2003 ---- ---- Equipment loans payable to banks and other financing agencies with principal and interest due monthly through October 2007, interest rates, fixed and variable, ranging from 0% to 8.7%, collateralized by vehicles $ 216,915 $ 228,642 Less: current maturities 97,331 116,242 ------------- ------------- Long-term debt $ 119,584 $ 112,400 ============= ============= Aggregate maturities on equipment loans payable are as follows: Period ended September 30, December 31, 2004 2003 ---- ---- 2004 $ 0 $ 116,242 2005 65,278 64,483 2006 42,858 34,555 2007 11,448 13,362 ------------- ------------- $ 119,584 $ 226,642 ============= =============
Related interest expense for the nine months ended September 30, 2004 and 2003 was $12,127 and $12,584, respectively. NOTE 5 - COMMITMENTS AND CONTINGENCIES Litigation The Company from time to time is subject to certain legal proceedings and claims, which have arisen in the ordinary course of its business. These actions when ultimately concluded will not, in the opinion of management, have a material adverse effect upon the financial position, results of operations or liquidity of the Company. F-23 QUALITY COMMUNICATIONS & ALARM COMPANY, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (continued) NOTE 6 - SUBSEQUENT EVENT On November 24, 2004, the shareholders of the Company approved a Stock Purchase Agreement with WPCS International Incorporated ("WPCS"). Pursuant to the terms of the agreement, WPCS acquired 100% of the Company's issued and outstanding common stock in exchange for $6,700,000 in cash, subject to adjustment. In connection with the acquisition, the outstanding loan balances on the line of credit and the revolving term loan agreement, referred to in Note 3, were repaid and the loans were not renewed with the Bank. F-24 INDEX TO UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION F-26 PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET- "WPCS" AT OCTOBER 31, 2004 AND "QUALITY" AT SEPTEMBER 30, 2004 F-27 - F-28 NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 2004 F-29 PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS -"WPCS" FOR TWELVE MONTHS ENDED APRIL 30, 2004 AND "QUALITY " FOR TWELVE MONTHS ENDED MARCH 31, 2004 F-30- F-31 NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR TWELVE MONTHS ENDED APRIL 30, 2004 F-32 PRO FORMA UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENT - "WPCS" FOR SIX MONTHS ENDED OCTOBER 31, 2004 AND "QUALITY " FOR SIX MONTHS ENDED SEPTEMBER 30, 2004 F-33 NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENT FOR SIX MONTHS ENDED OCTOBER 31, 2004 F-34
F-25 WPCS INTERNATIONAL INCORPORATED INTRODUCTION TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION We are providing the following unaudited pro forma condensed consolidated financial information of WPCS International Incorporated ("WPCS" or the "Company") and its acquisition of Quality Communications & Alarm Company, Inc. ("Quality") to present the results of operations and financial position of WPCS had the merger been completed at an earlier date. ACQUISITION OF QUALITY COMMUNICATIONS & ALARM COMPANY, INC. On November 24, 2004, ( the "Closing Date") WPCS acquired Quality for $6,700,000 in cash, subject to adjustment. Quality was acquired pursuant to a Stock Purchase Agreement ( the "Agreement") among WPCS, Richard Schubiger, Matthew Haber and Brian Fortier. In connection with the acquisition, Quality entered into employment agreements with Messrs. Schubiger, Haber and Fortier, each for a period of two years. Quality is a New Jersey based provider of wireless infrastructure services and has established a strong presence in the public safety sector and gaming industry with well-known clients such as Nextel, New Jersey Transit, Motorola, The Seminole Tribe of Florida, Mohegan Sun Casino, Bally's Park Place Hotel & Casino, Resorts International, Taj Mahal Casino and The Hard Rock Cafe. The unaudited pro forma condensed consolidated balance sheet of the Company gives effect to the merger as if it had occurred on October 31, 2004 and the unaudited pro forma condensed consolidated statement of operations of the Company gives effect to the acquisition as if it had occurred on May 1, 2003 for the twelve months ended April 30, 2004, and on May 1, 2004, for the six months ended October 31, 2004, respectively. The acquisition of Quality is accounted for under the purchase method of accounting in accordance with the Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"). Under the purchase method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair values. Goodwill is created to the extent that the merger consideration, including certain acquisition and closing costs, exceeds the fair value of the net identifiable assets acquired at the date of the merger. Based on the preliminary information currently available, we expect to recognize goodwill of approximately $4,987,000. Upon completion of a formal purchase price allocation there may be a decrease in the amount assigned to goodwill and a corresponding increase in tangible or other intangible assets. This unaudited pro forma condensed consolidated financial information is based on the estimates and assumptions set forth herein and in the notes thereto. The unaudited pro forma results for the twelve months ended April 30, 2004 have been prepared utilizing (a) the audited financial statements of WPCS included in Form 10-KSB for the fiscal year ended April 30, 2004; (b) the unaudited financial statements of Quality for the twelve months ended March 31, 2004; (c) the unaudited financial statements of Clayborn Contracting Group, Inc. for the four months ended August 31, 2003; and (d) the unaudited financial statements of Heinz Corporation for the eleven months ended March 31, 2004. The unaudited pro forma results for the six months ended October 31, 2004 have been prepared utilizing (a) the unaudited interim financial statements of WPCS included in Form 10-QSB for the six months ended October 31, 2004 and (b) the unaudited financial statements of Quality for the six months ended September 30, 2004. The following unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of (i) the results of operations of the Company that actually would have occurred had the Agreement been consummated on the dates indicated or (ii) the results of operations of the Company that may occur or be attained in the future. The following information is qualified in its entirety by reference to and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", WPCS's audited consolidated financial statements, including the notes thereto contained in its Annual Report on Form 10-KSB for the year ended April 30, 2004 incorporated herein by reference, Quiality's audited financial statements, including the notes thereto, for the years ended December 31, 2003 and 2002, and other historical financial information appearing elsewhere herein. F-26 WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES Unaudited Pro Forma Consolidated Balance Sheet for October 31, 2004
PRO FORMA SEPTEMBER 30, CONSOLIDATED OCTOBER 31, 2004 2004 PRO FORMA AFTER WPCS QUALITY ADJUSTMENTS ACQUISITION ------------------ ------------------ ------------------ ------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $632,503 $48,099 (a) $9,250,000 $3,230,602 (b) ($6,700,000) Accounts receivable, net of allowance 6,805,486 1,864,003 - 8,669,489 Costs and estimated earnings in excess of billings on uncompleted contracts 2,352,760 - - 2,352,760 Inventory 104,799 403,648 - 508,447 Prepaid expenses 252,878 94,882 - 347,760 Deferred income taxes 50,000 - - 50,000 ---------------- ---------------- -------------- --------------- Total current assets 10,198,426 2,410,632 2,550,000 15,159,058 PROPERTY AND EQUIPMENT, net 942,407 534,348 - 1,476,755 CUSTOMER LISTS 524,833 - - 524,833 GOODWILL 8,637,329 - (c) 4,987,112 13,624,441 OTHER ASSETS 169,693 5,200 - 174,893 ---------------- ---------------- -------------- --------------- Total assets $20,472,688 $2,950,180 $7,537,112 $30,959,980 ================ ================ ============== ===============
F-27 WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES Unaudited Pro Forma Consolidated Balance Sheet for October 31, 2004
SEPTEMBER 30, PRO FORMA OCTOBER 31, 2004 2004 PRO FORMA AFTER CONSOLIDATED WPCS QUALITY ADJUSTMENTS ACQUISITION ---------------- --------------- ---------------- ------------------ LIABILITIES AND SHARHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings under lines of credit $378,231 $250,000 - $628,231 Current maturities of capital lease obligation 2,664 - - 2,664 Current maturities of loans payable 96,645 97,331 - 193,976 Accounts payable and accrued expenses 5,373,911 574,855 (c) 40,000 5,988,766 Billings in excess of costs and estimated earnings on uncompleted contracts 1,387,656 155,522 1,543,178 Due to shareholders 73,245 - - 73,245 Income taxes payable 167,342 - - 167,342 Deferred income taxes 193,100 25,874 (c) (25,874) 193,100 ---------------- --------------- ---------------- ------------------ Total current liabilities 7,672,794 1,103,582 14,126 8,790,502 Capital lease obligation, net of current portion 708 - - 708 Loans payable, net of current portion 175,300 119,584 - 294,884 Due to shareholders, net of current portion 1,026,755 - - 1,026,755 Deferred income taxes 202,900 - - 202,900 ---------------- --------------- ---------------- ------------------ Total liabilities 9,078,457 1,223,166 14,126 10,315,749 ---------------- --------------- ---------------- ------------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred Stock - $0.0001 par value, 5,000,000 shares authorized - - - - Common Stock - $0.0001 par value, 75,000,000 shares authorized 2,085 500 (a) 2,500 4,585 - (d) (500) - Additional paid-in capital 11,964,588 (105,000) (a) 9,247,500 21,212,088 - (d) 105,000 - Unearned consulting services (12,853) - - (12,853) Retained earnings (accumulated deficit) (559,589) 1,831,514 (d) (1,831,514) (559,589) ---------------- --------------- ---------------- ------------------ Total shareholders' equity 11,394,231 1,727,014 7,522,986 20,644,231 ---------------- --------------- ---------------- ------------------ Total liabilities and shareholders' equity $20,472,688 $2,950,180 $7,537,112 $30,959,980 ================ =============== ================ ==================
F-28 WPCS INTERNATIONAL INCORPORATED and SUBSIDIARIES NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 2004 NOTE 1. On November 24, 2004, WPCS acquired Quality. For accounting purposes in the unaudited condensed consolidated balance sheet at October 31, 2004, this transaction has been treated as an acquisition with the net assets of each acquired company being stated at fair value in accordance with the purchase method of accounting. NOTE 2. The unaudited pro forma consolidated balance sheet at October 31, 2004 presented herein has been prepared as if the acquisition of Quality by WPCS had been consummated on May 1, 2004. Pro forma balance sheet adjustments have been made for the following: (a) To record the net proceeds received of $9,250,000 from the issuance of WPCS common stock, which was used primarily to finance the acquisition of Quality. On November 16, 2004, the Company sold an aggregate of $10,000,000 of the Company's common stock ("Common Stock") and common stock purchase warrants ("Warrants") to eight investors. The Company sold an aggregate of 25,000,000 shares of Common Stock and 25,000,000 Warrants to the investors. The Common Stock and the Warrants were issued in a private placement transaction pursuant to Section 4(2) under the Securities Act of 1933. Pursuant to the terms of sale, the Company agreed to cause a resale registration statement covering the Common Stock and the Common Stock issuable upon exercise of the Warrants to be filed no later than 45 days after the closing. The Company paid the placement agent of the offering a cash fee of 6.5% of the proceeds of the offering, and a finders fee of $100,000 to another third party in connection with the offering. (b) To record the cash consideration of $6,700,000 paid to the shareholders of Quality at the closing of the acquisition. (c) To reflect the excess of acquisition cost over the estimated fair value of the net assets acquired (goodwill). The preliminary allocation of the purchase price is based on the unaudited balance sheet of Quality as of September 30, 2004. Upon completion of a formal purchase price allocation, the amounts assigned to tangible assets, other intangible assets and goodwill may change. Based on the preliminary financial information currently available, the purchase price and purchase price allocation are summarized as follows:
Purchase price paid as: Cash consideration $6,700,000 Transaction costs 40,000 ------------------ Total purchase price consideration 6,740,000 Allocated to: Historical net book value of Quality at September 30, 2004 (1,727,014) Elimination of Quality deferred tax liability (25,874) ------------------ Cost in excess of net assets acquired $4,987,112 ==================
(d) To reflect the elimination of the shareholders' equity accounts of Quality of ($1,727,014). F-29 WPCS INTERNATIONAL INCORPORATED 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 APRIL 30, MONTHS ENDED MONTHS ENDED 2004 AUGUST 31, 2003 MARCH 31, 2004 WPCS CLAYBORN HEINZ ------------------- ------------------- ------------------ Revenue $22,076,246 $1,532,979 $3,627,278 ------------------- ------------------- ------------------ Costs and expenses: Cost of revenue 16,076,155 1,092,206 3,183,658 Selling, general and administrative expenses 5,560,583 605,512 571,668 Provision for doubtful accounts 91,137 - 14,997 Depreciation and amortization 382,510 47,610 27,646 ------------------- ------------------- ------------------ Total costs and expenses 22,110,385 1,745,328 3,797,969 ------------------- ------------------- ------------------ Operating income(loss) (34,139) (212,349) (170,691) Interest expense 14,048 - - ------------------- ------------------- ------------------ Income(loss) before provision for income taxes (48,187) (212,349) (170,691) Income tax provision (76,000) 84,041 - ------------------- ------------------- ------------------ Net income(loss) ($124,187) ($128,308) ($170,691) =================== =================== ================== Basic net loss per common share ($0.01) =================== Diluted net income per common share Basic weighted average number of common shares outstanding 18,260,359 =================== Diluted weighted average number of common shares outstanding F-30 WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended April 30, 2004 (continued) FOR THE TWELVE MONTHS ENDED PRO FORMA MARCH 31, 2004 PRO FORMA CONSOLIDATED AFTER QUALITY ADJUSTMENTS ACQUISITIONS ------------------- ------------------- ------------------- Revenue $9,313,406 $ - $36,549,909 ------------------- ------------------- ------------------- Costs and expenses: Cost of revenue 5,122,155 - 25,474,174 Selling, general and administrative expenses 3,103,989 - 9,841,752 Provision for doubtful accounts - - 106,134 Depreciation and amortization 170,597 (f) 140,333 768,696 ------------------- ------------------- ------------------- Total costs and expenses 8,396,741 140,333 36,190,756 ------------------- ------------------- ------------------- Operating income(loss) 916,665 (140,333) 359,153 Interest expense 22,997 - 37,045 ------------------- ------------------- ------------------- Income(loss) before provision for income taxes 893,668 (140,333) 322,108 Income tax provision (8,416) (e) (210,000) (210,375) ------------------- ------------------- ------------------- Net income(loss) $885,252 ($350,333) $111,733 =================== =================== =================== Basic net loss per common share $0.01 =================== Diluted net income per common share $0.01 =================== Basic weighted average number of common shares outstanding 19,229,804 =================== Diluted weighted average number of common shares outstanding 21,639,726 ===================
F-31 WPCS INTERNATIONAL INCORPORATED and SUBSIDIARIES NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED APRIL 30, 2004 NOTE 1. WPCS completed the following transactions: (a) on August 22, 2003, merged with Clayborn Contracting Group, Inc. ("Clayborn"), (b) on April 2, 2004 merged with Heinz and (c) on November 24, 2004 acquired Quality. The results of operations of Clayborn and Heinz have been included in the historical financial statements of WPCS from August 22, 2003 and April 2, 2004, respectively. For accounting purposes, each of these transactions has been treated as an acquisition with the net assets of each acquired company being stated at fair value in accordance with the purchase method of accounting. NOTE 2. The unaudited pro forma condensed consolidated statements of operations for the twelve months ended April 30, 2004 presented herein has been prepared as if the acquisition of WPCS and Quality had been consummated as of May 1, 2003. Likewise, the pro forma condensed consolidated statement of operations for the twelve months ended April 30, 2004 include Clayborn for the four months ended August 31, 2004 and Heinz for the eleven months ended March 31, 2004, as if the merger of these companies had been consummated as of May 1, 2003. Pro forma statement of operations adjustments for the twelve months ended April 30, 2004 have been made for the following: (e) To record the pro forma income tax provision adjustment for the year ended April 30, 2004 as a result of the acquisition of Quality, applying a 34% federal income tax rate to consolidated income before taxes, and a 6% state income tax rate to Quality's income before taxes. In connection with the acquisition, the Company has the option to make an Internal Revenue Code 338(h)(10) election. For income tax purposes, this provides the Company potential fair value income tax adjustments related to the purchase price, resulting in potential future income tax deductions. In the event this election is made, there will be a corresponding purchase price adjustment to the Quality selling shareholders. This purchase price adjustment has not yet been determined. (f) To record a full year of amortization for the fair value of customer lists acquired related to the Clayborn acquisition of $16,333, and the fair value of customer lists and backlog acquired related to the Heinz acquisition of $124,000, as if the acquisitions had been consummated as of May 1, 2003. Accordingly, additional amortization of approximately $140,000 is included as a pro forma adjustment. F-32 WPCS INTERNATIONAL INCORPORATED AND SUBSIDIARIES Unaudited Pro Forma Consolidated Income Statement for the Six Months Ended October 31, 2004
FOR THE SIX FOR THE SIX PRO FORMA MONTHS ENDED MONTHS ENDED CONSOLIDATED OCTOBER 31, 2004 SEPTEMBER 30, 2004 PRO FORMA AFTER WPCS QUALITY ADJUSTMENTS ACQUISITION ------------------ ------------------- ------------------- ------------------ Revenue $17,574,419 $5,305,642 - $22,880,061 ------------------ ------------------- ------------------ Costs and expenses: Cost of revenue 13,334,402 3,448,433 - 16,782,835 Selling, general and administrative expenses 3,801,008 1,504,308 - 5,305,316 Provision for doubtful accounts - 14,000 - 14,000 Depreciation and amortization 246,693 89,000 (h) 27,000 362,693 ------------------ ------------------- ------------------- ------------------ Total costs and expenses 17,382,103 5,055,741 27,000 22,464,844 ------------------ ------------------- ------------------- ------------------ Operating income 192,316 249,901 (27,000) 415,217 Interest expense 12,763 8,461 - 21,224 ------------------ ------------------- ------------------- ------------------ Income before provision for income taxes 179,553 241,440 (27,000) 393,993 Income tax provision (71,895) (8,969) (g) (88,000) (168,864) ------------------ ------------------- ------------------- ------------------ Net income $107,658 $232,471 ($115,000) $225,129 ================== =================== =================== ================== Basic net income per common share $0.01 $0.01 ================== ================== Diluted net income per common share $0.00 $0.01 ================== ================== Basic weighted average number of common shares outstanding 20,849,976 20,849,976 ================== ================== Diluted weighted average number of common shares outstanding 21,649,944 21,649,944 ================== ==================
F-33 WPCS INTERNATIONAL INCORPORATED and SUBSIDIARIES NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE SIX MONTHS ENDED OCTOBER 31, 2004 NOTE 1. The unaudited pro forma condensed consolidated statements of operations for the six months ended October 31, 2004 presented herein has been prepared as if the acquisition of WPCS and Quality had been consummated as of May 1, 2004. The pro forma income statement for WPCS was derived from its interim unaudited financial statements on Form 10Q-SB for the six months ended October 31, 2004. The income statement for Quality was derived from its interim unaudited financial statements for the six months ended September 30, 2004. Pro forma statement of operations adjustments for the six months ended October 31, 2004 have been made for the following: (g) To record the pro forma income tax provision adjustment for the six months ended October 31, 2004 as a result of the acquisition of Quality, applying a 34% federal income tax rate to consolidated income before taxes, and a 6% state income tax rate to consolidated income before taxes. In connection with the acquisition, the Company has the option to make an Internal Revenue Code 338(h)(10) election. For income tax purposes, this provides the Company potential fair value income tax adjustments related to the purchase price, resulting in potential future income tax deductions. In the event this election is made, there will be a corresponding purchase price adjustment to the Quality selling shareholders. This purchase price adjustment has not yet been determined. (h) To record the amortization for the fair value of customer lists acquired related to the Heinz acquisition, as if the acquisition had been consummated as of May 1, 2004. Accordingly, additional amortization of $27,000 is included as a pro forma adjustment. F-34