U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 1
TO THE
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
PEREGRINE INDUSTRIES, INC.
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(Name of Small Business Issuer in its charter)
FLORIDA 65-0611007
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(State of incorporation) (I.R.S. Employer Identification No.)
746 South Military Trail,
DEERFIELD BEACH, FL 33442
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(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (954) 725-8041
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Securities to be registered pursuant to 12(b) of the Act: NONE
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Securities to be registered pursuant to 12(g) of the Act:
COMMON STOCK $.0001 PAR VALUE
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(Title of Class)
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Page 1 of pages 27
Exhibit Index begin page 26
TABLE OF CONTENTS
PAGE NO.
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PART I
Item 1. Description of Business 1
Item 2. Management's Discussion and Analysis or
Plan of Operation 7
Item 3. Description of Property 12
Item 4. Security Ownership of Certain Beneficial
Owners and Management 13
Item 5. Directors, Executive Officers, Promoters and Control Persons 14
Item 6. Executive Compensation 16
Item 7. Certain Relationships and Related Transactions 21
Item 8. Description of Securities 22
PART II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters 23
Item 2. Legal Proceedings 24
Item 3. Changes in and Disagreements with Accountants 24
Item 4. Recent Sales of Unregistered Securities 24
Item 5. Indemnification of Directors and Officers 24
PART FS
Financial Statements 25
PART III
Item 1. Index to Exhibits 26
Signature 27
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This discussion in this Registration Statement regarding the Company
and its business and operations contains "forward-looking statements." These
forward-looking statements use words such as "believes," "intends," "expects,"
"may," "will," "should," "plan," "projected," "contemplates," "anticipates," or
similar statements. These statements are based on the Company's beliefs, as well
as assumptions the Company has used based upon information currently available
to it. Because these statements reflect the Company's current views concerning
future events, these statements involve risks, uncertainties and assumptions.
Actual future results may differ significantly from the results discussed in the
forward-looking statements. A reader, whether investing in the Company's
securities or not, should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Registration Statement.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Peregrine Industries, Inc. (the "Company") designs and manufactures
heat pump pool heaters, residential air conditioners and parallel flow coils for
the heating, ventilation and air conditioning (HVAC) industry. The Company's
current customer base includes companies in the United States, Canada, South
America, Europe and Africa.
The Company was formed under the laws of the State of Florida in
October 1995. Our Canadian operations are conducted through our subsidiary
Thermopompe Peregrine Heat Pump ("Peregrine Canada"), a Quebec corporation. In
June 1998 the Company formed a wholly-owned subsidiary, Peregrine Global, Inc.
("Peregrine Global"), a Virgin Islands corporation. Peregrine Global, a foreign
sales corporation, was formed to take advantage of more favorable income tax
rates on profits generated from export sales. In September 1998 the Company
formed Alcool, Inc. ("Alcool"), an Alabama corporation and a wholly-owned
subsidiary of the Company. Alcool was formed to manufacture the Company's
parallel flow coils. When used herein, the "Company" shall include Peregrine
Industries, Inc. and its subsidiaries Peregrine Canada, Alcool and Peregrine
Global.
The Company's fiscal year end is September 30 and its executive offices
are located at 746 South Military Trail, Deerfield Beach, Florida 33442. The
Company's telephone number is 954-725-8041.
Products
Pool Heaters
The Company is the designer and manufacturer of a complete line of
performance heat pump pool heaters whose standard features include
micro-processor digital controls, a dual thermostat and automatic pool pump
management. The Company distributes these products under private labels of
certain of its wholesale customers, as well as under the Company's brand name
Smartemp(TM).
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The Company is also the designer and manufacturer of the Smartemp
Plus(TM), an all-in-one, complete environmental control system. This single unit
heat pump functions as a residential air conditioner, hot water heater and
swimming pool heater. Smartemp Plus(TM) uses a micro-processor to manage the
operation and energy use of the air conditioner, pool heater and water heater,
as well as the pool filtration system. The unit components can also be
programmed to function independently, thus providing year round usage in a
variety of climates.
Both the Smartemp (TM) and Smartemp Plus (TM) units have been certified
by Applied Research Laboratories, a nationally recognized independent testing
facility, and meet the seasonal energy efficiency requirements (SEER) of the
National Appliance Energy Conservation Act of 1987.
Residential Air Conditioners
The Company is the designer and manufacturer of two residential central
air conditioning systems, the Seaire(TM) and the MicroCool. The design of pool
heaters and air conditioners is similar in that both use the common technology
of heat transfer through evaporating and condensing coils. The Company began
research and development activities on air conditioning products in early 1998
as a result of product inquiries from its customers seeking a low cost, high
efficiency air conditioner. The Company introduced its residential central air
conditioning systems in May 1999. Management of the Company believes the
Seaire(TM) is more compact that other models on the market as a result of the
incorporation of the Company's parallel flow coil. In management's opinion, the
Seaire(TM) is more efficient than any other central air conditioning system
currently on the market, with SEER ratings of approximately 16, as compared to
an industry average of 12. The SEER rating gives an indication of the
performance efficiency of the system. The higher the SEER rating, the more
efficient the unit. The more efficient the unit, the lower the operating costs.
Parallel Flow Coil
The Company designed and manufactures a propriety parallel flow coil
which is incorporated into the Company's products. The architecture of the new
coil allows more primary surface contact with the air while the secondary
surface, with shorter metallurgically bonded fins, allows for an even and flat
temperature gradient across the coil compared with round tube and fin coils. The
even and flat temperature gradient allows for a substantial increase (up to 30%
to 40%) in latent heat removal and an increase in evaporating temperature to as
high as 50 degrees. This technology lowers indoor humidity and energy
consumption.
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Manufacturing and Distribution
The Company manufactures its pool heaters, environmental control
systems and residential air conditioners at its Deerfield Beach, Florida
location, and its parallel flow coil at its Montgomery, Alabama location. The
Company's manufacturing process relies on the purchase of certain components
from a variety of third party suppliers and in-house fabrication of the balance
of the components used in the manufacture of the Company's products. Other than
the micro-processors which are incorporated into the Company's products, the
Company has secured multiple sources at competitive prices for components
purchased from third party suppliers. The Company is reliant, however, on
Viconics, Inc., a single third-party source, for the micro-processors which are
contained in the Smartemp (TM) and Smartemp Plus (TM) products. The Company
believes it will establish a second source for these micro-processors, at
substantially the same terms and conditions, by the end of fiscal 2000.
The Company' products are distributed on a wholesale basis. Wholesale
prices for the Company's pool heaters range between approximately $1,305 to
approximately $2,370, and wholesale prices for its residential central air
conditioning systems range from approximately $670 to approximately $1,450. The
Company averages approximately 30% gross profit on its products. Credit risk of
certain foreign customers is minimized through the purchase of insurance
policies covering the accounts receivables. See Part FS - Financial Statements.
The Company historically has had two customers which have accounted for
a significant portion of its sales. The following table provides information on
the amount of sales to these two customers for the period indicated, and the
percentage such sales represent to the Company's revenues for such period.
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YEAR ENDED
SEPTEMBER 30,
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1998 1997
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Amount % Amount %
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Heliotek Maguinas E $2,916,000 35% $2,743,000 47%
R&D Technology $3,000,000 36% $1,868,000 32%
NINE MONTHS ENDED
JUNE 30,
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1999 1998
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(unaudited)
Amount % Amount %
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Heliotek Maguinas E $ 982,000 19% $2,242,000 35%
R&D Technology $2,775,000 51% $2,564,000 40%
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Management of the Company will continue its efforts begun in fiscal
1998 to broaden its revenue base so as to minimize the Company's historical
dependence upon these two customers. These efforts included expanding the number
of distributors for the Company's products. The Company's targets for this
desired expansion included companies with nationwide distribution channels.
Since September 1999 the Company has been successful in establishing
relationships with three distributors, each of which have either nationwide or
regional distribution channels. However, as these relationships have just been
established, and these distributions have no contractual requirement to purchase
any products from the Company, there can be no assurances management's efforts
will be successful. Until management has been successful in its efforts, of
which there can be no assurance, the loss of one or more of these customers
could have a material adverse effect on the business and operations of the
Company until replacement customers are secured, of which there can be no
assurances.
To date, all parallel flow coils manufactured by the Company have been
incorporated into the Company's products. During fiscal 2000 the Company
anticipates that it will begin marketing and selling these coils to other
manufacturers in the HVAC industry. Management of the Company cannot anticipate,
as of the date hereof, the degree of success, if any, the Company will meet with
in this area.
Product Service and Warranty
The Company's products are serviced and repaired by the distributors
who purchase the products from the Company. The Company offers a 12-60 month
warranty on its products. To date, the Company has experienced minimal warranty
expenses; however, as a result of the relatively short history of the Company,
it is unable to accurately forecast warranty costs in the future. Since
inception, the Company has estimated its warranty expenses based upon an
internal review of its actual historical warranty costs. These reserves are
adjusted on a quarterly basis based upon actual warranty expense during the
prior periods, the total number of units sold to date by the Company, and as
well as increases in reserves with the introduction of new products . The
following table sets forth the warranty reserves for the periods indicated
At September 30, 1997 $ 56,907
At September 30, 1998 $ 71,778
At June 30, 1998 $ 60,612
At June 30, 1999 $ 36,014
There can be no assurances that any reserves the Company may make for
future warranty costs will be adequate.
Industrial Development Bond
In March 1999, in connection with the establishment of the Company's
Montgomery, Alabama manufacturing facility, the Industrial Development Board of
the City of Montgomery, Alabama issued $2,460,000 aggregate principal amount of
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Variable/Fixed Rate Industrial Development Bonds, Series 1999 (the "Bonds"). The
proceeds form the Bonds were used by the Company for long-term financing for the
acquisition of production equipment for Alcool, and for the partial repayment of
a commercial term loan. The Bonds were issued under a Trust Indenture dated
February 1, 1999 and maturing on February 1, 2007. Interest is payable monthly
at a variable weekly rate based on the average rate for similar issued as
determined by the remarketing agent. The rate at August 30, 1999 was 3.45%.
As collateral for the Bonds, the Company executed a Mortgage Security
Agreement and Assignment of Rents and Leases in favor of the bank, whereby the
bank was granted a mortgage on and a security interest in the Alcool production
equipment and an assignment of the interest of Alcool under its lease agreement
for its principal facilities in Montgomery, Alabama. The Bonds are also backed
by a letter of credit with an original amount of $2,503,809 issued by SouthTrust
Bank, N.A. which expires on February 15, 2007, subject to an earlier expiration
as set forth in the letter of credit. Mr. Merrill A. Yarbrough, the Company's
President and CEO, individually guaranteed the Bonds and assigned a key man life
insurance policy in the amount $1,000,000. Peregrine Global issued a corporate
guarantee dated February 1, 1999.
Merchant Capital, L.L.C., an NASD member firm, is the remarketing agent
for the Bonds. The Company is required to maintain certain financial ratios
while the Bonds remain outstanding, including fixed ratio coverage of 1.25:1 and
debt to tangible ratio coverage of 2:1. At June 30, 1999 the Company was in
default in certain of these ratios. As a result of such default, the Trustee has
the right to call the Bonds for redemption. See Item 2. Management's Discussion
and Analysis of Financial Condition or Plan of Operations and Part F/S,
Financial Statements.
The Company has further agreed to limit its capital expenditures
outside the United States to a maximum of $75,000 per year and to require its
customers (excluding Canadian customers) to tender payment in United States
Dollars. Finally, during the period in which the Bonds are outstanding, Mr.
Yarbrough must retain at least 51% ownership interest in the Company.
Government Regulation
The Company is subject to regulations promulgated under the National
Appliance Energy Conservation Act of 1987, as amended, and various state
regulations concerning the energy efficiency of its products. All of the
Company's products comply with the National Appliance Energy Conservation Act of
1987. The Company does not believe that such regulations will have a material
adverse effect on its business.
Environmental laws that affect or could affect the Company's operations
include, among others, the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, the Occupational Safety and Health Act, the
National Environmental Policy Act, the Toxic Substances Control Act, and
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regulations promulgated under these acts, and various other Federal, state and
local laws and regulations governing environmental matters. The Company believes
it is in substantial compliance with such existing environmental laws and
regulations.
Competition
The markets in which the Company does business are extremely
competitive and are dominated by companies with established brand recognition
and who have a longer history of operations and are better capitalized than the
Company. In particular, the Company competes against a variety of swimming pool
heat pump manufacturers and against numerous manufacturers of residential
central air conditioning systems including, but not limited to, York, Rheem,
Carrier and Lennox. Management believes the Company holds a competitive
advantage based upon the superior operating results of its products and the
incorporation of the Company's parallel flow coil into its products. There are
no assurances, however, that management's belief is correct. In addition, if the
Company is successful in marketing its parallel flow coil to other HVAC
manufacturers for incorporation into their products, the Company may lose a
portion of the competitive advantage it now holds. Ultimately, there can be no
assurance whatsoever that the Company will ever effectively compete in its
target markets.
Research and Development
The Company conducts on-going research and development for its existing
product to reduce manufacturing costs and increase product efficiency, as well
as research and development of new products. For the fiscal years ended
September 30, 1998 and 1997, the Company expended approximately $200,000 and
$105,400, respectively, in research and development costs. For the nine month
period ended June 30, 1999, the Company expended approximately $227,428 in
research and development costs related to the development of the Company's new
coil for the HVAC industry. See Part FS - Financial Statements.
Intellectual Property Rights
The Company holds a United States patent (patent number 5,802,864) on
the heat exchanger and heat transfer system which are the basis for the
Smartemp(TM) and Smartemp(TM) Plus products, which such patent was issued on
September 8, 1998. Although the Company has not secured registration of all of
its marks, it has made application to the United States Patent and Trademark
Office for a trademarks on the names " Smartemp", "Smartemp Plus" and "Seaire"
and for a patent on the parallel flow coil for the HVAC industry. The laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States, and effective patent,
copyright, trademark and trade secret protection may not be available in foreign
jurisdictions. In general, there can be no assurance that the Company's efforts
to protect its intellectual property rights through patent, copyright, trademark
and trade secret laws will be effective to prevent misappropriation of our
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intellectual property. Any failure or inability by the Company to protect its
proprietary rights could materially adversely effect its business, financial
condition, and results of operations by lessening the value of the intellectual
property and possibly increasing competition.
Employees
The Company currently has 35 full time employees, of which eight are
managerial or administrative personnel and 27 are production/assembly personnel.
The Company has no part-time employees. None of the Company's employees are
represented by a labor union, and it is not governed by any collective
bargaining agreements. Management believes its relationship with its employees
is good. As the Company expands its operations, it will become necessary for the
Company to increase its employee base. The Company faces a competitive
environment in the hiring of qualified employees. As a result, the Company may
encounter certain difficulties in expanding its labor force.
Availability of Additional Information
This Registration Statement, as filed by the Company, can be read and
copied at the public reference facilities maintained by the Securities and
Exchange Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. Information about the operation of the Public Reference Room may be
obtained by calling 1-800-SEC-0330. The Registration Statement is also available
to the public from commercial document retrieval services or via EDGAR on the
Commission's Web site at www.sec.gov.
Prior to the effective date of this Registration Statement, the Company
was not subject to the reporting requirements of the Securities Exchange Act of
1934 (the "Exchange Act") and did not file quarterly and annual reports with the
Commission. Commencing with the quarterly report for the period ending [ ,
1999], the Company will file these and other reports with the Commission. These
reports can be accessed via EDGAR at the Commission's Web site, www.sec.gov. In
addition, the Company will furnish its shareholders with annual reports
containing audited financial statements and may distribute quarterly reports
containing unaudited summary financial information for each of the first three
quarters of each fiscal year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Fiscal Year Ended September 30
Results of Operations
The Company reported an increase of approximately 43% in net sales for
fiscal 1998 versus fiscal 1997 as a result of what management believes to be
development of the Company's brand and the operating performance of its
products. Cost of sales as a percentage of net sales for fiscal 1998 declined
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approximately 10% as a result of manufacturing costs improvements, and volume
purchasing of parts and components. The Company reported an increase of
approximately $376,858, or approximately 65%, in general and administrative
expenses. This increase was attributable to an increase in staffing to meet
growth needs, and participation at industry trade shows and similar marketing
activities undertaken by the Company to increase market awareness of its
products. During fiscal 1998 the Company reported a loss of $30,258 on foreign
currency transactions. The Company continues to be subject to foreign currency
translation and transaction gains or losses. Lastly, the Company made a
provision for income taxes of $184,000 during fiscal 1998, when it made no such
provision for fiscal 1997, as a result of the conversion from an S corporation
to a C corporation effective April 1, 1998.
Liquidity and Capital Resources
The Company's working capital increased $765,018 at September 30, 1998
from September 30, 1997, which such increase is primarily attributable to the
Company's use of the proceeds it received in April 1998 from a private placement
of its Common Stock. See Part II - Item. 4 Recent Sales of Unregistered
Securities. In September 1998 the Company entered into a line of credit with a
commercial bank for $1,000,000 which is collateralized by accounts receivable,
inventory, property and equipment. This line of credit is also personally
guaranteed by Mr. Yarbrough, the Company's Chairman and Chief Executive Officer.
At September 30, 1998 the Company had a liability of $690,000 under this line of
credit, which such amount were used by the Company for general working capital.
See Part I - Item 7. Certain Relationships and Related Transactions and Part FS
Financial Statements.
Net cash used by operating activities for the year ended September 30,
1998 was $389,000 compared to net cash provided by operating activities of
$132,000 for the year ended September, 1997. This decrease was primarily
attributable to increases in accounts receivable and inventories attendant to
the Company's growth and product diversification. Net cash used for investing
activities for the year ended September 30, 1998 was $412,000 compared to
$142,000 for the year ended September 30, 1997. The increase was primarily
attributable to an increase in production and the establishment of the Company's
Alcool facility in Alabama. $844,000 was provided by financing activities,
including proceeds from the sale of securities and the establishment of a line
of credit with a commercial bank, during the year ended September 30, 1998 as
compared to $12,000 during the year ended September 30, 1997.
Nine Months Ended June 30
Results of Operations
Revenues for the nine months ended June 30, 1999 decreased
approximately 15% from the comparable period in fiscal 1998. This reduction is
attributable to:
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* a decrease of approximately 47% in orders from the Company's
Brazilian customers from the comparable period in fiscal 1998. This decrease is
the result of generally adverse economic conditions affecting in that country,
* a decrease of approximately 28% in shipments to the Company's
Canadian customers from the comparable period in fiscal 1998. This decrease is
related to the Company's inability to fill orders stemming from production
delays during the start-up of its Alabama facility,
* the delay in the Company's delivery of orders to its other customers
which was the result of delays in the start-up of the product manufacturing in
Alabama for the Company's new parallel flow coil.
At June 30, 1999 the Company had unfilled orders for approximately 300
of its pool heaters. These orders were from the Company's established customer
base. While the pool heaters were eventually shipped subsequent to June 30,
1999, the delay in shipping the product resulted in reduced revenues for the
period June 30, 1999. Assuming that the Company had been able to deliver this
product on a timely basis, its sales to one of its domestic customers, which was
approximately 14% higher for the nine months ended June 30, 1999 from the
comparable period in fiscal 1998, would have been approximately 25% higher for
the nine months ended June 30, 1999 from the nine months ended June 30, 1998. As
of July 1, 1999, the Company had resolved the initial difficulties encountered
in its Montgomery, Alabama facility and the facility is producing the parallel
flow coils according to the production schedule. Accordingly, management
believes the Company will begin to report quarterly increases in revenues with
the period beginning October 1,1999.
General and administrative expenses increased approximately 51% for the
nine months ended June 30, 1999 from the comparable period in fiscal 1998 as a
result of increased marketing costs associated with introduction of the
Company's new products (approximately $150,000) and costs associated with an
expansion of the Company's infrastructure in anticipation of introduction of the
Company's new parallel flow coil and the residential central air conditioning
systems. Management anticipates the Company will continue to incur additional
general and administrative expenses during the balance of fiscal 1999 and into
fiscal 2000.
Research and development expenses for the nine months ended June 30,
1999 were attributable to costs associated with the parallel flow coil and the
new heat exchanger. As the Company continues to develop new products, management
anticipates the Company will continue to incur research and development costs;
however, as the majority of the current product development has been completed,
management does not anticipate any significant additional expenses through the
balance of fiscal 1999.
Approximately 20% of the pre-operating costs of new product lines was
attributable to the Company's new line of residential air conditioners, with the
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balance attributable to the expansion of its operations through the Alcool
subsidiary. The Company did not have comparable costs in fiscal 1998.
Depreciation and amortization increased approximately 412% for the nine months
ended June 30, 1999 over the comparable period in fiscal 1998 as a result of the
establishment of Alcool's operations. Likewise, interest expense increased
approximately 838% for the nine months ended June 30, 1999 versus the nine
months ended June 30, 1998 primarily as a result of costs associated with the
Bonds. With the opening of Alcool's manufacturing facility, and the beginning of
production of the Company's parallel flow coil, in fiscal 1999 the Company has
begun generating revenue from the sale of scrap aluminum which is a by-product
of the manufacturing process. While the Company anticipates it will continue to
report other income from the sale of scrap aluminum, it anticipates the amount
will decline with an increase in manufacturing efficiencies at the Alabama
plant.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months ended
June 30, 1999 was $348,000 compared to net cash used by operating activities of
$33,000 for the nine months ended June 30, 1998. This increase was primarily
attributable to changes in working capital related to start-up cost at the
Company's Alcool facility. Net cash used for investing activities for the nine
months ended June 30, 1999 was $2,623,000 compared to $362,000 for the nine
months ended June 30, 1998. The increase was attributable to the establishment
of the Company's Alcool facility in Alabama. Net cash provided by financing
activities for the nine months ended June 30, 1999 was $2,754,000 as compared to
$770,000 for the nine months ended June 30, 1998. This increase was attributable
to proceeds the Company received from the Bonds, as well as funds available from
the Company's credit line.
As described above, in connection with liabilities associated with the
Bonds, the Company is required to maintain certain financial ratios. Likewise,
the Company is required to maintain certain financial ratios in connection with
a commercial term loan in the original principal amount of $1,500,000 which was
incurred in connection with the establishment of the Alabama plant. The Company
was in default of one of these covenants at June 30, 1999 in that it failed to
maintain a debt service coverage ratio of 1.25. At June 30, 1999, the debt
service coverage ratio was (4). The Company was unable to maintain the ratios
established by the commercial loan as a result of initial difficulties incurred
in commencing manufacturing at the new Alabama location. Once the Company was in
default under the commercial loan, it became in default under the Bonds. As a
result of these defaults, (i) the $2,460,000 principal amount of the Bonds and a
portion of the bank term loan ($157,539) were reclassified from long term
liabilities to short term liabilities, and (ii) the commercial lender may
exercise its rights to declare all unmature obligations immediately due and
payable. At September 28, 1999, the amount outstanding under the commercial term
loan was approximately $88,834. As a result of these reclassifications, the
Company has a working capital deficit of approximately $1,850,472 at June 30,
1999.
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The Company has participated in ongoing discussions with the lender and
has been informally advised that the commercial bank does not presently intend
to call the loan. The lender, however, has not consented to an amendment to the
loan documents removing the ratio requirements. Based upon information known to
management as of the date of this Registration Statement, management believes
the Company will be in full compliance with the loan covenants on or before
November 30, 1999. Management's belief is based upon the fact that the initial
manufacturing difficulties being encountered at the Alcool facility were
overcome in July 1999, and an internal analysis of the Company's shipments since
June 30, 1999. In the event the lender chooses to enforce its rights and call
the loan, the Company's business and operations will be materially and adversely
impacted. The Company would be required to seek replacement financing for this
loan. There are no assurances that such financing would be available to the
Company. In this event, the Company would be required to consider any and all
options available to it, including seeking protection under federal bankruptcy
laws.
As a result of the Company's default under the covenants of the
commercial term loan, the trustee may exercise its rights to call the Bonds.
While the Company does not believe it is likely the trustee would exercise its
rights based upon informal conversations with the trustee, in that event the
Company's business and operations would be materially and adversely impacted in
that the Company would be required to seek a refinancing of the liabilities
represented by the Bonds. There are no assurances the Company would be
successful in such endeavor. In this event, the Company would be required to
consider any and all options available to it, including seeking protection under
federal bankruptcy laws.
As described above, the Company entered into a line of credit
arrangement with a bank for $1,000,000 in September 1998; at June 30, 1999 the
amount outstanding to the bank was approximately $956,000. In October 1999 the
expiration date of this credit line was extended to March 4, 2000 by the lender.
The Company does not presently have any additional sources of working
capital. The Company is in preliminary discussions with an investment banking
regarding a private placement of the Company's securities. The Company has not
reached a firm understanding with the investment banking firm and, as it is
likely the private placement would be conducted on a "best efforts" basis, there
can be no assurances that the Company will raise any additional capital in this
contemplated private placement.
Year 2000 Compliance
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The Year 2000 issue
relates to whether computer systems will properly recognize and process
information relating to dates in and after the year 2000. These systems could
fail or produce erroneous results if they cannot adequately process dates beyond
the year 1999, and are not corrected. Significant uncertainty exists in the
software industry concerning the potential consequences that may result from the
failure of software to adequately address the Year 2000 issue. The Company has
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reviewed all software and hardware used internally by it in all support systems
to determine whether they are Year 2000 compliant. The software has already been
upgraded by the manufacturer or was recently purchased and is Year 2000
compliant. We do not believe that the aggregate cost for the Year 2000 issue
will be material. However, we cannot predict the effect of the Year 2000 issue
on entities with which we transact business. While the Company does not believe
any Year 2000 non-compliance by any entity with which it transacts business will
have a material adverse affect on the Company, there can be no assurances.
ITEM 3. DESCRIPTION OF PROPERTY
The Company presently leases approximately 28,000 square feet of
office/warehouse space in Deerfield Beach, Florida which houses the Company's
principal executive offices and Florida manufacturing facilities. These
facilities are covered under two separate lease agreements with an unaffiliated
third party. The first lease, which expires in August 2003, covers approximately
16,000 square feet at a current annual rent of approximately $99,000 (including
common area maintenance and other costs). The second lease, which expires in
September 2003, covers approximately 12,000 square feet at an annual rent of
approximately $80,436 (including common area maintenance and other costs).
Alcool leases an additional approximately 81,358 square feet of
office/warehouse space in Montgomery County, Alabama which houses the Company's
Alabama manufacturing operations. The lease, which is with an unaffiliated third
party and is guaranteed by the Company, expires in December 2003 and provides
for annual rent of approximately $265,860. The annual rental is comprised of
approximately $244,080 in base rent and approximately $21,780 in "additional
rent", which such amount is to amortize lessor's cost of $146,373 for certain
improvements made to the property at Alcool's request over a 10 year period,
using an interest factor of 8.5%. The lease may be renewed at Alcool's option
for an additional five year term at the rate of $280,680 per year in base rent,
plus the approximate $21,780 annually in "additional rent." At the option of
Alcool, the principal amount may be prepaid at any time during the term of the
lease. If Alcool does not exercise its option to renew this lease for an
additional five year term, upon expiration of the initial term Alcool shall be
required to pay to the lessor $88,455 representing the then remaining principal
amount of the additional rent.
The Company's Canadian operations are conducted from a portion of the
residence of its Canadian sales manager. The Company pays the normal operating
costs associated with these operations, including telephone, postage and
miscellaneous office expenses. The Company does not pay any rental or lease
payments to its Canadian sales manager.
12
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of September 28, 1999 there are 13,760,000 shares of Common Stock
issued and outstanding and 133,663 shares of Series A 5% Cumulative Convertible
Preferred Stock issued and outstanding. The Series A 5% Cumulative Convertible
Preferred Stock, which carries no voting rights, is convertible into shares of
Common Stock on a 1:1 basis. The following table sets forth, as of the close of
business on September 28, 1999, (a) the name, address and number of shares of
each person known by the Company to be the beneficial owner of more than 5% of
the Company's Common Stock and (b) the number of shares of Common Stock owned by
each director and all officers and directors as a group, together with their
respective percentage holdings of such shares, in both instances assuming that
the Series A 5% Cumulative Convertible Preferred Stock had been converted into
Common Stock at September 28, 1999. Except as otherwise specifically set forth
herein, the following tables give no effect to the exercise of any outstanding
stock options or the Placement Agent Warrants. See Part I - Item 7. Description
of Securities. Unless otherwise indicated, the address for each person is 746
South Military Trail, Deerfield Beach, FL 33442
<TABLE>
<CAPTION>
NAME AND AMOUNT OF PERCENTAGE
ADDRESS OF BENEFICIAL OF
OF BENEFICIAL OWNER OWNERSHIP OF STOCK CLASS
- ------------------- ------------------ -----
<S> <C> <C>
Merrill A. Yarbrough and 8,776,618 63.3%
Debra Zweig Yarbrough
Joint Tenants (1)(2)
Howard E. Cobb(1)(3) 7,500 *
Benjamin Swirsky (4) 25,000 *
Richard Szelewicki(1)(5) 1,935,397 14.0%
Cameron Perkins(1)(6) 977,699 7.1%
Laura Perkins(1)(7) 967,693 7.0%
All Executive Officers
and Directors as a Group
(three people)(1)(2)(3)(4) 8,809,118 63.4%
</TABLE>
- ----------
* represents less than 1%
(1) In connection with the Company's 1998 private placement, all
shareholders of the Company prior to such transaction delivered
"lock-up" letters to the Noble International Investments, Inc.
("Noble"), an NASD member firm which acted as the Company's placement
agent, irrevocably agreeing that such shareholder would not, directly
or indirectly, exercise, issue, sell, offer, contract to sell, or make
any short sale, pledge, grant any option to purchase, transfer, pledge,
assign, hypothecate, distribute or otherwise encumber or dispose of
13
<PAGE>
(whether pursuant to Rule 144 of the General Rules and Regulations
under the Securities Act or otherwise) any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for any
other rights to purchase or acquire Common Stock the 24 month-period
ending on May 6, 2000, without the prior written consent of Noble.
Noble has advised the Company that it does not have a general policy
with respect to the release of shares prior to the expiration of a
lock-up period.
(2) Includes (i) vested NSO options to purchase 15,000 shares of Common
Stock at $1.00 per share pursuant to the Company's 1998 Stock Option
Plan held by Mr. Yarbrough, (ii) 3,750 vested ISO option to purchase
3,750 shares of Common Stock at $1.00 per share pursuant to the
Company's 1998 Stock Option Plan held by Mrs. Yarbrough and (iii)
87,868 shares of Series A Preferred held by Mr. and Mrs. Yarbrough
which are convertible into 87,868 shares of Common Stock. Does not
include granted but unvested options held by either Mr. or Mrs.
Yarbrough nor the Executive Stock Options which may be earned by Mr.
Yarbrough pursuant to his employment agreement. See Part I - Item 6.
Executive Compensation and Part I - Item 7. Certain Relationships and
Related Transactions. Mr. and Mrs. Yarbrough are husband and wife.
(3) Includes vested ISO options to purchase 7,500 shares of Common Stock at
$1.00 per share pursuant to the Company's 1998 Stock Option Plan, but
excludes granted but unvested options. See Part I - Item 6.
Executive Compensation.
(4) Includes vested NSO options to purchase 25,000 shares of Common Stock
at $1.00 per share pursuant to the Company's 1998 Stock Option Plan.
See Part I - Item 6. Executive Compensation - Directors Compensation.
Mr. Swirsky's address is 350 Fairlawn Avenue, Toronto, Ontario, Canada.
(5) Includes 22,897 shares of Series A Preferred Stock which is convertible
into 22,897 shares of Common Stock. See Part I - Item 7. Certain
Relationships and Related Transactions. Mr. Szelewicki's address is
22384 Siesta Key Drive, Boca Raton, Florida 33428.
(6) Includes 11,449 shares of Series A Preferred Stock which is convertible
into 11,449 shares of Common Stock. See Part I - Item 7. Certain
Relationships and Related Transactions. Mr. Perkins' address is 5801 NE
14 Way, Fort Lauderdale, Florida 33334.
(7) Includes 11,449 shares of Series A Preferred Stock which is convertible
into 11,449 shares of Common Stock. See Part I - Item 7. Certain
Relationships and Related Transactions. Ms. Perkins' address is 2779
Arrandale Lane, Sun Valley, California 93063..
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names, positions with the Company
and ages of the executive officers and directors of the Company. Directors will
be elected at the Company's annual meeting of shareholders and serve for one
year or until their successors are elected and qualify. Officers are elected by
the Board and their terms of office are, except to the extent governed by
employment contract, at the discretion of the Board.
14
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Merrill A. Yarbrough 56 President, Chief Executive Officer and Chairman of the Board
Howard E. Cobb 72 Chief Financial Officer, Treasurer and Director
Benjamin Swirksy 57 Director
</TABLE>
MERRILL A. YARBROUGH. Mr. Yarbrough has been President, Chief Executive
Officer and Chairman of the Board of the Company since its formation. Mr.
Yarbrough was also founder and President of Alternative Energy Systems, Inc., a
pool heater sales and installation company from its formation in 1987 until
August 1995. See "Certain Relationships and Related Transactions." Prior to
founding the Company in 1995, for approximately 15 years, Mr. Yarbrough was
involved in the sales, service and installation in the heating, ventilation and
air conditioning industry, primarily involving central air conditioning systems,
heat pump pool heaters, solar pool heaters and residential water heaters. Mr.
Yarbrough received a B.B.A. from the University of Miami.
HOWARD E. COBB. Mr. Cobb has been Chief Financial Officer, Treasurer
and a director of the Company since October 1996. Mr. Cobb first joined the
Company in December 1995 as its Comptroller. Prior to joining the Company, from
March 1993 until December 1995, Mr. Cobb was self employed as a financial
consultant. Mr. Cobb has held senior financial management positions in the
high-technology operations of General Motors and International Telephone and
Telegraph. Mr. Cobb received a B.S. in Business Administration from West
Virginia Tech and has served as an officer in a chapter of Financial Executives
Institute.
BENJAMIN SWIRSKY. Mr. Swirsky has been a member of the Board of
Directors since October 1998 and serves on the Audit and Compensation Committees
of the Board of Directors. Since June 1998 Mr. Swirsky has been Chairman and CEO
of Nextel Group, Inc., a telecommunications company which is a subsidiary of
Easy Access, Inc., a publicly-traded company (OTCBB: EZZZ). From June 1993 until
January 1998, Mr. Swirsky was President and Chief Executive Officer of Slater
Steel, Inc., a publicly traded company listed on the Toronto Stock Exchange
(SSI) with investments in the steel, steel service, forging, pole-line hardware
and trucking industries. Mr. Swirsky is also a member of the Board of Directors
of the Four Seasons Hotel Corp., a chain of first class hotels located
throughout the world, and serves on the Audit, Compensation and Governance
committees of the Board. Mr. Swirsky also sits on the Board of Directors of a
number of other companies, including (i) PC DOCS Group International Inc., a
Canadian publicly-traded company (Nasdaq: DOCSF, TSE: DXX) where he currently
serves as Chairman, (ii) CamVec Corp., a Canadian publicly-traded company
(CAT.CV), (iii) MigraTEC Inc., a publicly-traded company (Nasdaq: MIGR) where he
currently serves as Chairman, (iv) Easy Access, Inc., a publicly traded company
listed on the OTC Bulletin Board (OTCBB: EZZZ), in which he is also a principal
shareholder, (iv) Commercial Alcohols, Inc., in which he is also a principal
shareholder, (v) Bee Line Monorail Systems, Inc. and (vi) Visual Data
Corporation (Nasdaq NMS: VDAT).
15
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
Cash Compensation
The following table summarizes all compensation recorded by the Company
in each of the last three fiscal years for the Company's Chief Executive Officer
and each other executive officers serving as such whose annual compensation
exceeded $100,000.
<TABLE>
<CAPTION>
LONG - TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- -------------------
NAME AND OTHER ANNUAL RESTRICTED OPTIONS/ ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STK AWDS SARS(#) LTIP COMPEN.
- ------------------ ---- ------ ----- ------------ -------- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Merrill A. Yarbrough 1998 $ 105,850 $0 $0 0 20,000(1) 0 0
President, Chief 1997 $ 67,187(2) $0 $0 0 0 0 0
Executive Officer, 1996 $ 40,500(2) $0 $0 0 0 0 0
Chairman
</TABLE>
- ----------
(1) Excludes unvested options which may be granted pursuant to his
Employment Agreement. See "Employment Agreements" and "Stock Option
Plan" below.
(2) Prior to January 1997, all compensation received by Mr. Yarbrough was
pursuant to management fees paid by the Company to Alternative Energy,
Inc., a Florida corporation of which Mr. Yarbrough is the beneficial
owner.
OPTION GRANTS IN YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------
NO. OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING GRANTED TO EMPLOYEES EXERCISE EXPIRATION
NAME OPTIONS GRANTED IN FISCAL YEAR PRICE DATE
- ---- --------------- -------------- ----- ----
<S> <C> <C> <C> <C> <C>
Merrill A. Yarbrough,
President, Chief
Executive Officer
and Chairman 20,000(1) 30.1% $1.00 5-1-02
Howard E. Cobb,
Chief Financial
Officers, Treasurer
and Director 10,000(2) 15.4% $1.00 5-1-02
</TABLE>
- ----------
(1) Excludes options which may be granted under the Company's 1998 Stock
Option Plan providing Mr. Yarbrough remains an employee of the Company
or options which may be granted pursuant to his Employment Agreement.
See "Employment Agreements" and "Stock Option Plan" below.
(2) Excludes options which may be granted under the Company's 1998 Stock
Option Plan providing Mr. Cobb remains an employee of the Company. See
"Employment Agreements" below.
16
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN YEAR ENDED SEPTEMBER 30, 1998
AND YEAR-END OPTION VALUES
NO. OF SECURITIES
UNDERLYING OPTIONS VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE SEPTEMBER 30, 1998 SEPTEMBER 30, 1998(1)
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Merrill A. Yarbrough
President, Chief
Executive Officer,
and Director 0 n/a 20,000 10,000 $28,000 $14,000
Howard E. Cobb,
Chief Financial
Officer, Treasurer
and Director 0 n/a 10,000 10,000 $14,000 $14,000
</TABLE>
- ----------
(1) The dollar value of the unexercised in-the-money options is calculated
based upon the difference between the option exercise price of $1.00
per share and $2.40 per share, being the closing price of the Company's
Common Stock on September 30, 1998 as reported NASD OTC Bulletin Board.
Employment Agreements
Merrill A. Yarbrough
Effective April 30, 1998 the Company entered into a three year
employment agreement with Merrill A. Yarbrough, the Company's Chief Executive
Officer, President and Chairman of the Board of Directors. The terms of this
agreement, which is renewable for additional one year terms at the Company's
option, provides for an annual base salary of $145,000 (as adjusted), which such
amount may be increased by vote of the Board of Directors (with Mr. Yarbrough
abstaining) in the event of a material change in the scope of his duties as a
result of a significant expansion of the Company's business and operations, a
material diversification of the Company's business activities, one or more
acquisitions or other similar long-term, permanent occurrences which would
result in Mr. Yarbrough undertaking additional responsibilities. The agreement
also provide, among other things, for (i) participation in any profit-sharing or
retirement plan and in other employee benefits applicable to employees and
executives of the Company, (ii) an automobile allowance and fringe benefits
commensurate with the duties and responsibilities of Mr. Yarbrough, and (iii)
benefits in the event of disability and contain certain non-disclosure and
non-competition provisions.
Under the agreement, Mr. Yarbrough was granted 20,000 four year NSO
options under the Company's 1998 Stock Option Plan to purchase shares of the
Company's Common Stock at $1.00 per share, which such options vested 10,000
options on May 1, 1998, 5,000 option on May 1, 1999 and the remaining 5,000
17
<PAGE>
options vest on May 1, 2000. Under the terms of the agreement, on May 1, 1999,
he was granted an additional 10,000 five year NSO options, exercisable at $4.00
per share, being fair market value on the date of grant, and vesting in equal
thirds on each of May 1, 2000, 2001 and 2002. Likewise, providing Mr. Yarbrough
remains an employee of the Company on May 1, 2000, he will be entitled to be
granted an additional 10,000 five year NSO options, also exercisable at fair
market value on the date of grant, and vesting in equal thirds on each of May 1,
2001, 2002 and 2003. All of the foregoing options are eligible for accelerated
vesting (at the then current fair market value of the Company's Common Stock) in
the event of (i) a sale of all or substantially all of the assets of the Company
or (ii) a merger, stock exchange or other form of business combination the
result of which being that the then current shareholders of the Company, will
own, after the consummation of such business combination, less that 49% of the
then issued and outstanding voting securities of the Company.
As a term of the employment agreement, Mr. Yarbrough has been given the
opportunity to earn certain stock options based upon the future performance of
the Company. During the two year period beginning October 1, 1997 and ending
September 30, 1999 (the "Performance Option Period"), Mr. Yarbrough will be
entitled to be granted one option to purchase one share of the Company's Common
Stock for each $3.20 of cumulative Net Income (as hereinafter defined) the
Company reports in excess of $2,000,000, up to a maximum of 250,000 options.
Subsequent to the Company reporting cumulative Net Income of $2,800,000 during
the Performance Option Period, additional Net Income, if any, during such period
will be accumulated until such time as the Company shall report Net Income
during the Performance Option Period of at least an additional $8,000,000 over
and above $2,800,000 cumulative Net Income. Thereafter, Mr. Yarbrough shall be
entitled to be granted one option to purchase one share of the Company's Common
Stock for each $5.00 of cumulative Net Income the Company reports in excess of
at least an additional $8,000,000 during the Performance Option Period, up to a
maximum of 250,000 options. The options earned will be computed quarterly based
on the Company's Financial Statements, and the exercise price of these options
will be the fair market value of the Company's Common Stock on the date so
earned. For the purposes of herein, the term "Net Income" shall mean the net
income, after taxes, as reported on either the Company's audited financial
statements for the year then ended, or unaudited financial statements for the
fiscal quarter then ended, in either case which such statements shall have been
prepared in accordance with generally accepted accounting principles
consistently applied and, in the case of the audited financial statements such
financial statements shall be accompanied by an unqualified report of the
Company's independent auditors. In the event such options are granted pursuant
to the results of the Company as reported in unaudited quarterly financial
statements, such statements shall have first been reviewed by the Audit
Committee of the Company's Board of Directors, if any, or by the outside
directors of the Company, who shall be satisfied in their sole discretion that
such unaudited financial statements have been prepared in accordance with
generally accepted accounting principles consistently applied.
Under the terms of the Agreement, the Company may terminate the
employment of Mr. Yarbrough either with or without cause. If the Agreement is
18
<PAGE>
terminated by the Company without good cause (which requires a six month notice
provision), the Company would be obligated to pay Mr. Yarbrough an amount equal
to 18 months then current base salary under the Agreement. To the extent that
Mr. Yarbrough is terminated for cause, no severance benefits shall be paid to
him.
Howard E. Cobb
Effective April 30, 1998 the Company entered into a three year
employment agreement with Howard E. Cobb, the Company's Chief Financial Officer,
Treasurer and a member of the Board of Directors. The terms of this agreement,
which is renewable for additional one year terms at the Company's option,
provides for an annual base salary of $60,000 (as adjusted), which such amount
may be increased by vote of the Board of Directors (with Mr. Cobb abstaining) in
the event of a material change in the scope of his duties as a result of a
significant expansion of the Company's business and operations, a material
diversification of the Company's business activities, one or more acquisitions
or other similar long-term, permanent occurrences which would result in Mr. Cobb
undertaking additional responsibilities. The agreement also provide, among other
things, for (i) participation in any profit-sharing or retirement plan and in
other employee benefits applicable to employees and executives of the Company,
(ii) fringe benefits commensurate with the duties and responsibilities of Mr.
Cobb, and (iii) benefits in the event of disability and contain certain
non-disclosure and non-competition provisions.
Under the agreement, Mr. Cobb was granted 10,000 four year ISO options
under the Company's 1998 Stock Option Plan to purchase shares of the Company's
Common Stock at $1.00 per share, which such options vested 5,000 options on May
1, 1998, an additional 2,500 options vested on May 1, 1999, and the remaining
options vest on May 1, 2000. Under the terms of the agreement, on May 1, 1999
Mr. Cobb granted an additional 5,000 five year ISO options, exercisable $4.00
per share, being the fair market value on the date of grant, and vesting in
equal thirds on each of May 1, 2000, 2001 and 2002. Likewise, providing Mr. Cobb
remains an employee of the Company on May 1, 2000, he will be entitled to be
granted an additional 5,000 five year ISO options, also exercisable at fair
market value on the date of grant, and vesting in equal thirds on each of May 1,
2001, 2002 and 2003. All of the foregoing options are eligible for accelerated
vesting (at the then current fair market value of the Company's Common Stock) in
the event of (i) a sale of all or substantially all of the assets of the Company
or (ii) a merger, stock exchange or other form of business combination the
result of which being that the then current shareholders of the Company, will
own, after the consummation of such business combination, less that 49% of the
then issued and outstanding voting securities of the Company.
Under the terms of the Agreement, the Company may terminate the
employment of Mr. Cobb either with or without cause. If the Agreement is
terminated by the Company without good cause (which requires a 30-day notice
provision), the Company would be obligated to pay Mr. Cobb an amount equal to 11
months then current base salary under the Agreement. To the extent that Mr. Cobb
is terminated for cause, no severance benefits shall be paid to him.
19
<PAGE>
Stock Option Plan
In May 1998, the Company adopted a qualified stock option plan, the
Peregrine Industries, Inc. 1998 Stock Option Plan (the "Plan"). The purpose of
the Plan was to increase the employees' and non-employee directors' proprietary
interest in the Company and to align more closely their interests with the
interests of the Company's shareholders, as well as to enable the Company to
attract and retain the services of experienced and highly qualified employees
and non-employee directors.
The Company reserved an aggregate of 1,000,000 shares of Common Stock
for issuance pursuant to options granted under the Plan ("Plan Options"). As of
September 28, 1999, an aggregate of 376,500 options (both ISO and NSO) have been
granted under the Plan. The Board of Directors or a Committee of the Board of
Directors (the "Committee") will administer the Plan including, without
limitation, the selection of the persons who will be granted Plan Options under
the Plan, the type of Plan Options to be granted, the number of shares subject
to each Plan Option and the Plan Option price.
Plan Options granted under the Plan may either be options qualifying as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), or options that do not so qualify
("Non-Qualified Options"). Any Incentive Option granted under the Plan must
provide for an exercise price of not less than 100% of the fair market value of
the underlying shares on the date of such grant, but the exercise price of any
Incentive Option granted to an eligible employee owning more than 10% of the
Company's Common Stock must be at least 110% of such fair market value as
determined on the date of the grant.
The term of each Plan Option and the manner in which it may be
exercised is determined by the Board of the Directors or the Committee, provided
that no Plan Option may be exercisable more than 10 years after the date of its
grant and, in the case of an Incentive Option granted to an eligible employee
owning more than 10% of the Company's Common Stock, no more than five years
after the date of the grant. The exercise price of Non-Qualified Options shall
be determined by the Board of Directors or the Committee.
The per share exercise price of shares granted under the Plan may be
adjusted in the event of certain changes in the Company's capitalization, but
any such adjustment shall not change the total purchase price payable upon the
exercise in full of Plan Options granted under the Plan. Officers, directors and
key employees of and consultants to the Company and its subsidiaries will be
eligible to receive Non-Qualified Options under the Plan. Only officers,
directors and employees of the Company who are employed by the Company or by any
subsidiary thereof are eligible to receive Incentive Options.
20
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1997, Merrill A. Yarbrough applied for a patent on the heat transfer
system he invented which is the basis for certain of the Company's products;
this patent was granted in September 1998. In April 1998 Mr. Yarbrough assigned
all rights under this patent, as well as any other intellectual property used by
the Company, to the Company. Mr. Yarbrough did not receive any additional
compensation for such assignment.
On April 24, 1997, the Company entered into a license agreement (the
"License Agreement") with Mr. Yarbrough relating to the heat transfer system,
related apparatus, and processes, and certain patent rights associated
therewith, which are used by the Company in the manufacture of the Smartemp
Plus(TM). The License Agreement granted the Company the right to manufacture,
use, sell and otherwise commercialize the licensed products for the life of the
patent, unless sooner terminated by the default of the Company as set forth in
the License Agreement. Pursuant to the terms of the License Agreement, the
Company agreed to pay Mr. Yarbrough a royalty of $10.00 on Smartemp Plus(TM)
product sold by the Company which incorporates Mr. Yarbrough's heat transfer
system. Mr. Yarbrough, in turn, entered into a separate agreement in July 1997
with Russell Lambert, a former shareholder of the Company, agreeing to pay Mr.
Lamberg a $2.00 per unit royalty on each unit of the Smartemp Plus(TM) sold by
the Company. In connection with the aforedescribed assignment of all
intellectual property rights owned by Mr. Yarbrough to the Company, this License
Agreement was terminated and the Company assumed the obligations of Mr.
Yarbrough under the agreement with Mr. Lambert. As of June 30, 1999, the Company
has sold an aggregate of 47 Smartemp Plus (TM) units, generating royalties of
$94 to Mr. Lambert.
In connection with the conversion of the Company's tax status from an S
corporation to a C corporation effective April 1, 1998, the Company made
aggregate distributions of $1,348,422 to its shareholders which represented all
S corporation net income reported by the Company for the fiscal year ended
September 30, 1997 and the subsequent six months ended March 31, 1998. In March
and April 1998, the Company distributed $215,000 of its net income to its
shareholders for the aforementioned periods. In addition, the Company
distributed $316,000 to shareholders during May and June 1998, and recorded an
additional distribution of $38,000 to the shareholders in accrued liabilities at
June 30, 1998. The final remaining distribution of approximately $748,000 was
recorded by the Company by offsetting advances to stockholder of $93,000 and
issuing unsecured promissory notes of $655,000 to its shareholders in an amount
equal to their proportionate share of the final remaining distribution based
upon their ownership interest in the Company. In September 1998 the principal
and all accrued but unpaid interest due under such notes were converted by the
holders into an aggregate of 133,663 shares of the Company's Series A 5%
Cumulative Convertible Preferred Stock.
During the fiscal years ended September 30, 1998 and 1997 the Company
recorded sales of approximately $58,000 and $104,000, respectively, to an entity
owned by Mr. Yarbrough. At September 30, 1998 all amounts receivable from such
entity had been collected and the entity is now inactive.
21
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 30,000,000 shares of Common Stock,
par value $.0001 per share, of which 13,760,000 shares were issued and
outstanding as of September 28, 1999. The issued and outstanding shares of
Common Stock are fully paid and nonassessable. Holders of the shares are
entitled to one vote per share on each matter submitted to a vote at a meeting
of shareholders. The shares of Common Stock do not have cumulative voting rights
or preemptive rights and there are no redemption or conversion privileges
attached thereto. Holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Company and to participate ratably in the
distribution of any assets legally available for distribution with respect to
the Common Stock. The Company does not expect to pay dividends for the
foreseeable future.
Lock-Up Restrictions
Pursuant to the terms of the April 1998 private placement, all
officers, directors and then existing shareholders of the Company executed
lock-up letters agreeing not to sell, transfer, assign, hypothecate or otherwise
dispose of the shares of Common Stock owned by them until May 2000 without the
prior consent of Noble. Noble does not have a general policy with regard to
early release of lock-up agreements.
Preferred Stock
The Articles of Incorporation for the Company provide for 5,000,000
shares of blank check preferred stock, par value $.0001, issuable in such series
and bearing such voting, dividend, conversion, liquidation and other rights and
preferences as the Board of Directors may determine. As of September 28, 1999
the Company has designated a series of 200,000 shares of preferred stock
entitled Series A 5% Cumulative Convertible Preferred Stock, of which 133,663
shares are issued and outstanding. The remaining 4,800,000 shares of preferred
stock remain without designation.
The designations, rights and preferences of the Series A 5% Cumulative
Convertible Preferred Stock provide (i) that such shares carry no voting rights,
(ii) such shares are convertible into shares of the Company's Common Stock at
any time at the option of either the Holder or the Company at the rate of one
share of Common Stock for each share of Series A 5% Cumulative Convertible
Preferred Stock so converted, (iii) the shares may be redeemed at any time at
the option of the Company for $5.00 per share, (iv) the shares pay an annual
dividend of 5% in arrears, payable in cash, shares of Common Stock, or any
combination thereof, (v) the shares carry a liquidation value of $5.00 per
share, and (vi) the shares are transferrable at any time at the holders' option.
22
<PAGE>
Placement Agent Warrants
In April 1998, in connection with the Company's private placement, the
Company granted Noble warrants to purchase 100,000 shares of the Company's
Common Stock for $1.00 per share. The Placement Agent Warrants are not
transferrable until April 1999, except to Noble's officers, consultants or
partners and to selected dealers, and may be exercised in whole or in part at
any time and from time to time during the period of four (4) years commencing
April 1999. The Placement Agent Warrants contain provisions providing for
adjustment of the exercise price and the number and type of securities issuable
upon exercise of the Placement Agent Warrants upon the occurrence of certain
events including subdivisions and combinations of Common Stock. Such
anti-dilution provisions are PARI PASSU with all other shareholder groups. The
Placement Agent warrants also grant to the holders thereof certain registration
rights under the Securities Act for the shares of Common Stock underlying such
Placement Agent Warrants. Florida Anti-Takeover Statutes; Indemnification
Florida has enacted legislation that may deter or frustrate a take-over
of a Florida corporation. The Florida Control Share Act generally provides that
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless such voting rights are approved by a majority of the
corporation's disinterested shareholders. The Florida Affiliated Transactions
Act generally requires super majority approval by disinterested directors or
shareholders of certain specified transactions between a corporation and holders
of more than 10% of the outstanding voting shares of the corporation (or their
affiliates). The Florida law permits the Company's Articles of Incorporation to
require the Company to indemnify the Company's directors, officers, employees
and agents.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER STOCKHOLDER MATTERS
The Company's Common Stock has been listed for trading on the OTC
Bulletin Board under the symbol "HVAC" since August 11, 1998. The following
table sets forth, for the period since August 11, 1998, the high and low closing
sales prices for the Common Stock as reported by the OTC Bulletin Board.
<TABLE>
<CAPTION>
COMMON STOCK
------------
HIGH LOW
---- ---
<S> <C> <C>
August 11, 1998 - September 30, 1998 $2.75 $1.9375
October 1, 1998 - December 31, 1998 $2.4375 $1.875
January 1, 1999 - March 31, 1999 $3.875 $3.00
April 1, 1999 - June 30, 1999 $6.00 $3.00
</TABLE>
23
<PAGE>
At September 28, 1999 the closing bid price of the Common Stock as
reported on the OTC Bulletin Board was $2.45. At September 28, 1999 the Company
has approximately 20 record shareholders. The Company, however, believes that it
has in excess of 100 beneficial owners of its securities.
The transfer agent for the Company's Common Stock is Florida Atlantic
Stock Transfer, Inc., 7130 Nob Hill Road, Tamarac, Florida 33321.
Dividend Policy
The Company has never paid cash dividends on its Common Stock. The
designations, rights and preference of the Series A 5% Cumulative Convertible
Preferred Stock provide for annual dividends, in arrears, of 5%. See Part I,
Item 7. Description of Securities. The Company presently intends to retain
future earnings, if any, to finance the expansion of its business and does not
anticipate that any cash dividends will be paid in the foreseeable future. The
future dividend policy will depend on the Company's earnings, capital
requirements, expansion plans, financial condition and other relevant factors.
ITEM 2. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not Applicable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
In April 1998 the Company sold an aggregate of 1,000,000 shares of its
Common Stock to a group of accredited or otherwise qualified investors in a
private placement exempt from registration under the Securities Act in reliance
on Section 3(b) and Rule 504, Regulation D thereof. The net proceeds received by
the Company of approximately $846,000. Noble International Investments, Inc.
("Noble"), a member of the National Association of Securities Dealers, Inc.
("NASD"), acted as placement agent in the offering and was paid a placement
agent fee of 10%, a non-accountable expense allowance of 3% and the Company sold
Noble, or its designees, for nominal consideration warrants to purchase 100,000
shares of the Company's Common Stock for $1.00 per share (the "Placement Agent
Warrants"). See Part I - Item 7. Description of Securities.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act permits the indemnification of
directors, employees, officers and agents of Florida corporations. The Company's
Articles of Incorporation and Bylaws provide that the Company shall indemnify
its directors and officers to the fullest extent permitted by the Corporation
Act. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed 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.
24
<PAGE>
PART F/S
<TABLE>
<CAPTION>
Consolidated Financial Statements for the
Fiscal Years Ended September 30, 1998 and 1997
<S> <C>
Report of Independent Accountants................................................................................F-1
Balance Sheets...................................................................................................F-2
Statements of Income.............................................................................................F-3
Statements of Changes in Stockholders' Equity....................................................................F-4
Statements of Cash Flow..........................................................................................F-5
Notes to Consolidated Financial Statements.......................................................................F-6-F-14
Consolidated Financial Statements for
the Six Months Ended June 30, 1999
Balance Sheet at June 30, 1999 (unaudited) and September 30, 1998................................................F-15
Statement of Loss and Comparative Loss for the Six Months Ended June 30, 1999
and 1998 (unaudited)....................................................................................F-16
Statement of Changes in Stockholders' Equity for the Six
Months Ended June 30, 1999 and 1998 (unaudited).........................................................F-17
Statement of Cash Flow for the Six Months Ended
June 30, 1999 and 1998 (unaudited)......................................................................F-18
Notes to Unaudited Consolidated Financial Statements.............................................................F-19-F-29
</TABLE>
25
<PAGE>
Report of Independent Accountants
November 13, 1998
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Peregrine Industries, Inc. and its subsidiaries at September 30, 1998 and 1997,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
F-1
<PAGE>
PEREGRINE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 45,515 $ 2,480
Accounts receivable, net of allowance for doubtful accounts of $15,000 875,400 472,059
in 1998 and $0 in 1997
Inventory 1,815,329 819,436
Prepaid and other current assets 62,344 27,922
Federal income tax deposits 110,426 0
Deferred tax asset 5,600 0
----------- -----------
Total current assets 2,914,614 1,321,897
Property and equipment, net 538,543 182,836
Deposits 131,865 19,073
Deferred tax asset, net 20,200 0
----------- -----------
Total assets $ 3,605,222 $ 1,523,806
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilites:
Bank overdraft $ 24,273 $ 22,939
Accounts payable 744,912 611,537
Accrued expenses and other payables 99,841 117,514
Line of credit 690,000 0
State income taxes payable 20,663 0
----------- -----------
Total current liabilities 1,579,689 751,990
Warranty reserve 71,778 56,907
----------- -----------
Total liablities 1,651,467 808,897
----------- -----------
Commitments and contingency (Note 5)
Stockholders' equity:
Preferred stock - $.0001 par value; 5,000,000 shares authorized,
200,000 shares designated as Series A, 5% cumulative,
convertible, 133,663 shares issued and outstanding 13 0
Common stock - $.0001 par value; 30,000,000 shares authorized,
13,760,000 issued and outstanding 1,376 10
Additional paid-in capital 1,582,782 69,990
Retained earnings 421,704 644,909
Foreign currency translation adjustment (52,120) 0
----------- -----------
Total stockholders' equity 1,953,755 714,909
----------- -----------
Total liabilities and stockholders' equity $ 3,605,222 $ 1,523,806
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
PEREGRINE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
for the years ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 8,334,293 $ 5,837,624
Cost of sales 5,940,446 4,553,720
----------- -----------
Gross Profit 2,393,847 1,283,904
----------- -----------
Operating expenses:
General and administrative 953,962 577,104
Depreciation and amortization 56,090 40,130
----------- -----------
Total operating expenses 1,010,052 617,236
----------- -----------
Income from operations 1,383,795 666,668
Other income (expenses):
Interest income 2,113 0
Interest expense (46,432) (34,294)
Loss on foreign currency transactions (30,258) 0
----------- -----------
Income before provision for income taxes 1,309,218 632,374
Provision for income taxes 184,000 0
----------- -----------
Net income $ 1,125,218 $ 632,374
=========== ===========
Net income per common and common
equivalent share:
Basic $ .09 $ .05
=========== ===========
Diluted $ .08 $ .05
=========== ===========
Pro Forma Income data
(Unaudited)(Note 6)
Income before income taxes $ 1,309,218 $ 632,374
----------- -----------
Pro Forma provision
for income taxes relating
to S-Corporation (287,318) (240,302)
Actual income tax expense (184,000) (-0-)
----------- -----------
Total provision and pro forma
provision for income taxes (471,318) (240,302)
----------- -----------
Pro Forma net income $ 837,900 $ 392,072
=========== ===========
Pro Forma net income per common
share:
Basic $ .07 $ .03
=========== ===========
Diluted $ .06 $ .03
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PEREGRINE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Foreign
Preferred Stock Common Stock Additional Currency
--------------- ------------------- Paid-in Retained Advances to Translation
Shares Amount Shares Amount Capital Earnings Stockholder Adjustment Total
------- ------ ---------- ------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1996
as restated for stock split
(Note 11) 0 $ 0 12,750,000 $ 1,275 $ 68,725 $ 12,53 $ 0 $ 0 $ 82,535
Net income 0 0 0 0 0 632,374 0 0 632,374
------- ---- ---------- ------- ---------- ---------- ------- --------- ----------
Balance, September 30, 1997 0 0 12,750,000 1,275 68,725 644,909 0 0 714,909
Sale of stock 0 0 1,010,000 101 845,755 0 0 0 845,856
Issuance of preferred stock 133,663 13 0 0 668,302 0 0 0 668,315
Distributions 0 0 0 0 0 (1,348,423) 0 0 (1,348,423)
Net income 0 0 0 0 0 1,125,218 0 0 1,125,218
Increase in advances to
stockholder 0 0 0 0 0 0 (93,025) 0 (93,025)
Decrease in advances to
stockholder 0 0 0 0 0 0 93,025 0 93,025
Foreign currency translation
adjustment 0 0 0 0 0 0 0 (52,120) (52,120)
------- ---- ---------- ------- ---------- ---------- ------- --------- ----------
Balance, September 30, 1998 133,663 $ 13 13,760,000 $ 1,376 $1,582,782 $ 421,704 $ 0 $ (52,120) $1,953,755
======= ==== ========== ======= ========== ========== ======= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PEREGRINE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,125,218 $ 632,374
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Accrued interest on stockholder notes 13,291 0
Deferred tax benefit (25,800) 0
Depreciation and amortization 56,090 40,130
Foreign currency translation adjustment (52,120) 0
Warranty reserve 14,871 33,018
Changes in operating assets and liabilities: 0
Accounts receivable (403,341) (401,018)
Inventory (995,893) (391,548)
Prepaid and other current assets (34,422) (1,114)
Federal income tax deposits (110,426) (11,000)
Deposits (112,792) (10,589)
Accounts payable 133,375 163,509
Accrued expenses and other payables (17,673) 77,931
State income taxes payable 20,663 0
----------- -----------
Net cash provided by (used in) operating activities (388,959) 131,693
----------- -----------
Cash flow from investing activities:
Expenditures for property and equipment (411,797) (141,506)
----------- -----------
Net cash used in investing activities (411,797) (141,506)
----------- -----------
Cash flows from financing activities:
Bank overdraft 1,334 12,293
Advances to stockholder (93,025) 0
Borrowings on line of credit, net 690,000 0
Distributions to stockholders (600,374) 0
Proceeds from sale of common stock 845,856 0
----------- -----------
Net cash provided by financing activities 843,791 12,293
----------- -----------
Net increase in cash and cash equivalents 43,035 2,480
----------- -----------
Cash and cash equivalents, beginning of year 2,480 0
----------- -----------
Cash and cash equivalents, end of year $ 45,515 $ 2,480
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 299,563 $ 7,867
=========== ===========
Supplemental disclosure of non-cash financing activities:
During the year ended September 30, 1998, the Company recorded distributions
to stockholders by offsetting advances to stockholder of $93,025 and issuing
notes payable to stockholders of $655,024. The notes payable to stockholders,
including accrued interest of $13,291, were subsequently exchanged for 133,663
shares of preferred stock (see Note 13).
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
PEREGRINE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Business:
Peregrine Industries, Inc. (the "Company") was formed on October 1, 1995
for the purpose of manufacturing residential pool heaters. The Company is
located in Deerfield Beach, Florida. Products are primarily sold
throughout the United States, Canada, and Brazil. In September 1998, the
Company formed a wholly-owned subsidiary, Alcool, Inc., in Montgomery,
Alabama, in order to expand its manufacturing capacity and product line
(see Note 14).
Foreign Sales Corporation
In June 1998, the Company formed a foreign sales corporation, Peregrine
Global, Inc. in St. Thomas, U.S. Virgin Islands. This wholly-owned
subsidiary was formed to take advantage of more favorable income tax
rates on profits generated from export business. For 1998, approximately
$1,100,000 in export sales were recorded under this provision and a sales
commission of approximately $68,000 was earned by Peregrine Global, Inc.
2. Summary of Significant Accounting Policies:
Principals of Consolidation
The consolidated financial statements include the accounts of Peregrine
Industries, Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Inventory
Inventory consists primarily of pool heaters and raw materials and is
valued at the lower of first-in, first-out (FIFO) cost or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation of equipment is
computed on the straight line method over the estimated useful lives of
the assets which range from five to seven years. Leasehold improvements
are amortized using the straight line method over six years. This period
represents the lesser of the lease term or the economic life of the
leasehold improvements. Upon the sale or retirement of equipment and
leasehold improvements, the cost and related accumulated depreciation are
eliminated from the respective accounts and the resulting gain or loss is
reflected in the statement of income. Repairs and maintenance are
expensed as incurred.
F-6
<PAGE>
PEREGRINE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, Continued:
Income Taxes
Effective April 1, 1998, pursuant to its conversion from an S corporation
to a C corporation, the Company accounted for income taxes in accordance
with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109, the
asset and liability method is used in accounting for income taxes. This
standard requires, among other things, recognition of future tax
benefits, measured by enacted tax rates, attributable to deductible
temporary differences between financial statement and income tax bases of
assets and liabilities to the extent that realization of such benefits is
more likely than not. See Note 6.
SFAS No. 109 requires a valuation allowance against deferred tax assets
if, based on the weight of available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized.
For the year ended September 30, 1997, the Company elected, under
Subchapter S of the Internal Revenue Code, to have its income taxed
directly to the stockholders. Prior to October 1, 1996, the Company was a
C corporation.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Revenue Recognition
Revenue is reported at the time products are shipped to customers.
Currency Translation
The Company considers the U.S. dollar as the functional currency of all
the Company's operations. Accordingly, the Canadian branch, which
maintains its accounting records in currency other than the U.S. dollar,
translates assets and liabilities into U.S. dollars at current exchange
rates and revenues and expenses are translated at average exchange rates
for the year. Resulting translation adjustments are reflected as a
separate component of stockholders' equity.
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the U.S dollar are
included in the results of operations as incurred.
Net Income Per Share
During 1997, the Company adopted SFAS No. 128, which requires the
presentation of both basic and diluted earnings per share. Basic net
income per share is calculated by dividing net income after dividend
requirements on preferred shares by the weighted average number of
common shares outstanding during the period. Diluted net income per
share is based on the weighted average common shares outstanding plus
the additional common shares resulting from the conversion of
convertible preferred shares and the exercise of stock options and
warrants if such conversion was dilutive.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
Research and Development Expense
Research and Development costs are charged to expense when incurred. For
the years ended September 30, 1998 and 1997 research and development
expense was approximately $200,000 and $105,400, respectively.
F-7
<PAGE>
PEREGRINE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Inventory:
Inventory consists of the following:
1998 1997
---------- ----------
Raw materials $1,267,078 $ 598,216
Work in process 56,230 193,433
Finished goods 492,021 27,787
---------- ----------
$1,815,329 $ 819,436
========== ==========
4. Property and Equipment:
Property and equipment consist of the following:
1998 1997
-------- --------
Computer equipment $ 51,577 $ 27,277
Furniture and fixtures 21,414 13,743
Leasehold improvements 44,520 40,413
Tooling at vendor 74,462 69,531
Production equipment 139,246 101,753
Construction in progress (Note 14) 333,293 0
-------- --------
664,512 252,717
Less accumulated depreciation and amortization 125,969 69,881
-------- --------
$538,543 $182,836
======== ========
F-8
<PAGE>
PEREGRINE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Commitments and Contingency:
On September 1, 1996, the Company entered into a three year lease for an
operating facility located in Deerfield Beach, Florida. During June 1998,
the Company extended that lease through August 2003 and entered into a
new lease through the same date for additional space in the same
industrial complex. Future minimum lease payments for these operating
leases as of September 30, 1998 are approximately as follows:
September, 1999 $ 130,000
September, 2000 136,000
September, 2001 143,000
September, 2002 150,000
September, 2003 144,000
----------
$ 703,000
==========
Rent expense recorded under the above leases for the years ended
September 30, 1998 and 1997 was approximately $116,000 and $60,000,
respectively.
During 1997, the Company entered into a license agreement with a
stockholder of the Company related to certain patent rights owned by such
stockholder. Pursuant to the terms of the license agreement, the Company
agreed to pay the stockholder a royalty of $10 on each unit sold which
utilizes the patented technology. In connection with a private placement
offering of common stock in April 1998 (see Note 13), the stockholder
assigned the patent rights to the Company and terminated this license
agreement. In connection with this action, the Company agreed to assume
responsibility for such stockholder's obligation to pay a $2 per unit
royalty to a former shareholder and co-inventor. As of September 30,
1998, thirty nine such products had been sold.
6. Income Taxes:
The significant components of the net deferred tax assets as of September
30, 1998 are as follows:
Current Non-current
------- -----------
Deferred tax assets (liabilities):
Allowance for doubtful accounts $ 5,600 $ 0
Warranty reserve 0 27,000
Depreciation of property and equipment 0 (6,800)
-------- -------
Net deferred tax asset $ 5,600 $20,200
======== =======
F-9
<PAGE>
PEREGRINE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Income Taxes, Continued:
The provision for income taxes at September 30, 1998 is comprised of the
following:
Current provision(1) $ 209,800
Deferred benefit (1,400)
---------
208,400
Net adjustment to deferred taxes for change in
tax status(2) (24,400)
---------
$ 184,000
=========
(1) In June 1998, the Company formed a wholly-owned subsidiary,
Peregrine Global, Inc., a foreign sales corporation. The tax
benefit of this structure for the year ended September 30, 1998 is
$13,500 which is included in the current provision.
(2) Effective April 1, 1998, the Company converted from an S
corporation to a C corporation. Accordingly, deferred tax assets
and liabilities have been recorded to recognize the temporary
differences between financial statement and income tax bases of
assets and liabilities at that date.
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes.
1998
-----------
Pre-tax income
from continuing operations: 1,309,795
Income excluded prior to
conversion from S to C Corporation 716,626
-----------
593,169
Statutory tax rate 34%
-----------
Federal income tax expense
at statutory rate (C Corporation income) 201,677
State income taxes, less federal
income tax effect 19,028
Effect of deferred tax benefit from
conversion from S to C Corporation (24,000)
Benefit of foreign sales corporation (13,500)
Other items (none in excess of 5%
of computed tax) 795
-----------
Total income tax expense 184,000
===========
7. Related Party Transactions:
During the years ended September 30, 1998 and 1997, the Company recorded
sales of approximately $58,000 and $104,000, respectively, to an entity
owned by a stockholder of the Company. At September 30, 1998, all amounts
receivable from such entity had been collected. The entity is now
inactive.
8. Significant Customers:
In the ordinary course of business, the Company extends credit to its
customers after completing a credit analysis based on certain financial
and other criteria. Credit risk of certain foreign customers is minimized
through the purchase of insurance policies. Insurance is obtained on a
specific customer basis based upon the creditworthiness of the
respective customer as well as projected sales volume. At September 30,
1998 and 1997 there was approximately $113,000 and $83,000, respectively,
in accounts receivable related to foreign customers, of which $102,000
and $75,000 respectively, was covered by credit insurance. At September
30, 1998, one Brazilian and one United States customer accounted for 46%
and 18%, respectively, of accounts receivable and 35% and 36%,
respectively, of net sales for the year then ended. At September 30,
1997, these two customers individually accounted for 61% and 19% ,
respectively of accounts receivable and 47% and 32%, respectively, of net
sales for the year then ended. As it relates to the Brazilian customer,
terms of sale require a 25% down payment, 50% due upon delivery and 25%
due in 90 days. The terms of sale for the United States customer requires
payment in 30 days. No right of return exists for any of the company's
customers.
F-10
<PAGE>
PEREGRINE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Savings Incentive Match Plan for Employees:
In November 1997, the Company introduced a Savings Incentive Match Plan
for Employees (SIMPLE IRA) for substantially all employees. Under terms
of the plan, employees may contribute up to $6,000 annually. The plan
also provides for Company matching contributions up to a limit of 3% of
the employee's annual compensation. During 1998 the Company incurred
expenses of approximately $6,000 under the plan.
10. Line of Credit:
In September 1998, the Company entered into a line of credit arrangement
with a bank for $1,000,000. Borrowings against the line bear interest at
1% over prime rate, are collateralized by accounts receivable, inventory
and property and equipment, and are personally guaranteed by a
stockholder of the Company. The line of credit expires in September 1999.
11. Net Income Per Common and Common Equivalent Share:
The calculation of basic and diluted net income per share for the years
ended September 31, 1998 and 1997 are as follows:
Years ended September 30,
-------------------------
1998 1997
---- ----
Basic net income per share:
Net income $ 1,125,218 $ 632,374
============================
Weighted average common shares
outstanding 13,256,384 12,750,000
============================
Basic net income per share $ .09 $ .05
============================
Diluted net income per share:
Weighted average common shares
outstanding 13,256,384 12,750,000
Convertible preferred shares 133,663 -
Stock options 9,284 -
----------------------------
Weighted average common and potential
common shares outstanding 13,399,331 12,750,000
============================
Net income $ 1,125,218 $ 632,374
============================
Diluted net income per share $ .08 $ .05
============================
12. Recapitalization:
Common Stock
In March 1998, the Company increased the authorized shares of common
stock to 30,000,000 shares in anticipation of offering for sale 1,000,000
shares as described in Note 13. In addition, the Company declared a stock
split of 12,750 to 1.
Preferred Stock
The articles of incorporation were further amended in September, 1998 to
authorize the issuance of 5,000,000 shares of 5% cumulative, convertible
preferred stock with a par value of $.0001 per share. At the same time,
Series A of such stock was designated, consisting of 200,000 shares. The
holders of the Series A preferred stock do not have voting rights and can
convert such shares into the Company's common stock on a one to one
ratio. The Company may redeem the Series A preferred stock at any time at
the stated value of $5 per share plus accrued but unpaid dividends.
As discussed in Note 13, the holders of promissory notes issued to former
Subchapter S stockholders exchanged those notes along with accumulated
interest for 133,663 shares of Series A preferred stock in September,
1998.
F-11
<PAGE>
PEREGRINE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Sale of Stock:
In April 1998, the Company sold 1,000,000 shares of common stock at a
price of $1.00 per share. The funding occurred on May 11, 1998, and the
net proceeds to the Company from the sale of the shares was approximately
$846,000 after payment of the Placement Agent's commission of 10%,
non-accountable expenses of 3% and all other fees and expenses of this
offering. Of these net proceeds, the Company designated approximately
$385,000 for the payment of dividends to current shareholders pursuant to
the Company's conversion from an S corporation to a C corporation
effective April 1, 1998. The remaining net proceeds have been set aside
for general working capital and expansion of its business and operations.
Certain other offering costs were paid by issuing an additional 10,000
shares of stock.
The shares were offered without registration under the Securities Act of
1933 and pursuant to the exemptions under Sections 4(2) or 3(b) of the
Act and Rule 504 of Regulation D and state small corporate offering
registration provisions.
Employment Agreements
Prior to the closing of the offering, and as a condition of the Placement
Agent Agreement, a stockholder and three key employees have entered into
employment agreements with the Company upon terms and conditions
consistent with their current their current compensation arrangements.
Executive Stock Options
Pursuant to the terms of an employment agreement, a stockholder has been
given the opportunity to earn certain stock options based upon the future
performance of the Company. During the two year option period beginning
with fiscal year ending September 30, 1998, and continuing through fiscal
year ending September 30, 1999, the stockholder will be entitled to be
granted one option to purchase one share of the Company's common stock
for each $3.20 of cumulative net income, as defined, the Company reports
in excess of $2,000,000 during the two year period, up to a maximum of
250,000 options. The options earned will be computed and granted
quarterly, and the exercise price of these options will be the fair
market value of the Company's common stock at the end of each quarter
when earned. After reporting cumulative net income of $2,800,000,
additional net income, if any, during the two year period will be
accumulated toward the next threshold of $8,000,000. Thereafter, the
stockholder will be entitled to be granted one option to purchase one
share of the Company's common stock for each $5 of net income, as
defined, the Company reports in excess of $8,000,000 up to a maximum of
250,000 options with the exercise price being the fair market value of
the Company's common stock on September 30, 1999. Options will be
exercisable for five years from the date of the grant. At September 30,
1998, no options have been granted under this agreement.
F-12
<PAGE>
PEREGRINE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Sale of Stock, Continued:
Stock Option Plan
Prior to the closing of the offering, the Company adopted a qualified
stock option plan. The Company has reserved an aggregate of 1,000,000
shares of common stock for issuance pursuant to options granted under the
Plan. Options granted under the Plan may either be qualifying incentive
options or non-qualifying options.
In May 1998, the Company granted non-qualified options to certain key
employees to purchase an aggregate of 52,000 shares of common stock at an
exercise price of fair market value at the date of grant of $1 per share.
Options for 26,000 shares vest immediately and the remainder vest
annually through May 2000. At September 30, 1998, none of the options
have been exercised.
Had the Company determined compensation expense based on the fair value
of the option at the grant date for its stock options, the Company's net
income would have been decreased. Based on Black-Scholes values,
pro-forma net income for 1998 would be $1,117,470 versus reported net
income of $1,125,218; pro-forma earnings per common share(basic) for 1998
would be $0.09 versus reported of $0.09. The following assumptions were
used for employee stock option grants: risk free interest rate at grant
date of 8.85%, no dividends and expected lives of four years. No options
have been exercised, cancelled or forfeited as of September 30, 1998.
Distributions
In connection with the conversion of the Company's tax status from an S
corporation to a C corporation effective April 1, 1998, the Company made
aggregate distributions of $1,348,423 to its shareholders which represent
all S corporation net income reported by the Company for the fiscal year
ended September 30, 1997 and the subsequent six months ended March 31,
1998. Prior to October 1, 1996, the Company was a C corporation. Net
income for the fiscal year ended September 30, 1997 was $632,374 and net
income for the six months ended March 31, 1998 was $716,049. In March and
April 1998, the Company used borrowings from its line of credit to
distribute $215,000 of its net income to its shareholders for the
aforementioned periods. In addition, the Company distributed from the
proceeds of the offering $366,000 to shareholders during May and June
1998 and recorded an additional distribution of $19,000 to the
shareholders in accrued liabilities at September 30, 1998.
The final remaining distribution of approximately $748,000, after the
distributions made as discussed above, was recorded by the Company by
offsetting advances to stockholder of $93,000 and issuing unsecured
promissory notes of $655,000 to its shareholders in an amount equal to
their proportionate share of the final remaining distribution based upon
their ownership interest in the Company. The notes were interest bearing
at 5% per year. In September 1998, majority stockholders adopted a
resolution, which permitted the promissory note holders to convert their
notes to Series A 5% cumulative, convertible preferred stock as discussed
in Note 12.
F-13
<PAGE>
PEREGRINE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Sale of Stock, Continued:
Warrants
Immediately following the offering, the Company entered into a Financial
Advisory/ Investment Banking Agreement with the Placement Agent wherein
the Placement Agent will provide the Company certain investment banking
and consulting services related to corporate financial matters. The terms
of this 24 month agreement provide that the Placement Agent will receive
a monthly fee of $3,000 for the first six months of the agreement, a
monthly fee of $5,000 for the next six months, and thereafter, a monthly
fee of $6,000 for the remaining 12 months of the Agreement, plus
reimbursement for any reasonable expenses incurred. As of September 30,
1998, the Company had recorded consulting services of $15,000 under this
Agreement.
In addition, the Company has agreed to sell to the Placement Agent, or
its designees, for nominal consideration, warrants to purchase from the
Company an aggregate of 100,000 shares of common stock at a purchase
price of $1 per share. At September 30, 1998, no warrants have been
exercised.
14. New Manufacturing Subsidiary:
In September 1998 Alcool, Inc. was formed as an Alabama corporation. This
wholly-owned subsidiary will manufacture certain proprietary components
that replace those previously purchased from outside sources. During
1998, the Company issued purchase contracts totaling approximately
$2,000,000 for production equipment for that operation and had made cash
deposits thereon of approximately $283,000 at September 30, 1998. Such
amounts are included in construction in progress (see Note 4). An interim
equipment loan of $1,500,000 at 8 3/4% interest with a 7 year
amortization was closed with a local bank in October, 1998. The Company
is required to maintain certain levels of current ratios, debt to equity
comparisons, and similar balance sheet relationships. In addition, the
loan is guaranteed by a stockholder of the Company, and the Company must
maintain a $1,000,000 life insurance policy on such stockholder.
As of September 30, 1998, the Company had made an earnest money deposit
of $90,000 on the purchase of a 135,000 square foot manufacturing plant
in Montgomery, Alabama, on behalf of Alcool, Inc. In November, the
purchase contract was cancelled by the Company under terms that provide
full recovery of the deposit. A lease for a 80,000 square foot building
in Montgomery, Alabama, is in the final stage of negotiation with annual
rent payments of approximately $266,000 for the first five years and
$302,000 annual rent payments for the five year renewal option.
F-14
<PAGE>
<TABLE>
<CAPTION>
(Unaudited)
June 30, September 30,
ASSETS 1999 1998
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 524,528 $ 45,515
Accounts receivable, net of allowance for 842,776 875,400
doubtful accounts of $26,355
Inventory 1,864,898 1,815,329
Prepaid and other current assets 111,254 62,344
Deferred tax asset, net 191,287 5,600
Federal income tax deposits - 110,426
----------- -----------
Total current assets 3,534,743 2,914,614
Property and equipment, net 3,021,808 538,543
Deferred financing charges 105,338 131,865
Deposits and other 75,169 20,200
----------- -----------
Total assets $ 6,737,058 $ 3,605,222
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ - $ 24,273
Accounts payable 1,549,682 744,912
Accrued expenses and other payables 261,994 99,841
Line of credit 956,000 690,000
Bank term loan 157,539 -
Industrial development bonds 2,460,000 -
State and income taxes payable - 20,663
----------- -----------
Total current liabilities 5,385,215 1,579,689
Long-term liabilities:
Warranty reserve 36,014 71,778
----------- -----------
Total liabilities 5,421,229 1,651,467
----------- -----------
Commitments and contingency (Notes 8 and 16)
Stockholders' equity:
Preferred stock - $.0001 par value; 5,000,000 shares authorized,
200,000 shares designated as Series A, 5% cumulative,
convertible, 133,663 shares issued and outstanding 13 13
Common stock - $.0001 par value; 30,000,000 shares authorized,
13,760,000 shares issued and outstanding 1,376 1,376
Additional paid-in capital 1,582,782 1,582,782
Retained loss (earnings) (216,696) 421,704
Accumulated other comprehensive loss (51,646) (52,120)
----------- -----------
Total stockholders' equity 1,315,829 1,953,755
----------- -----------
Total liabilities and stockholders' equity $ 6,737,058 $ 3,605,222
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
Peregrine Industries, Inc.
Consolidated Statement of Loss and Comprehensive Loss
For the nine months ended June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Net sales $ 5,460,039 $ 6,412,194
Cost of sales 4,385,623 4,529,398
----------- -----------
Gross profit 1,074,416 1,882,796
----------- -----------
Operating expenses:
General and administrative 1,137,888 734,948
Pre-operating costs of new product lines 284,256 -
Research and development 227,428 -
Depreciation and amortization 139,998 33,924
----------- -----------
Total operating expenses 1,789,570 768,872
----------- -----------
(Loss) income from operations (715,154) 1,113,924
----------- -----------
Other income (expenses):
Interest income 12,868 1,652
Interest expense (134,401) (15,678)
Other 7,000 -
----------- -----------
(114,533) (14,026)
----------- -----------
(Loss) income before income tax provision (829,687) 1,099,898
Income tax benefit (provision) 191,287 (123,500)
----------- -----------
Net loss (Note 11) (638,400) 976,398
----------- -----------
Other comprehensive income
Foreign currency translation adjustment, net of
income tax benefit of $0 474 -
----------- -----------
Comprehensive loss $ (637,926) $ 976,398
=========== ===========
Net (loss) income per common and common
equivalent share:
Basic $ .04 $ .07
=========== ===========
Diluted $ .04 $ .07
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
Peregrine Industries, Inc.
Consolidated Statement of Changes in Stockholders' Equity
For the nine months ended June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Additional Other
----------------- -------------------- Paid-in Retained Comprehensive
Shares Amount Shares Amount Capital Earnings Loss Total
------- ------ ---------- -------- ---------- ---------- ------------- -----------
(Loss)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1998 133,663 $ 13 13,760,000 $ 1,376 $1,582,782 $ 421,704 $ (52,120) $ 1,953,755
Net loss - - - - - (638,400) - (638,400)
Foreign currency translation
adjustment - - - - - - 474 474
------- ---- ---------- -------- ---------- ---------- --------- -----------
Balance, June 30, 1999 133,663 $ 13 13,760,000 $ 1,376 $1,582,782 $ (216,696) $ (51,646) $ 1,315,829
======= ==== ========== ======== ========== ========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
Peregrine Industries, Inc.
Consolidated Statement of Cash Flows
For the nine months ended June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (638,400) $ 976,398
Adjustments to reconcile net loss to net
cash provided by operating activities:
Deferred tax provision (165,487) (41,500)
Depreciation and amortization 139,998 33,924
Bad debt provision 11,355 50,000
Foreign currency translation adjustment 474 (47,880)
Warranty reserve (35,764) 3,705
Changes in operating assets and liabilities:
Accounts receivable 21,269 (704,471)
Inventory (49,569) (772,033)
Prepaid and other current assets (48,910) (5,091)
Deposits and other 56,696 (7,053)
Accounts payable 804,770 272,077
Accrued expenses and other payables 141,490 43,302
Federal tax deposits 110,426 165,000
----------- -----------
Net cash (used in) provided by operating activities 348,348 (33,622)
----------- -----------
Cash flows from investing activities:
Expenditures for property and equipment (2,623,263) (362,177)
----------- -----------
Net cash used in investing activities (2,623,263) (362,177)
----------- -----------
Cash flows from financing activities:
Bank overdraft (24,273) 276,181
(Repayment) proceeds on line of credit 266,000 303,000
Proceeds from long-term debt 1,500,000 -
Repayments of long-term debt (1,342,461) -
Distribution to stockholders - (562,500)
Proceeds from sale of common stock - 845,856
Proceeds from Industrial Development Bonds 2,354,662 -
Advances to stockholders - (93,025)
----------- -----------
Net cash provided by financing activities 2,753,928 769,512
----------- -----------
Net increase (decrease) in cash and cash equivalents 479,013 373,713
----------- -----------
Cash and cash equivalents, beginning of period 45,515 2,480
----------- -----------
Cash and cash equivalents, end of period $ 524,528 $ 376,193
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 22,000 $ 69,563
=========== ===========
Cash paid for interest $ 134,401 $ 10,750
=========== ===========
Supplemental disclosure of noncash investing and financing activities:
During March 1999 the Company repaid long-term debt of $1,209,000 and incurred
loan costs of $105,338 with proceeds of the Industrial Development Bond.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
1. Organization and Business:
Peregrine Industries, Inc. (the "Company") was formed on October 1, 1995
for the purpose of manufacturing residential pool heaters. The Company is
located in Deerfield Beach, Florida. Products are primarily sold
throughout the United States, Canada, and Brazil. In September 1998, the
Company formed a wholly-owned subsidiary, Alcool, Inc., in Montgomery,
Alabama, in order to expand its manufacturing capacity and product line
(see Note 14).
The financial information included herein has been prepared by the
Company without an audit. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to rules and regulations of the Securities and Exchange
Commission. However, the Company believes that the disclosures herein are
adequate to make the information presented not misleading. It is
suggested that these condensed consolidated financial statements be read
in conjunction with the financial statements and the notes thereto
included in the Company's latest annual report. The information furnished
reflects all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a
fair statement of the results for the interim periods. The results for
these interim periods are not necessarily indicative of results to be
expected for the full year, due to seasonal factors, among others.
Foreign Sales Corporation
In June 1998, the Company formed a foreign sales corporation, Peregrine
Global, Inc. in St. Thomas, U.S. Virgin Islands. This wholly-owned
subsidiary was formed to take advantage of more favorable income tax
rates on profits generated from export business. For the nine months
ended June 30, 1999, approximately $1,454,000, in export sales were
recorded under this provision and a sales commission of approximately
$92,000 was earned by Peregrine Global, Inc.
2. Summary of Significant Accounting Policies:
Principals of Consolidation
The consolidated financial statements include the accounts of Peregrine
Industries, Inc. and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Inventory
Inventory consists primarily of pool heaters and raw materials and is
valued at the lower of first-in, first-out (FIFO) cost or market.
F-19
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued:
Property and Equipment
Property and equipment are recorded at cost. Depreciation of equipment is
computed on the straight line method over the estimated useful lives of
the assets which range from three to five years. Leasehold improvements
are amortized using the straight line method over six years. This period
represents the lesser of the lease term or the economic life of the
leasehold improvements. Upon the sale or retirement of equipment and
leasehold improvements, the cost and related accumulated depreciation are
eliminated from the respective accounts and the resulting gain or loss is
reflected in the statement of income. Repairs and maintenance are
expensed as incurred.
Bond Costs
Costs associated with issuance of the Industrial Development Bonds are
being amortized over the contractual life of the Bonds, which is 8 years.
(See Note 7.)
Income Taxes
As required by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109), the Company applies an
asset and liability approach to financial reporting for income taxes.
Deferred income tax assets and liabilities are recognized based on the
temporary differences between the financial reporting basis and the tax
basis of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable for the period and changes during the period
in deferred tax assets and liabilities.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Revenue Recognition
Revenue is reported at the time products are shipped to customers.
F-20
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued:
Currency Translation
The Company considers the U.S. dollar as the functional currency of all
the Company's operations. Accordingly, the Canadian branch, which
maintains its accounting records in currency other than the U.S. dollar,
translates assets and liabilities into U.S. dollars at current exchange
rates and revenues and expenses are translated at average exchange rates
for the year. Resulting translation adjustments are charged directly to
accumulated other comprehensive loss as a separate component of
stockholders' equity.
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the U.S dollar are
included in the results of operations as incurred.
On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", which established
standards for reporting and display of comprehensive income and its
components in a full set of financial statements. Comprehensive income is
defined as the change in stockholders' equity during a period from
transactions from nonowner sources. Comprehensive income consists of net
income and other comprehensive income, which includes all other nonowner
changes in stockholders' equity.
Net Income (Loss) Per Share
During 1997, the Company adopted SFAS No. 128, which requires the
presentation of both basic and diluted earnings per share. Basic net
income (loss) per share is calculated by dividing net income after
dividend requirements on preferred shares by the weighted average number
of common shares outstanding during the period. Diluted net income per
share is based on the weighted average common shares outstanding plus
the additional common shares resulting from the conversion of
convertible preferred shares and the exercise of stock options and
warrants if such conversion was dilutive.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents.
Stock Options
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25.
"Accounting for Stock Issued to Employees". Compensation cost for stock
options, if any, is measured as the excess of the quoted market price of
the Company's stock at the date of grant over the amount an employee must
pay to acquire the stock. Restricted stock is recorded as compensation
cost over the requisite vesting periods based on the market value on the
date of grant.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," established accounting and disclosure
requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. The Company has elected to
remain on its current method of accounting as described above, and has
adopted the disclosure requirements of SFAS No. 123.
F-21
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
3. Inventory:
Inventory consists of the following:
Raw material $1,459,314
Work in process 274,018
Finished goods 131,566
----------
$1,864,898
==========
4. Property and Equipment:
Property and equipment consist of the following:
Furniture and fixtures $ 59,940
Computer equipment 86,329
Tooling at vendor 80,543
Production equipment 2,919,704
Leasehold improvements 133,037
Construction in process (Note 14) 8,223
----------
3,287,776
Less accumulated depreciation and amortization (265,968)
----------
$3,021,808
==========
5. Line of Credit:
In September 1998, the Company entered into a line of credit arrangement
with a bank for $1,000,000. Borrowings against the line bear interest at
1% over prime rate, are collateralized by accounts receivable, inventory
and property and equipment, and are personally guaranteed by a
stockholder of the Company. The line of credit expires in September 1999.
At June 30, 1999, the outstanding balance on this line of credit was
$956,000.
F-22
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
6. Bank Term Loan:
In October 1998, the Company borrowed $1,500,000 under a seven year term
loan agreement with interest at 8.75%. The loan requires monthly
principal and interest payments of $24,053, and borrowings are
collateralized by substantially all equipment located at Alcool, Inc. The
Company is required to maintain certain levels of current ratios, debt to
equity comparisons, and similar balance sheet relationships. In addition,
the loan is guaranteed by a stockholder of the Company, and the Company
must maintain a $1,000,000 life insurance policy on such stockholder.
The Company was in default of certain of the above covenants at June 30,
1999. As a result of such default, the lender may exercise its right to
declare all unmatured obligations immediately due and payable.
Accordingly, the balance outstanding of $157,539 has been classified as a
current liability in the accompanying consolidated balance sheet (see
Notes 7 and 16).
7. Industrial Development Bonds:
On March 8, 1999 the Industrial Development Board of the City of
Montgomery, Alabama issued $2,460,000 aggregate principal amount of
Variable/Fixed Rate Industrial Development Revenue Bonds, Series 1999
(the "Bonds"). The proceeds from the Bonds were used for long-term
financing for acquisition of production equipment for Alcool, Inc., the
Company's subsidiary in Alabama (see Note 14), and for partial repayment
of the bank term loan.
The Bonds were issued pursuant to a Trust Indenture dated February 1,
1999 and maturing on February 1, 2007. Interest is payable monthly at a
variable weekly rate based on the average rate for similar issues as
determined by the remarketing agent. The rate at June 30, 1999 was 3.9%.
As a collateral of the Bonds, the Company executed a Mortgage Security
Agreement and Assignment of Rents and Leases dated as of February 1, 1999
in favor of the bank, whereby the bank was granted a mortgage on and
security interest in the acquired production equipment and an assignment
of the interest of the Lessee under the Lease Agreement.
The Bonds were also backed by a letter of credit with an original amount
of $2,503,809, issued by SouthTrust Bank, National Association which
expires on February 15, 2007, unless certain events ensue earlier, as
provided by the Letter of Credit Agreement.
In addition, the president of the Company has executed an Individual
Guaranty Agreement dated as of February 1, 1999 with an assignment of
life insurance of the Individual Guarantor in an amount not less than
$75,000 and the Company's foreign subsidiary (see Note 1) has executed a
Corporate Guaranty Agreement dated February 1, 1999.
F-23
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
7. Industrial Development Bonds, Continued:
As discussed in Note 6, the Company was in default of certain financial
covenants under its Term Loan. Under the terms of the Bonds, due to the
default of the Company's Term Loan, the Bonds are considered in default.
Accordingly, the outstanding balance has been reclassified to current
liabilities (see Note 16).
The redemption of the Bonds shall be in accordance with the following
schedule:
Redemption date principal amount
(June 1) to be redeemed
-------- ----------------
2000 $ 295,000
2001 310,000
2002 330,000
2003 350,000
2004 370,000
2005 390,000
2006 415,000
-----------
$ 2,460,000
===========
8. Commitments and Contingency:
In September 1996, the Company entered into a three year lease for an
operating facility located in Deerfield Beach, Florida. During June 1998,
the Company extended that lease through August 2003 and entered into a
new lease through the same date for additional space in the same
industrial complex.
In December 1998, a subsidiary, Alcool, Inc., entered into a five year
lease for approximately 81,000 square foot plant in Montgomery, Alabama,
to manufacture coils for both internal use and sale to non-affiliates.
(See Note 14). This lease, which is guaranteed by the Company, provides
one five year renewal option.
F-24
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
8. Commitments and Contingency, Continued:
Future minimum lease payments for these operating leases as of June 30,
1999 are approximately as follows:
2000 $ 400,342
2001 407,078
2002 414,139
2003 421,553
2004 181,359
-----------
$ 1,824,471
===========
Rent expense recorded under the above leases for the nine months ended
June 30, 1999 was approximately $289,000.
During 1997, the Company entered into a license agreement with a
stockholder of the Company related to certain patent rights owned by such
stockholder. Pursuant to the terms of the license agreement, the Company
agreed to pay the stockholder a royalty of $10 on each unit sold which
utilizes the patented technology through 2014. In connection with a
private placement offering of common stock in April 1998, the stockholder
assigned the patent rights to the Company and terminated this license
agreement. In connection with this action, the Company agreed to assume
responsibility for such stockholder's obligation to pay a $2 per unit
royalty to a former shareholder and co-inventor. As of June 30, 1999, six
such units had been sold and royalty payments had been made accordingly.
9. Significant Customers:
In the ordinary course of business, the Company extends credit to its
customers after completing a credit analysis based on certain financial
and other criteria. Credit risk of certain foreign customers is
minimized through the purchase of insurance policies. At June 30, 1999,
one Brazilian and one United States customer accounted for 25% and 35%,
respectively, of accounts receivable. Such customers also accounted for
19% and 51%, respectively, of net sales for the nine months ended
June 30, 1999.
F-25
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
10. Savings Incentive Match Plan for Employees:
The Company sponsors a Savings Incentive Match Plan for Employees
(SIMPLE IRA) for substantially all employees. Under terms of the plan,
employees may contribute any amount and the Company will match such
contributions up to 3% of the employee's annual compensation. During the
nine months ended June 30, 1999, the Company incurred expenses of
approximately $8,000 under the plan.
11. Net (Loss) income Per Common and Common Equivalent Share:
The calculation of basic and diluted net (loss) income per share for the
nine months ended June 30, 1999 and 1998 are as follows:
Nine Months Ended June 30,
---------------------------
1999 1998
---- ----
(Unaudited)
Basic net income per share:
Net (loss) income $ (637,926) $ 976,398
Cumulative preferred dividend 25,062 -
----------------------------
(Loss) income applicable to common stock (612,864) 976,398
============================
Weighted average common shares
outstanding 13,760,000 13,086,667
============================
Basic net (loss) income per share $ (.04) $ .07
============================
Diluted net income per share:
Weighted average common shares
outstanding - 13,086,667
============================
Stock options - -
============================
Weighted average common and potential
common shares outstanding - 13,086,667
============================
Loss (income) applicable
to common stock $ - $ 976,398
============================
Diluted net income per share $ - $ .07
============================
Options to purchase common shares and the conversion of preferred shares
were not included in the computation of diluted loss per shares as the
effect would have been anti-dilutive.
12. Stock Options:
Pursuant to the terms of an employment agreement, a stockholder has been
given the opportunity to earn certain stock options based upon the future
performance of the Company. During the two year option period beginning
with fiscal year ending September 30, 1998, and continuing through fiscal
year ending September 30, 1999, the stockholder will be entitled to be
granted one option to purchase one share of the Company's common stock
for each $3.20 of cumulative net income, as defined, the Company reports
in excess of $2,000,000 during the two year period, up to a maximum of
250,000 options. The options earned will be computed and granted
quarterly, and the exercise price of these options will be the quoted
market price of the Company's common stock at the end of each quarter
when earned. After reporting cumulative net income of $2,800,000,
additional net income, if any, during the two year period will be
accumulated toward the next threshold of $8,000,000. Thereafter, the
stockholder will be entitled to be granted one option to purchase one
share of the Company's common stock for each $5 of net income, as
defined, the Company reports in excess of $8,000,000 up to a maximum of
250,000 options with the exercise price being the quoted market price of
the Company's common stock on September 30, 1999. Options will be
exercisable for five years from the date of the grant. At June 30, 1999,
no options have been granted under this agreement.
In connection with a private placement offering of common stock in April
1998, the Company adopted a qualified stock option plan and reserved an
aggregate of 1,000,000 shares of common stock for issuance pursuant to
options granted under the Plan. Options granted under the Plan may either
be qualifying incentive options or non-qualifying options.
The Company has granted non-qualified options to certain key employees to
purchase an aggregate of 65,000 shares of common stock at an exercise
price equal to quoted market price at the date of grant. Options for
26,000 shares vested immediately and the remainder vest annually through
May 2002. At June 30, 1999, none of the options have been exercised.
F-26
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
12. Stock Options, Continued:
In October 1998, the Company added an outside director to its Board of
Directors. In addition to normal director's fees and expenses, the
director was granted an option to purchase 100,000 shares of the
Company's common stock at $1.00 per share with 25,000 shares vesting
concurrent with the grant and 25,000 shares vesting on each of the first
three anniversary dates of the grant. The options expire in October 2003.
In accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," to the extent
that a stock option price is less than the quoted market price of the
stock as of the measurement date, such difference is compensation to the
optionee and an expense to the Company. The quoted market price was $1.93
on the first vesting date in October 1998; accordingly, the Company
incurred a charge to income in the amount of $23,250. Additional charges
to income for compensation are being accrued over the vesting period.
Information regarding the above options for the nine months ended June
30, 1999 is as follows:
Shares
Options outstanding, October 1, 1998 65,000
Options granted 100,000
-------
Options outstanding, June 30, 1999 165,000
-------
Options exercisable, June 30, 1999 51,000
-------
Weighted average exercise price, October 1, 1998 $ 1.00
Weighted average exercise price, June 30, 1999 $ 1.00
All shares of stock issued upon the exercise of options granted pursuant
to the employment agreement or stock option plan described above, shall
be "restricted securities" as that term is defined in Rule 144 of the
Securities Act of 1933.
F-27
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
13. Warrants:
In April 1998, the Company entered into a Financial Advisory/ Investment
Banking Agreement with the private placement offering Placement Agent
wherein the Placement Agent will provide the Company certain investment
banking and consulting services related to corporate financial matters.
The terms of this 24 month agreement provide that the Placement Agent
will receive a monthly fee of $3,000 for the first six months of the
agreement, a monthly fee of $5,000 for the next six months, and
thereafter, a monthly fee of $6,000 for the remaining 12 months of the
Agreement, plus reimbursement for any reasonable expenses incurred. For
the nine months ending June 30, 1999, the Company recorded consulting
services of $45,000 under this Agreement.
In addition, the Company has agreed to sell to the Placement Agent, or
its designees, for nominal consideration, warrants to purchase from the
Company an aggregate of 100,000 shares of common stock at a purchase
price of $1 per share. At June 30, 1999, no warrants have been
exercised.
14. New Manufacturing Subsidiary:
In September 1998, Alcool, Inc. was formed as an Alabama corporation.
This wholly-owned subsidiary will manufacture certain proprietary
components that replace those previously purchased from outside sources.
Such components are for use by the Company as well as for sale to
customers. As of June 30, 1999, production equipment costing
approximately $2,100,000 and product raw materials costing approximately
$128,000 had been purchased for that operation; purchase commitments for
additional equipment totaling approximately $202,000 were outstanding at
June 30, 1999. Costs incurred in connection with putting this new plant
into operation have been classified as pre-operating costs on the
accompanying statement of loss.
15. Comprehensive Income:
For the Company, other comprehensive income consists of a foreign
currency translation adjustment that amounted to $474 for the nine months
ended June 30, 1999. Accumulated other comprehensive loss at June 30,
1999 amounted to $51,646. The cumulative adjustment amount previously
reported as a separate component of stockholders' equity is now included
in accumulated other comprehensive loss in the consolidated balance
sheet.
F-28
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
- --------------------------------------------------------------------------------
16. Debt Covenant Violations:
As discussed in Notes 6 and 7, the Company is currently in violation of
certain of its covenants associated with its Industrial Development Bond
and Bank Term Loan. Accordingly, such obligations have been reclassified
into current liabilities. As a result of its covenant violations, such
debt obligations could be called on demand. However, it is uncertain as
to whether the Company will be able to repay the debt obligations on
demand, refinance them with its current lenders or obtain other sources
of financing. The inability of the Company to repay or refinance its
debt obligations could have a material adverse impact on the Company's
financial condition.
* * * *
F-29
<PAGE>
<TABLE>
<CAPTION>
PART III
ITEM 1. INDEX TO EXHIBITS
Sequential
Exhibit Description of Document Page No.
- ------- ----------------------- ----------
<S> <C> <C>
3(i) Articles of Incorporation, as amended of
Peregrine Industries, Inc.(1)
3(ii) By-Laws of Peregrine Industries, Inc.(1)
4(i) Form of Placement Agent Warrant(1)
4(ii) Credit Agreement among Alcool, Inc., Peregrine
Industries, Inc. and Southtrust Bank, National
Association dated February 1, 1999(1)
4(iii) Corporate Guaranty Agreement dated as of
February 1, 1999 by Peregrine Global, Inc. in
favor of Southtrust Bank, National Association(1)
4(iv) Bond Purchase Agreement dated March 5, 1999(1)
4(v) Bond Guaranty Agreement dated February 1, 1999
by Alcool, Inc. in favor of Southtrust Bank,
National Association, as Trustee(1)
4(vi) Irrevocable Letter of Credit No. SB 2009 dated
March 8, 1999(1)
4(vii) Mortgage Security Agreement, and Assignment of
Rents and Leases from The Industrial Development
Board of the City of Montgomery and Alcool, Inc.
to Southtrust Bank, National Association dated as
of February 1, 1999(1)
10(i) Employment Agreement between Peregrine
Industries, Inc. and Merrill A. Yarbrough(1)
10(ii) Employment Agreement between Peregrine
Industries, Inc. and Howard E. Cobb(1)
10(iii) Placement Agent Agreement between Peregrine
Industries, Inc. and Noble International Investments, Inc.(1)
10(iv) Lease Agreement dated December 9, 1998 by and between Industrial
Partners and Alcool, Inc.(1)
10(v) Lease Agreement by and between Principal Mutual Life Insurance
Company and Peregrine Industries, Inc. and First Amendment to the
Lease Agreement by and between Principal Mutual Life Insurance
Company and Peregrine Industries, Inc.(1)
10(vi) Letter Agreement dated October 8, 1996 executed by Trammell Crow
Company and Peregrine Industries, Inc.(1)
10(vii) 1998 Stock Option Plan(1)
21 Subsidiaries of the Registrant(1)
</TABLE>
(1) Previously filed
26
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of
1934, the Registrant caused this Amendment No 1. to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
PEREGRINE INDUSTRIES, INC.
By: /s/ Merrill A. Yarbrough
-------------------------------------------------------
Merrill A. Yarbrough, Chairman, Chief Executive Officer
and President
Date: November 10, 1999
27
