U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) - September 30, 1999
Peregrine Industries, Inc.
--------------------------
(Exact name of registrant as specified in its charter)
Florida 000-27511 65-0611007
- --------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
746 South Military Trail, Deerfield Beach, FL 33442
---------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code 954-725-8041
------------
Securities registered under Section 12(b) of the Exchange Act:
none
-----------------------------
(Title of each class)
Name of each exchange on which registered
not applicable
-----------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
-----------------------------
-----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [ ] No
[x]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]
<PAGE>
State issuer's revenues for its most recent fiscal year. $ 7,258,829
for the 12 months ended September 30, 1999.
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. The aggregate market value of the voting stock held by
non-affiliates computed at the closing price of the Company's common stock on
January 11, 2000 is approximately $15,589,062.
State the number of shares outstanding of each of the issuer's class of
common equity, as of the latest practicable date. As of January 11, 2000,
13,760,000 shares of Common Stock are issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB into which the document
is incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) of
the Securities Act of 1933 ("Securities Act").
Not Applicable.
Transitional Small Business Disclosure Form (check one):
Yes [ ] No [X]
<PAGE>
This discussion in this annual report 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 annual report.
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
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products under private labels of certain of its wholesale customers, as well as
under the Company's brand name Smartemp(TM).
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 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.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1999 1998 1997
---- ---- ----
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Heliotek Maguinas E $1,385,339 17% $2,916,000 35% $2,743,000 47%
R&D Technology $3,332,035 43% $3,000,000 36% $1,868,000 32%
</TABLE>
Management of the Company has 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. Subsequent to September 1, 1999, the
Company now sells its products directly to R&D Technology's former Florida
distributors, and it no longer sells product to R&D Technology. 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
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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 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 both
actual warranty expense during the prior periods, as well the total number of
units sold to date by the Company and increases in reserves with the
introduction of new products . The following table sets forth the warranty
reserves for the periods indicated
<TABLE>
<CAPTION>
<S> <C>
Warranty reserve balance at September 30, 1997 $ 56,907
Warranty expenses during fiscal 1998 (66,468)
Increases in warranty reserves during fiscal 1998 81,339
---------
Warranty reserve balance at September 30, 1998 71,778
Warranty expenses during fiscal 1999 (96,214)
Increases in warranty reserves during fiscal 1999 78,072
---------
Warranty reserve balance at September 30, 1999 $ 53,636
=========
</TABLE>
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
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 November 30, 1999 was 4.1%.
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
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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 debt service ratio coverage of
1.25:1 and debt to tangible ratio coverage of 2:1. At September 30, 1999 the
Company was in default in certain of these ratios. A waiver was obtained from
the bank for all default occurrences of the above-mentioned covenants for fiscal
1999 and through the period October 1, 1999 through January 15, 2000.
Additionally, the covenants were temporarily modified retroactively to October
1, 1999 up to October 1, 2000 to allow the Company to comply with the covenants.
See Part II, Item 6. Management's Discussion and Analysis of Financial Condition
or Plan of Operations and Item 7. 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
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
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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
products to reduce manufacturing costs and increase product efficiency, as well
as research and development of new products. For the fiscal years ended
September 30, 1999, 1998 and 1997, the Company expended approximately $266,000,
$200,000 and $105,400, respectively, in research and development costs.
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", "Seaire" and
Swimrite(TM) and for a patent outdoor evaporator using the parallel flow
technology. 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 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 43 full time employees, of which 13 are
managerial or administrative personnel and 30 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
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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.
Item 2. 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 September 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.
Item 3. Legal Proceedings
The Company is involved in legal proceedings, claims and litigation
arising in the ordinary course of business. Management of the Company believes
the outcome of such current legal proceedings, claims and litigation could have
a material effect on quarterly or annual operating results or cash flows when
resolved in future periods. Management of the Company does not believe these
matters will materially affect the Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
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Item 5. Market for Common Equity and Related 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
July 1, 1999 - September 30, 1999 $3.375 $1.75
October 1, 1999 - December 31, 1999 $3.00 $1.00
</TABLE>
At January 11, 2000, the closing bid price of the Common Stock as
reported on the OTC Bulletin Board was $1.25. At January 11, 2000, 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%. 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 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations
Revenues for the fiscal year ended September 30, 1999 decreased
approximately 13% from fiscal 1998. This reduction is attributable to:
* a decrease of approximately 52% in orders from the Company's
Brazilian customers from fiscal 1998. This decrease is the result of generally
adverse economic conditions affecting that country,
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* a decrease of approximately 33% in shipments to the Company's
Canadian customers from 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.
General and administrative expenses increased approximately 110% for
the fiscal year ended September 30, 1999 from 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 fiscal 2000.
Research and development expenses for the fiscal year ended September
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.
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
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 370% for fiscal 1999 from
fiscal 1998 as a result of the establishment of Alcool's operations. Likewise,
interest expense increased approximately 310% for the fiscal 1999 versus fiscal
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 began 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 fiscal year ended
September 30, 1999 was $83,000 compared to net cash used by operating activities
of $389,000 for fiscal 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 fiscal year ended September 30,
1999 was $2,678,000 compared to $412,000 for fiscal 1998. The increase was
attributable to the establishment of the Company's Alcool facility in Alabama.
Net cash provided by financing activities for fiscal 1999 was $2,597,000 as
compared to $843,000 for fiscal 1998. This increase was attributable to proceeds
the
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Company received from the Bonds, as well as funds available from the Company's
credit line.
The Company reduced its warranty reserve by approximately 25% at
September 30, 1999 from September 30, 1998. This reduction in warranty reserve
was made prior to the introduction of the Company's new products. The decision
to make the reduction was based upon an internal review by the Company of its
actual warranty costs, after which it was determined that the warranty reverse
account was overstated. The Company believes its warranty reserve at September
30, 1999 was sufficient in view of historical warranty expenses to date, and the
number of units subject to warranty claims.
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 the Bonds and term loan covenants at September 30, 1999. A
waiver was obtained from the banks for all default occurences of these covenants
under both the Bonds and the commercial term loan for fiscal 1999 through
January 15, 2000. See Item 7. Financial Statements - Note 6.
The Company's working capital deficit at September 30, 1999 was
$360,579. Other than internally generated working capital, the Company does not
presently have any additional sources of working capital.
Year 2000 Compliance
The Company was aware of the issues associated with the programming
code in existing computer systems as the year 2000 approaches. The Company has
reviewed all software and hardware used internally by it in all support systems
to determine whether they are Year 2000 compliant. The software had already been
upgraded by the manufacturer or was recently purchased and was Year 2000
compliant. The aggregate cost for the Year 2000 issue to the Company was not
material. Since January 1, 2000 the Company has not experienced any disruptions
in its systems or those of third parties with which it does business as a result
of the Year 2000 issue. The Company cannot say, however, with any certainty that
it will not experience any Year 2000 problems in the future.
Item 7. Financial Statements
The Company's financial statements are contained in pages F-1 through F-24 as
follows.
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Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
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.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Merrill A. Yarbrough 56 President, Chief Executive Officer and
Chairman of the Board
Howard E. Cobb 73 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 Item 12. 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.
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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).
Compliance With Section 16(a) of the Exchange Act
The Company did not become subject to the reporting requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") until November 1999, and,
accordingly its officers, directors and principal shareholders were not required
to file reports required by Section 16(a) of the Exchange Act during fiscal
1999.
Item 10. 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 1999 $ 135,776 $0 $0 0 0 0 0
President, Chief 1998 $ 105,850 $0 $0 0 20,000(1) 0 0
Executive Officer, 1997 $ 67,187(2) $0 $0 0 0 0 0
Chairman
</TABLE>
12
<PAGE>
(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.
<TABLE>
<CAPTION>
OPTION GRANTS IN YEAR ENDED SEPTEMBER 30, 1999
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 10,000(1) 10% $3.25 5-1-05
Howard E. Cobb,
Chief Financial
Officers, Treasurer
and Director 5,000(2) 5% $3.25 5-1-05
</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.
AGGREGATE OPTION EXERCISES IN YEAR ENDED SEPTEMBER 30, 1999
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
No. of Securities
Underlying Options Value of Unexercised
Options at In-the-Money options at
Shares September 30, 1999 September 30, 1999(1)
Acquired on Value ---------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Merrill A. Yarbrough
President, Chief
Executive Officer,
and Director 0 n/a 15,000 15,000 $0 $0
Howard E. Cobb,
Chief Financial
Officer, Treasurer
and Director 0 n/a 7,500 7,500 $0 $0
</TABLE>
- ----------
13
<PAGE>
(1) The dollar value of the unexercised in-the-money options is calculated
based upon the difference between the option exercise price of $3.25
per share and $2.00 per share, being the closing price of the Company's
Common Stock on September 30, 1999 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
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 $3.25
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.
Under the terms of the Agreement, the Company may terminate the
employment of Mr. Yarbrough either with or without cause. If the Agreement is
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
14
<PAGE>
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 $3.25
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.
Stock Option Plan
15
<PAGE>
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
December 31, 1999, an aggregate of 250,000 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.
Item 11. Security Ownership of Certain Beneficial Owners and Management
As of December 31, 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.
16
<PAGE>
The following table sets forth, as of the close of business on December 31,
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
December 31, 1999. Except as otherwise specifically set forth herein, the
following tables give no effect to the exercise of any outstanding stock options
or warrants. 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 63.2%
Debra Zweig Yarbrough
Joint Tenants (1)(2)
Howard E. Cobb(1)(3) 7,500 *
Benjamin Swirsky (4) 50,000 *
Richard Szelewicki(1)(5) 1,935,397 13.9%
Cameron Perkins(1)(6) 967,709 7.0%
Laura Perkins(1)(7) 967,709 7.0%
All Executive Officers
and Directors as a Group
(three people)(1)(2)(3)(4) 8,834,118 63.7%
</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
(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 in the 24 month-period
ending on May 6, 2000, without the prior written consent of Noble.
17
<PAGE>
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. 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.
(4) Includes vested NSO options to purchase 50,000 shares of Common Stock
at $1.00 per share pursuant to the Company's 1998 Stock Option Plan.
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. 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. 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. Ms. Perkins' address is 2779
Arrandale Lane, Sun Valley, California 93063.
Item 12. 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.
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 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,
18
<PAGE>
the Company distributed $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 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 year ended September 30, 1998 the Company recorded
sales of approximately $58,000 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.
PART IV
Item 13. Exhibits and Reports on Form 8-K
The following documents are filed as a part of this report or are
incorporated by reference to previous filings, if so indicated:
<TABLE>
<CAPTION>
Exhibit Description of Document
- ------- -----------------------
<S> <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)
19
<PAGE>
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) Incorporated by reference to the Registration Statement on Form 10-SB, File
No. 000-27511, as amended, as filed with the Securities and Exchange Commission.
(b) Reports on Form 8-K
None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Peregrine Industries, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Peregrine Industries, Inc.
By: /s/ Merrill A. Yarbrough
----------------------------
Merrill A. Yarbrough, President, Chief
Executive Officer, Chairman of the
Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Merrill A. Yarbrough Director, President, January 12, 2000
- ------------------------------- Chief Executive Officer,
Chairman of the Board
/s/ Howard E. Cobb Director, Chief Financial January 12, 2000
- ------------------------------ Officer, Treasurer
______________________________ Director
</TABLE>
The foregoing represents a majority of the Board of Directors
21
<PAGE>
Peregrine Industries, Inc.
Report on Audit of
Consolidated Financial Statements
For the Years Ended September 30, 1999 and 1998
<PAGE>
Peregrine Industries, Inc.
Table of Contents
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants F-1
Consolidated Financial Statements (Unaudited):
Balance Sheets F-2
Statements of Income (Loss) and Comprehensive Income (Loss) F-3
Statements of Changes in Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6-24
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of
Peregrine Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Peregrine Industries, Inc. and its subsidiaries at September 30, 1999 and
1998, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States, 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
December 21, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
Peregrine Industries, Inc.
Consolidated Balance Sheets
September 30, 1999 and 1998
- -------------------------------------------------------------------------------------------------------------------
September 30,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 46,980 $ 45,515
Restricted cash 441,809 -
Accounts receivable, net of allowance for doubtful accounts of
$230,370 in 1999 and $15,000 in 1998 594,912 875,400
Inventory, net 1,941,574 1,815,329
Prepaid and other current assets 68,237 62,344
Debt issue costs 14,500 -
Federal income tax deposits 3,570 110,426
Deferred tax asset 94,387 5,600
Income tax receivable 189,062 -
------------ ------------
Total current assets 3,395,031 2,914,614
Property and equipment, net 2,987,555 538,543
Deposits and other 87,312 131,865
Debt issue costs 87,076 -
Deferred tax asset, net 281,132 20,200
------------ ------------
Total assets $ 6,838,106 $ 3,605,222
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft 102,464 24,273
Accounts payable 2,292,634 744,912
Accrued expenses and other payables 107,174 99,841
Line of credit 818,000 690,000
Industrial development bonds 324,583 -
Bank term loan 88,384 -
State income taxes payable - 20,663
Note payable and capital leases 8,371 -
Notes payable to stockholder and director 14,000 -
------------ ------------
Total current liabilities 3,755,610 1,579,689
Warranty reserve 53,636 71,778
Note payable and capital leases 28,547 -
Industrial development bonds 2,061,667 -
------------ ------------
Total liabilities 5,899,460 1,651,467
============ ============
Commitments and contingency (Notes 8 and 14)
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 issued and outstanding 1,376 1,376
Additional paid-in capital 1,629,282 1,582,782
Retained (loss) earnings (636,118) 421,704
Accumulated other comprehensive loss (55,907) (52,120)
------------ ------------
Total stockholders' equity 938,646 1,953,755
------------ ------------
Total liabilities and stockholders' equity $ 6,838,106 $ 3,605,222
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
Peregrine Industries, Inc.
Consolidated Statements of Income (Loss) and Comprehensive
Income (Loss)
For the years ended September 30, 1999 and 1998
- -------------------------------------------------------------------------------------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Net sales $ 7,258,829 $ 8,334,293
Cost of sales 6,214,880 5,940,446
------------------ ------------------
Gross Profit 1,043,949 2,393,847
------------------ ------------------
Operating expenses:
General and administrative 1,438,657 685,090
Provision for doubtful accounts 219,526 68,872
Pre-operating costs of new product lines 284,256 -
Research and development 266,173 200,000
Depreciation and amortization 262,244 56,090
------------------ ------------------
Total operating expenses 2,470,856 1,010,052
------------------ ------------------
(Loss) income from operations (1,426,907) 1,383,795
Other income (expenses):
Interest income 20,540 2,113
Interest expense (190,174) (46,432)
Other - (30,258)
------------------ ------------------
(169,634) (74,577)
(Loss) income before income tax provision (1,596,541) 1,309,218
Income tax benefit (provision) 538,719 (184,000)
------------------ ------------------
Net (loss) income (1,057,822) 1,125,218
------------------ ------------------
Other comprehensive loss
Foreign currency translation adjustment, net of
income tax effect (3,787) (52,120)
------------------ ------------------
Comprehensive (loss) income $(1,061,609) $ 1,073,098
================== ==================
Net income (loss) per common and common equivalent share:
Basic $ (.10) $ .09
================== ==================
Diluted $ (.10) $ .08
================== ==================
Pro Forma Income Data (Unaudited)
Income before income taxes $ 1,309,218
------------------
Pro Forma provision for income taxes relating to S-Corporation (287,318)
Actual income tax expense (184,000)
------------------
Total provision and pro forma provision for income taxes (471,318)
------------------
Pro Forma net income $ 837,900
Pro Forma net income per common share:
Basic $ .07
==================
Diluted $ .06
==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Peregrine Industries, Inc.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended September 30, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign
Additional Currency
Preferred Stock Common Stock 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, September 30, 1997 - $ - 12,750,000 $ 1,275 $ 68,725 $ 644,909 $ - $ - $ 714,909
Sale of stock - - 1,010,000 101 845,755 - - - 845,856
Issuance of preferred stock 133,663 13 - - 668,302 - - - 668,315
Distributions - - - - - (1,348,423) - - (1,348,423)
Net income - - - - - 1,125,218 - - 1,125,218
Increase in advances to
stockholder - - - - - - (93,025) - (93,025)
Decrease in advances to
stockholder - - - - - - 93,025 - 93,025
Foreign currency translation
adjustment - - - - - - - (52,120) (52,120)
------- ------ ---------- -------- ---------- ---------- -------- --------- ----------
Balance, September 30, 1998 133,663 13 13,760,000 1,376 1,582,782 421,704 - (52,120) 1,953,755
Outstanding stock options - - - - 46,500 - - - 46,500
Net loss - - - - - (1,057,822) - - (1,057,822)
Foreign currency translation
adjustment - - - - - - - (3,787) (3,787)
------- ------ ---------- -------- ---------- ---------- -------- --------- -----------
Balance, September 30, 1999 133,663 $ 13 13,760,000 $ 1,376 $1,629,282 $ (636,118) $ - $(55,907) $ 938,646
======= ====== ========== ======== ========== ========== ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Peregrine Industries, Inc.
Consolidated Statement of Cash Flows
For the years ended September 30, 1999 and 1998
- -------------------------------------------------------------------------------------------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (1,057,822) $ 1,125,218
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Accrued interest on stockholder notes - 13,291
Deferred tax benefit (349,719) (25,800)
Depreciation and amortization 262,244 56,090
Allowance for doubtful accounts 219,526 68,872
Provision for write downs on inventory 65,004
Outstanding stock options 46,500 -
Foreign currency translation adjustment (3,787) (52,120)
Warranty reserve (18,142) 14,871
Changes in operating assets and liabilities:
Restricted cash (441,809) -
Accounts receivable 60,962 (472,213)
Income tax receivable (189,062) -
Inventory (191,249) (995,893)
Prepaid and other current assets (5,893) (34,422)
Federal income tax deposits 106,856 (110,426)
Deposits 44,553 (112,792)
Accounts payable 1,547,722 133,375
Accrued expenses and other payables 7,333 (17,673)
State income taxes payable (20,663) 20,663
--------------- ----------------
Net cash provided by (used in) operating activities 82,554 (388,959)
--------------- ----------------
Cash flow from investing activities:
Expenditures for property and equipment (2,677,676) (411,797)
--------------- ----------------
Net cash used in investing activities (2,677,676) (411,797)
--------------- ----------------
Cash flows from financing activities:
Bank overdraft 78,191 1,334
Advances to stockholder - (93,025)
Borrowings on line of credit, net 128,000 690,000
Distributions to stockholder - (600,374)
Proceeds from sale of common stock - 845,856
Proceeds from Term Loan 1,500,000 -
Payment on Term Loan (1,411,616) -
Debt issue cost (105,338) -
Proceeds from Industrial Bond 2,460,000 -
Payment on Industrial Bond (73,750) -
Proceeds from notes payable to shareholder and officer 14,000 -
Proceeds from capital leases 9,520
Payment on note payable and capital leases (2,420) -
--------------- ----------------
Net cash provided by financing activities 2,596,587 843,791
--------------- ----------------
Net increase in cash and cash equivalents 1,465 43,035
--------------- ----------------
Cash and cash equivalents, beginning of year 45,515 2,480
--------------- ----------------
Cash and cash equivalents, end of year $ 46,980 $ 45,515
=============== ================
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 192,500 $ 299,563
=============== ================
Interest paid $ 185,174 $ 46,432
=============== ================
</TABLE>
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 10).
During 1999 the Company financed the purchase of a vehicle of approximately
$29,800 through a note payable.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
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 16). Canadian operations are conducted through a wholly owned
subsidiary Thermopompe Peregrine Heat Pump, a Quebec corporation.
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. Export sales of
approximately $0 and $1,100,000 in 1999 and 1998, respectively, were
recorded under this provision and a sales commission of approximately $0
and $68,000, respectively, was earned by Peregrine Global, Inc.
2. Summary of Significant Accounting Policies:
Principles 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
stated at the lower of cost or net realizable value with cost determined
on the first-in, first-out (FIFO) basis. Cost includes the cost of
material, direct labor, an applicable share of variable manufacturing
overhead and fixed manufacturing costs.
Property and Equipment
Property and equipment are recorded at cost net of accumulated
depreciation. Depreciation of equipment is computed on the straight line
method over the estimated useful lives of the assets. Estimated useful
lives of the Company's assets are as follows:
Furniture, fixtures and computer equipment 7 years
Tooling at vendor 7 years
Production equipment 7 years
Leasehold improvements 6 to 10 years
Vehicles 5 years
F-6
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued:
Property and Equipment, Continued
The Company reviews for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. 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 6(b).)
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. Effective April 1, 1998, pursuant
to the Company's conversion from an S corporation to a C corporation, the
Company accounted for income taxes in accordance with the provisions of
SFAS 109.
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-7
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued:
Currency Translation
The assets and liabilities of the Company's Canadian branch are generally
translated 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 income (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.
Reporting Comprehensive Income
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.
Cash and Cash Equivalents
Cash and cash equivalents are defined as all highly liquid investments
with a maturity of three months or less from the date of purchase.
Restricted Cash
As described in Note 6(b), production equipment for the new subsidiary,
Alcool, Inc., was financed in part by Industrial Development Bonds.
Approximately $442,000 of the bond proceeds were not spent as of
September 30, 1999. The restricted cash is bearing interest at a variable
rate averaging 3% annually and is under the control of the Trustee
appointed by the issuer of the bonds. The remaining bond proceeds must be
spent for additional production equipment by September 2000; the Company
expects to make such expenditures by September 2000. If the Company does
not make such expenditures, the remaining bond proceeds would be returned
to the issuer.
F-8
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies, Continued:
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.
Research and Development Expense
Research and development costs are charged to expense when incurred.
Product Warranties
All products are warranteed against manufacturing defects under
established policies and as described in owner manuals delivered to the
end user with the product. An accrual is recorded monthly for estimated
future claims. Such accruals are based upon the historical relationship
of warranty cost to income and management's estimate of the level of
future claims.
Reclassifications in 1998 Consolidated Statements
Certain reclassifications were made to the September 30, 1998
consolidated statements to comply with September 30, 1999 presentation.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"). Among other provisions, SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It also requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is
effective for financial statements for fiscal years beginning after June
15, 1999. Management does not believe that this standard will have a
material effect on the financial statements.
F-9
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3. Inventory:
Inventory consists of the following:
1999 1998
----------------- -----------------
<S> <C> <C>
Raw materials $ 1,796,827 $ 1,267,078
Work in process 90,750 56,230
Finished goods 119,001 492,021
----------------- -----------------
2,006,578 1,815,329
Reserve for obsolete and slow moving inventory 65,004 -
----------------- -----------------
$ 1,941,574 $ 1,815,329
================= =================
</TABLE>
<TABLE>
<CAPTION>
4. Property and Equipment:
Property and equipment consist of the following:
1999 1998
----------------- -----------------
<S> <C> <C>
Computer equipment $ 86,818 $ 21,414
Furniture and fixtures 59,940 51,577
Tooling at vendor 92,782 74,462
Production equipment 2,952,291 139,247
Leasehold improvements 150,358 44,520
Construction in progress - 333,293
Vehicle 29,818 -
----------------- -----------------
3,285,189 664,513
Less accumulated depreciation and amortization (384,452) (125,469)
----------------- -----------------
$ 2,900,737 $ 538,543
================= =================
</TABLE>
5. Line of Credit:
In September 1998, the Company entered into a line of credit arrangement
with a bank for $1,000,000. The line of credit expired in September 1999
and was renewed in October 1999. 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 new line expires in March
2000. At September 30, 1999 and 1998, the outstanding balance on the line
of credit was $818,000 and $690,000, respectively.
F-10
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
6. Long Term Debt Obligations:
a) Bank Term Loan
In October 1998, the Company borrowed $1,500,000 under a seven year
term loan agreement with annual interest at a fixed rate of 8.75%.
The loan required monthly principal and interest payments of
$24,053, and borrowings were collateralized by substantially all
equipment located at Alcool, Inc. A partial principal reduction of
$1,209,000 was made from proceeds of the funding of the Industrial
Development Bonds in March 1999 as described in Note 6(b). In
October 1999, the resultant principal balance of approximately
$65,000 was refinanced for a one year period. Interest rate and
general terms remain unchanged and monthly principal and interest
payments of $5,679 are required under the refinanced Term Loan. 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
September 30, 1999. A waiver was obtained from the bank for all
default occurrences of above-mentioned covenants for fiscal 1999
through January 15, 2000. Additionally, certain covenants were
temporarily modified retroactively to October 1, 1999 up to October
1, 2000, to allow the Company to comply with the covenants.
b) 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 16),
and for partial repayment of the bank term loan. (See (a) above).
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
annualized rate for 1999 was 3.4%.
As a collateral of the Bonds, the Company executed a Mortgage
Security Agreement and Assignment of Rents and Leases dated
February 1, 1999 in favor of the bank, whereby the bank is granted
a mortgage on and security interest in the acquired production
equipment and an assignment of the interest of Alcool, Inc. under
the Lease Agreement.
The Bonds are 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.
F-11
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
6. Long Term Debt Obligations, Continued:
b) Industrial Development Bonds, Continued
In addition, the president of the Company has executed an
Individual Guaranty Agreement dated 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. Additionally, the Company is required to maintain
certain financial covenants in accordance with the bond agreement.
The Company was in default of certain financial covenants. A waiver
was obtained from the bank for all default occurrences of
above-mentioned covenants for fiscal 1999 through January 15, 2000.
Additionally, the covenants were temporarily modified retroactively
to October 1, 1999 up to October 1, 2000, to allow the Company to
comply with the covenants.
The redemption of the Bonds shall be in accordance with the
following schedule:
<TABLE>
<CAPTION>
Redemption date Principal amount
(June 1) to be redeemed
-------- --------------
<S> <C> <C>
2001 $ 295,000
2002 310,000
2002 330,000
2003 350,000
2004 370,000
Thereafter 805,000
-------------
$ 2,460,000
=============
</TABLE>
c) Notes Payable to Stockholder and Director
In August 1999, a stockholder and a director loaned $14,000
combined to the company for working capital purposes. The loans
bear interest of 11% and, by oral agreement, will be repaid at the
convenience of the Company.
d) Note Payable and Capital Leases Obligations
The Company leases certain telephone equipment. Accordingly, the
leased assets have been included in property and equipment. Assets
recorded under capital leases include cost and accumulated
amortization of approximately $9,520 and $680, respectively, in
1999.
F-12
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
6. Long Term Debt Obligations, Continued:
d) Note Payable and Capital Leases Obligations, Continued
Obligations under note payable and capital leases as of September
30, 1999 in the accompanying financial statements include the
following:
<TABLE>
<CAPTION>
<S> <C>
NEC America, Inc., lease term of 60 months with monthly lease payments of $202,
ending March 2004, 9.84%
per annum $ 8,634
SouthTrust Bank, note term of 48 months ending
July 2003, 8% per annum. Collateral: vehicle 28,284
-----------------
36,918
Less: current portion (8,371)
-----------------
$ 28,547
=================
</TABLE>
Future minimum lease payments, including principal and interest,
under capital leases as of September 30, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
2000 $ 1,641
2001 1,810
2002 1,997
2003 2,202
2004 984
----------------
Present value of minimum lease payments 8,634
Less current principal obligations 1,785
----------------
Long-term principal obligations $ 6,849
================
</TABLE>
e) Aggregate maturities for all long-term borrowings for each of the
five years ending September 30, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
2000 $ 435,180
2001 325,587
2002 346,364
2003 365,771
2004 377,650
Thereafter 675,000
----------------
$ 2,525,552
================
</TABLE>
F-13
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
7. Income Tax:
The provision for income taxes at September 30, 1999 and 1998 is
comprised of the following:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Current (benefit) provision(1) $ (189,000) $ 209,800
Deferred benefit (349,719) (1,400)
----------------- -----------------
(538,719) 208,400
Net adjustment to deferred taxes for change
in tax status(2) - (24,400)
----------------- -----------------
$ (538,719) $ 184,000
================= =================
</TABLE>
(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 Company incurred a net operating loss in 1999 of $1,375,000, which
will be carried back to recover $192,500 of federal taxes that were paid
for 1998, less $3,500 of AMT tax. The remaining $808,000 carryforward of
the unutilized net operating loss will expire in 2019. SFAS No. 109
requires that deferred tax assets be reduced by a valuation allowance if
it is more likely than not that some portion or all of the deferred tax
asset will not be realized. During 1999, management did not record a
valuation allowance due to the Company's historical profitability.
F-14
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
7. Income Tax, Continued:
The significant components of the net deferred tax assets as of
September 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Deferred tax assets (liabilities) current:
Allowance for doubtful accounts $ 86,687 $ 5,600
Outstanding stock options 17,498 -
State income taxes (34,259) -
Obsolete inventory 24,461 -
----------------- -----------------
Net deferred tax assets current 94,387 5,600
----------------- -----------------
Deferred tax assets (liabilities) non current:
Accumulated depreciation (32,524) (6,800)
Warranty reserve 20,183 27,000
Net operating loss 293,473 -
----------------- -----------------
Net deferred tax assets non current 281,132 20,200
----------------- -----------------
Net deferred tax asset $ 375,519 $ 25,800
================= =================
</TABLE>
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.
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Pre-tax (loss) income
from continuing operations $ (1,596,541) $ 1,309,795
Income excluded prior to
conversion from S to C Corporation 716,626
----------------- -----------------
(1,596,541) 593,169
Statutory tax rate 34% 34%
----------------- -----------------
Effect of deferred tax benefit from
conversion from S to C Corporation - (24,000)
Federal income tax (benefit) expense
at statutory rate (C Corporation income) (542,824) 201,677
State income taxes, less federal
income tax effect - 19,028
Officer life insurance (5,738) -
Benefit of foreign sales corporation (13,500)
Other items 1,633 795
----------------- -----------------
Total income tax (benefit) expense $ (538,719) $ 184,000
================= =================
</TABLE>
Cash paid during 1999 and 1998 for income taxes was $192,500 and
$299,563, respectively.
F-15
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
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, 1999 and
1998, there was approximately $270,000 and $520,000, respectively, in
accounts receivable related to foreign customers, of which $10,000 and
$77,000, respectively, was covered by credit insurance. At September 30,
1999, one Brazilian and one United States customer accounted for 23% and
25%, respectively, of accounts receivable and 17% and 43%, respectively,
of net sales for the year then ended. At September 30, 1998, these two
customers individually accounted for 46% and 18%, respectively, of
accounts receivable and 35% and 36%, 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 payments in 30
days. No right of return exists for any of the Company's customers. As
described in Note 14, sales to the United states customer ceased in
September 1999, in connection with the acquisition of the Florida
marketing rights of that customer.
9. 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 up to $6,000 annually. The Company will match
such contributions up to 3% of the employee's annual compensation. During
the years ended September 30, 1999 and 1998, the Company incurred
expenses of approximately $10,600 and $6,000, respectively, under the
plan.
10. Stockholders' Equity:
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.
Preferred stock dividends in arrears as of September 30, 1999 amounted to
$33,416.
In September 1998, 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.
F-16
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
10. Stockholders' Equity, Continued:
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.
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 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.
Subsequent to year end, the Company sold additional shares (see Note 20).
11. Stock Options:
Pursuant to the terms of an employment agreement, a stockholder was 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 was entitled to be
granted one option to purchase at the market value of the common stock at
date of grant 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. At September 30, 1999, no options were 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.
F-17
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
11. Stock Options, Continued:
All shares of stock issued upon the exercise of options granted pursuant
to the employment agreement or stock option plan, shall be "restricted
securities" as that term is defined in Rule 144 of the Securities Act of
1933.
The Company has granted non-qualified options to certain key employees to
purchase an aggregate of 137,064 shares of common stock at an exercise
price equal to quoted market price at the date of grant. Options will be
granted annually through year 2000 and vest annually through September
30, 2004. As of September 30, 1999, none of the options have been
exercised.
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, in 1999 the Company incurred a
charge to income in the amount of $46,500. Additional charges to income
for compensation are being accrued over the vesting period. At September
30, 1999, the weighted average exercise price is $1 and the weighted
average fair value is $0.74.
Options to purchase 20,000 shares at fair market value at the date of the
grant were issued in July 1999 to a technical consultant with vesting
provisions based on patent issuance or use of the related technology by
Peregrine Industries. Options were granted at $2.50. No options had
vested as of September 30, 1999.
F-18
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
11. Stock Options, Continued:
A summary of the Company's fixed and performance stock option activity as
of September 30, 1999 and 1998, and changes during the years then ended
is presented below:
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Fixed options
Outstanding at beginning of year 52,000 $ 1.00 - $ -
Granted 230,500 2.01 52,000 1.00
Forfeited 32,500 1.99 - -
---------- --------- --------- ---------
Outstanding at end of year 250,000 $ 1.75 52,000 $ 1.00
========== ========= ========= =========
Options exercisable at end of year 69,418 26,000
========== =========
Weighted-average fair value of
options granted during the year $ 228,030 $ 1.05 $ 46,760 $ .72
========== ========= ========= =========
Weighted-average remaining
contractual life 4.63 4.95
========= =========
</TABLE>
Significant option groups outstanding at September 30, 1999 and related
price and life information follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted
Weighted- average Weighted-
average remaining average
Range of Exercise exercise contractual exercise
Prices Outstanding price life Exercisable price
----------------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
$1.00 150,000 $ 1.00 3.78 66,918 $ 1.00
$2.50 - $2.88 76,500 2.77 5.85 - -
$3.25 23,500 3.25 6.11 2,500 3.25
250,000 $ 1.75 4.63 69,418 $ 1.08
</TABLE>
Value of Stock-Based Compensation
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. No compensation costs have been charged in 1999
or 1998 with the exception of the $46,500 in 1999 described above. If
compensation costs for the Company's stock option plan had been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of FASB Statement 123, the
Company's 1999 and 1998 net (loss) income would have been increased
(decreased) as indicated below:
F-19
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
<S> <C> <C>
Net (loss) income As reported ($ 1,433,341) $ 1,125,218
Pro forma ($ 1,449,979) $ 1,117,470
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123"), which was
effective as of January 1, 1996, the fair value of option grants is
estimated on the date of grant using the Black-Scholes option-pricing
model for proforma footnote purposes with the following assumptions used
for grants in all years; risk-free interest rate of 8.85% and expected
option life ranging from 2 to 7 years. Expected volatility was assumed to
be 100%.
12. Net (Loss) Income Per Common and Common Equivalent Share:
The calculation of basic and diluted net (loss) income per share for the
years ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
1999 1998
------------ --------------
<S> <C> <C>
Basic net income per share:
Net (loss) income $ (1,433,341) $ 1,125,218
------------ -----------
Weighted average common shares
outstanding 13,760,000 13,256,384
------------ -----------
Basic net (loss) income per share $ (.10) $ .09
------------ -----------
Diluted net income per share:
Weighted average common shares
outstanding 13,760,000 13,256,384
Convertible preferred shares - 133,663
Stock options and warrants - 9,284
------------ -----------
Weighted average common and potential
common shares outstanding 13,760,000 13,399,331
------------ -----------
Net (loss) income $ (1,433,341) $ 1,125,218
============ ===========
Diluted net (loss) income per share: $ (.10) $ .08
============ ===========
</TABLE>
F-20
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
Options and warrants to purchase common shares and the conversion of
preferred shares were not included in the computation of diluted loss per
share for the year ended September 30, 1999 as the effect would have been
anti-dilutive.
13. 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 $366,000
from the proceeds of the April 1998 common stock offering 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 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 10.
14. 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 16). This lease, which is guaranteed by the Company, provides
one five year renewal option.
F-21
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
14. Commitments and Contingency, Continued:
Future minimum lease payments for these operating leases as of September
30, 1999 are approximately as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
2000 $ 401,987
2001 408,793
2002 416,940
2003 410,017
2004 88,620
----------------
$ 1,726,357
================
</TABLE>
Rent expense recorded under the above leases for the years ended
September 30, 1999 and 1998 was approximately $405,000 and $116,000,
respectively.
In April 1998, the Company entered into a financial advisory agreement
(see Note 15).
In September 1999, the Company entered into a written agreement with
R&D Technologies (the "R&D Agreement"), an established major domestic
distributor, to acquire the right to sell directly to R&D's Florida
customers effective September 1, 1999. R&D is to receive $50 and $35
each pool heater sold for the fiscal years ended September 30, 2000 and
2001, respectively. The agreement also includes the issuance of 50,000
shares of the Company's common stock to R&D's Technology. At September
30, 1999, the Company recorded an accrued liability due to R&D of
$12,400 based on sales realized from September 1, 1999 to September 30,
1999. The accrued balance is included in accrued expenses and other
payables in the accompanying consolidated balance sheet.
Prior to the closing of the April 1998 common stock 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 compensation
arrangements.
15. 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 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,
1999 and 1998, the Company recorded consulting services of $63,000 and
$15,000, respectively, under this Agreement.
F-22
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
15. Warrants, Continued:
In addition, the Company issued to the Placement Agent, or its
designees, 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, 1999, no warrants have been exercised.
16. 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.
In March 1999, the city of Montgomery, Alabama issued $2,460,000 in tax
exempt industrial revenue bonds, guaranteed by a bank letter of credit
and a Peregrine Industries stockholder. Beginning in July 1999, Alcool
began making deposits into a trustee-managed sinking fund structured to
redeem the bonds ratably over a seven year period beginning June 2000;
such payments totaled approximately $74,000 as of September 30, 1999.
Bond proceeds were used to pay bond underwriting cost of approximately
$50,000, a reduction of $1,209,000 in a related gap loan, and
approximately $752,000 in production equipment purchases. The remaining
balance of approximately $450,000 is resting in an interest bearing bank
account managed by the trustee and must be used for future equipment
purchases on or before September 2000; the Company plans to use these
funds by September 2000 for additional equipment. Alcool production
equipment, building lease, and certain equipment owned by Peregrine
Industries along with a $1,000,000 life insurance policy on a Peregrine
executive also serve as collateral for the bonds.
A lease for a 80,000 square foot building in Montgomery, Alabama, was
executed in December 1998 with occupancy February 1, 1999. Annual rent is
approximately $266,000 for the first five years and $302,000 during the
five year renewal option.
17. Comprehensive Income:
For the Company, other comprehensive income consists of a foreign
currency translation adjustment that amounted to $3,787 for the year
ended September 30, 1999. Accumulated other comprehensive loss at
September 30, 1999 and 1998 amounted to $55,907 and $52,120,
respectively. 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-23
<PAGE>
Peregrine Industries, Inc.
Notes to Consolidated Financial Statements
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
18. Litigation:
The Company is involved in legal proceedings, claims and litigation
arising in the ordinary course of business. In the opinion of management,
the outcome of such current legal proceedings, claims and litigation
could have a material effect on quarterly or annual operating results or
cash flows when resolved in a future period. However, in the opinion of
management, these matters will not materially affect the Company's
consolidated financial position.
19. 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.
20. Subsequent Event:
In December 1999 and January 2000, the Company sold 366,667 shares of its
common stock for $.75 per share to certain directors or customers to
provide funds for further expansion. This transaction was made under
Section 607.0821 of the Florida Business Corporation Act. For each two
shares purchased, the buyers receive a warrant to purchase one share of
common stock for $1.25 each; the warrants expire in three years following
registering of the underlying shares under the Securities Act of 1933
which the Company expects to do by March 31, 2000. These sales result in
an increase of $275,000 in stockholders' equity.
* * * *
F-24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 46,980
<SECURITIES> 0
<RECEIVABLES> 594,912
<ALLOWANCES> 230,370
<INVENTORY> 1,941,574
<CURRENT-ASSETS> 3,395,031
<PP&E> 2,987,555
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,838,106
<CURRENT-LIABILITIES> 3,755,610
<BONDS> 2,061,667
0
13
<COMMON> 1,376
<OTHER-SE> 1,629,282
<TOTAL-LIABILITY-AND-EQUITY> 6,838,106
<SALES> 7,258,829
<TOTAL-REVENUES> 7,258,829
<CGS> 6,214,880
<TOTAL-COSTS> 2,470,856
<OTHER-EXPENSES> (169,634)
<LOSS-PROVISION> (1,596,541)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,061,609)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,061,609)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,061,609)
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
</TABLE>
