SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-K SB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended Commission
File Number
April 30, 1997 0-18980
____________________
PROCESS EQUIPMENT, INC. (formerly PEI, Inc.)
(Exact name of registrant as specified in its charter)
Nevada 62-1407522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26569 Corporate Ave.
Hayward, California 94545
(Address of principal executive offices)
Registrant's telephone number, including area code:
(510) 782-5122
____________________
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not 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-K SB or any
amendment to this Form 10-K SB. [ ]
The estimated aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of June 30, 1997: $414,000. This
estimated market value is based on the average quoted bid and ask prices of
such stock on June 30, 1997. The registrant's Common Stock has been
sporadically quoted in the over-the-counter market. The quotes reflect inter-
dealer trading and are not necessarily representative of actual transactions
or of the value of Common stock. The number of shares of the registrant's
Common Stock outstanding as of June 30, 1997 is 3,644,800.
Documents incorporated by reference: See page #27
<PAGE 1>
PART I
ITEM 1. BUSINESS
History
Process Equipment, Inc. (the "Company") was incorporated as Sharon
Capital Corporation ("Sharon") on September 21, 1989 under the laws of the
State of Nevada. Sharon was a "blind pool/blank check" corporation organized
for the purpose of purchasing, merging with or acquiring a business or assets
from another company. On March 1, 1990, Sharon completed a public offering
of 36,000 Units, the net proceeds from which were approximately $148,760.
(See Item 5). In July, 1990, Sharon was changed to PEI, Inc. In November,
1990, PEI was changed to Process Equipment, Inc.
On April 18, 1990, Sharon acquired all of the outstanding shares of
Common Stock of Process Engineers, Inc., a California corporation ("Process
Engineers"), in exchange for the issuance of 2,144,000 shares of Sharon's
Common Stock. As part of the acquisition, Sharon's officers and directors
resigned and were replaced by the officers and directors of Process
Engineers. For present purposes, the business of the Company is the business
of Process Engineers Inc., its wholly owned subsidiary.
Process Engineers' business was founded in 1957 in Oakland, California.
Initially, the principal business was as manufacturer's representative for
various tanks, valves, fittings and equipment sold to the dairy industry In
1966, Process Engineers was incorporated to carry on the business. In 1970,
new owners added engineering and manufacturing capabilities to Process
Engineers that were targeted on the dairy industry.
In 1973, Process Engineers relocated to larger quarters in Hayward,
California to commence the manufacture of specialty stainless steel products
and systems for the food, wine and dairy industries. It also became a
distributor for products of ITT Grinnell, Waukesha, Demoisy, Europress, Pera
and Stone. The addition of these lines allowed Process Engineers to engineer
systems and distribute components for a wide range of needs in the food and
wine industries. In subsequent years, it designed and supplied processing
systems to Del Monte and Dole for pineapple processing plants, designed and
built an egg custard plant and a turn-key cheese manufacturing facility for
the California Dairyman's Co-op.
In September 1989, Dr. Robert Lundak, George Cortessis and
H. Douglas Power purchased 94.8% of the shares of Process Engineers.
Mr. Power had been an officer of the corporation since 1981. Dr. Lundak and
Mr. Cortessis had substantial previous experience in other companies with
bio-technology products and services. (See Item 10). Mr. Power resigned from
the office of President of the Company during July, 1991 and is no longer
employed by the Company. On January 1, 1993 he resigned as director of the
Company.
During the year ended April 30, 1993, 432,000 Class A and 432,000 Class
B Common Stock Purchase Warrants and 3,600 Underwriter's Warrants were
exercised. The Company received net proceeds of $1,069,074.
On September 23, 1994, Dr. Robert Lundak resigned as CEO and Chairman of
the Board of Directors and is no longer employed by the Company.
<PAGE 2>
Business
The Company designs and manufactures sanitary stainless steel systems
used for manufacturing processes in the wine, food and bio-technology
industries. The Company also serves as a distributor for pumps, valves and
other components used in such systems and for winery equipment imported from
Europe. In addition, it provides repair and other services related to such
equipment and systems.
A majority of the Company's revenues have historically come from its
business of providing products and services for the wine and food industries,
with wineries accounting for most of those revenues. However, the Company in
recent years has developed and marketed bio-technology products and services
which utilize components and technologies similar to those used in the
Company' wine and food business. Currently, approximately 40% of the
Company's revenues are from sales of products and services for the
biotechnology industry.
The wine business is seasonal and the Company's wine-related activities
and sales are largely confined to the time periods immediately prior to and
during the August-October "crush" season. Sales of winery equipment tend to
be concentrated in the months preceding August and servicing of the equipment
tends to concentrate during the crush season. Consequently, the Company's
winery business is largely dormant during significant portions of the spring
and winter months.
Manufacturing
Components for systems sold by the Company are acquired from various
third party suppliers and then modified and combined into systems by the
Company's production personnel at the Company's plant in Hayward, California.
The Company's employees are particularly skilled in precise welding,
machining and other fabrication of stainless steel. The systems are also
tested and installed by the Company's personnel. The products distributed by
the Company carry various warranties, generally for a one-year period,
provided by their manufacturers. At June 30, 1997, the Company had four
employees engaged in production, testing and field service activities.
Marketing
At June 30, 1997, the Company's sales force consisted of three
employees. The Company has focused its marketing efforts on the wine and
bio-technology industries within California. Emphasis has been placed on the
Company's knowledge of wine processes and systems engineering, its
fabrication capability and its commitment to service.
Wineries are typically capital intensive requiring specialized machinery
such as destemmers, membrane presses, filter systems, crushers, tanks, pumps,
bottling equipment and piping. The wine industry is divided into "premium"
and "jug" table wines. The Company has focused its marketing efforts on the
premium wine segment. The Company presently has approximately 450 winery
customers.
The Company has marketed its bio-technology products to smaller bio-tech
companies that do not have sufficient in-house expertise to design or
fabricate their own equipment or systems. The Company has focused marketing
efforts on equipment for fermentation, separation and purification.
Marketing is carried out by the Company's sales force and has been
concentrated in California, although the Company has executed major bio-tech
projects in Washington, Massachusetts and Virginia as well.
<PAGE 3>
Competition
Numerous companies compete to furnish equipment to the California
wineries. Many distributors and manufacturer's representatives are authorized
to sell products which compete with those of the Comapny, additionally many
engineering firms can competently design similar products to those designed
and built by the Company.
The bio-technology equipment and parts industry consists of diverse
group of suppliers such as ABEC Inc., New Brunswick Scientific, Millipore
Corp, B. Braun Biotech and ITT Sherotec Inc.. Management believes that no
single company, or small group of companies, now dominates the market for
bio-technology equipment. The market is highly fractured, with numerous
small companies that market one or a small number of types of systems. The
larger bio-technology companies have the capacity to fabricate their own
equipment and parts in-house and smaller companies frequently use engineering
firms to custom design and specify components which are then assembled by the
companies themselves or by contract fabricators.
A small number of fabrication companies exist that will custom build
bio-technology systems from the designs or packages furnished by customers.
Typically, the fabrication companies provide limited warranties and no
ongoing repair, servicing or support.
The Company believes that important competitive factors in the markets
for winery and bio-technology components and systems marketed by the Company
include pricing, product effectiveness and reliability, servicing
capabilities and general marketing abilities. Management believes a
particular competitive strength of the Company is its capacity to provide
complete turn-key systems to its customers.
Government Regulation
The Company is subject to various state and federal laws, regulations
and guidelines relating to safe working conditions and manufacturing
practices. While the Company's bio-technology customers are generally
subject to extensive regulation by the U.S. Food and Drug Administration,
which may affect their specifications for products supplied by the Company,
the Company's products and operations are not directly subject to such
regulation.
Patents and Trade Secrets
The Company presently has no patents on its products and does not
believe that having patents or other proprietary technology is important to
the success of its planned operations.
Employees
At June 30, 1997, the Company had eleven full-time employees.
<PAGE 4>
ITEM 2. PROPERTIES
Process Engineers leases a 15,600 square foot building in Hayward,
California which contains 3,600 square feet of administrative, engineering
and sales space and 12,000 square feet of inventory and manufacturing space.
The manufacturing space has been designed to accommodate the special needs of
the Company's inert gas welding and large system assembly. Rent payments of
$4,600 per month plus common area maintenance charges are owed under the
lease from September 1993 to July 1998, the end of the lease term. An
agreement to modify the terms of this lease was entered into on August 1,
1994. The terms of the modified lease include deferral of approximately
$18,000 of lease payments and the forgiveness of approximately $18,000 of
lease payments otherwise payable over the period August 1, 1994 to August 1,
1995. The lease term has an option for one five year extension.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Common Stock
The Company's Articles of Incorporation authorize the issuance of
25,000,000 shares of Common Stock, $.001 par value per share. At June 30,
1997, 3,644,600 shares were outstanding. Shares of Common Stock (i) have
equal rights to dividends from funds legally available therefor, when, as and
if declared by the Company's Board of Directors, (ii) are entitled to share
ratably in any remaining assets of the Company available for distribution to
shareholders upon the Company's liquidation and (iii) do not have preemptive,
subscription or conversion rights. All shares of Common Stock now
outstanding are fully paid for and non-assessable.
All holders of Common Stock have one vote per share on all matters
submitted to a vote of stockholders. Stockholders do not have rights to
cumulate their votes in the election of directors under the Company's
Articles of Incorporation or applicable provisions of the Nevada General
Corporation Law. However, under Section 2115 of the California Corporations
Code, specific provisions of the California General Corporation Law,
including mandatory cumulative voting rights of shareholders, are made
applicable to "pseudo-California" corporations incorporated under laws of
other states which meet certain tests. The tests are that the average of
specified property, payroll and sales factors (generally relating to the
extent of activities in California) exceed 50% on a consolidated basis during
the corporation's latest full income year, and that more than one-half of the
corporation's outstanding voting securities are held of record by persons
having addresses in California.
<PAGE 5>
Market for Securities
The Company's shares are quoted sporadically in the over-the-counter
market with very little actual trading. Market makers and other dealers
provide bid and ask quotations for the Company's securities, and list such
quotations in the National Daily Quotation Sheets, commonly referred to as
the interdealer "pink sheets."
At June 30, 1997, the bid and ask quotations for the Company's shares,
as reported by the National Quotation Bureau, Inc. were $0.125 and $0.25
respectively. From completion of the Company's initial public offering on
March 1, 1990, the Company's securities were quoted sporadically in the
Over-The-Counter (OTC) market, with very little actual trading. Since September
1990, the Company's Common Stock has also been sporadically quoted on the
NASD Electronic Bulletin Board under the symbol "PEQM". These quotas were
reported in the interdealer "pink sheets," and reflect interdealer prices
without retail mark-up, mark-down or commission; are not necessarily
representative of actual transactions or of the value of the Company's
securities; and may not be based on any recognized technique of valuation
used in the investment banking community.
As of June 30, 1997, there were approximately 355 holders of record of
the Company's then outstanding shares of Common Stock.
Transfer Agent
The transfer agent for the Common Stock is American Stock Transfer &
Trust Company, 40 Wall Street, New York, New York 10005.
Dividends
The Company does not presently anticipate that it will pay dividends at
any time in the foreseeable future. The payment of any dividends will
depend, among other things, upon the Company's earnings, assets and general
financial condition, and upon other relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Year Ended April 30, 1997 Compared to Year Ended April 30, 1996
Total sales of the Company for the year ended April 30, 1997 increased
by $365,471 from sales for the year ended April 30, 1996. This increase was
due to a $221,784 increase (from $972,654 to $1,194,438) in sales of wine and
food products and services as well as by a $143,687 increase (from $680,851
to $824,538) in sales of bio-technology products and services.
Cost of goods sold increased $286,853 and the gross profit increased by
$78,618 for the year April 30, 1997 as compared to the previous year. Gross
profit as a percentage of revenue for 1997 fell to 29.1% compared to 30.8%
for 1996.
General and administrative expenses increased $56,159 for the year ended
April 30, 1997 as compared to the previous year.
<PAGE 6>
Year Ended April 30, 1996 compared to Year Ended April 30, 1995
Total sales of the Company for the year ended April 30, 1996 increased
by $645,166 from sales for the year ended April 30, 1995. This increase was
due to a $193,280 increase (from $779,374 to $972,654) in sales of wine and
food products and services as well as by a $451,886 increase (from $228,965
to $680,851) in sales of bio-technology products and services.
Cost of goods sold increased $502,877 and the gross margin increased by
$142,288 for the year April 30, 1996 as compared to the previous year. These
increases were the result of the increase in sales revenue and decrease of
gross profit margin for 1996 to 31% compared to 36% for 1995.
General and administrative expenses decreased $35,836 for the year ended
April 30, 1996 as compared to the previous year.
Liquidity and Capital Resources
The Company has in recent years financed its operations primarily with
operating revenues and loans from various lenders, many of whom are
affiliates, and from the proceeds of exercises in 1993 of Warrants to
purchase its Common Stock.
On September 15, 1994, the Company borrowed $70,000 from Peter G.
Cortessis, a shareholder, who is the father of George P. Cortessis. The
Company issued an unsecured promissory note for $70,000 bearing 6% interest
per annum to Peter G. Cortessis. During the fiscal year ended April 30, 1997,
principle payments to Peter G. Cortessis reduced to $10,000 the principle
balance of this note.
On September 15, 1994 the Company borrowed $30,000 from its officer and
director, George P. Cortessis. On September 15, 1994 the Company issued a
promissory note to George P. Cortessis in the amount of $54,800,
consolidating this borrowing and an outstanding demand note in the amount of
$24,800 held by George P. Cortessis. The note bears interest at a rate of 6%
per annum and is due on demand. During the fiscal year ended April 30, 1997,
principle payments to George P. Cortessis reduced to $46,800 the principle
balance of this note.
On August 1, 1994 Dr. Robert Lundak, the Company's President at the time
forgave an unsecured promissory note in the amount of $22,800 owed to him by
the Company and accrued interest in the amount of $4,062.
During April 1997, the company obtained an unsecured line of credit from
Wells Fargo Bank of California with an allowed maximum indebtedness amount of
$100,000. Borrowings from this line of credit incur interest at the rate of
"Prime plus 3 percent" per annum. As of June 30, 1997 no indebtedness on this
line of credit had been incurred.
The Company anticipates that revenues from its operations will be
sufficient to satisfy the Company's cash requirements for operations during
the next 12 months, except to the extent that increasing orders and sales may
require temporary borrowings to finance such expansion and related costs of
employee compensation and inventory build-up. No assurance can be given,
however, that additional debt or equity financing will not be required or
will be available if required.
<PAGE 7>
ITEM 7. SELECTED FINANCIAL DATA
The following information has been summarized from financial information
included elsewhere and should be read in conjunction with such financial
statements and notes thereto.
Summary of Statements of Operations of Process Equipment (in thousands except
for per share amount)
Years Ended April 30th
1997 1996 1995
Sales $2,018 $1,656 $1,008
Gross Profit $ 588 $ 510 $ 368
Net Income (Loss) $ 166 $ 141 $ 14
Net Income (Loss)
Per Share $0.046 $0.039 $0.004
Summary of of Balance Sheets of Process Equipment (in thousands)
April 30, 1997 April 30, 1996
Working Capital $ 541 $ 372
Total Assets $1,031 $ 897
Stockholders' Equity $ 588 $ 422
<PAGE 8>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS Page
Report of Independent Public Accountants.....................10
Consolidated Balance Sheets at April 30, 1997 and 1996....11,12
Consolidated Statements of Operations
for the Years Ended April 30, 1997, 1996 and 1995........... 13
Consolidated Statements of Cash Flow
for the Years Ended April 30, 1997, 1996 and 1995............14
Consolidated Statements of Stockholders' Equity
for the Years Ended April 30, 1997, 1996 and 1995............15
Notes to Consolidated Financial Statements................16-19
<PAGE 9>
BAUM & COMPANY, P.A.
Certified Public Accountants
1515 University Drive - Suite 209
Coral Springs, Florida 33071
(954) 752-1712
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Process Equipment, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of
Process Equipment, Inc. and Subsidiary as of April 30, 1997 and
1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended April 30,
1997, 1996 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Process
Equipment, Inc. and Subsidiary as of April 30, 1997 and 1996 and
the results of its operations and its cash flows for the years
ended April 30, 1997, 1996 and 1995 in conformity with generally
accepted accounting principles.
Coral Springs, Florida
June 10, 1997
<PAGE 10>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
April 30, 1997 and 1996
ASSETS
1997 1996
Current Assets
Cash in Bank and on Hand $ 138,356 $ 121,544
Accounts Receivable
(less allowance for doubtful
accounts of $5,000 for both
1997 and 1996) 470,964 291,054
Inventory (Note 1) 352,575 421,577
Prepaid Expenses 13,040 1,382
Deposits 9,341 9,341
Total Current Assets 984,276 844,898
Property, Plant and Equipment
(Net of $158,429 and $319,586 of
of accumulated depreciation for 1997
and 1996 respectively) 46,291 51,611
(Notes 1 and 2)
Total Assets $1,030,567 $ 896,509
See Accountant's Report and Accompanying Footnotes
<PAGE 11>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
April 30, 1997 and 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
Current Liabilities
Notes and Lease Payable - Current
Portion (Notes 3 and 4) $ 57,201 $ 124,800
Accounts Payable and Accrued
Expenses 255,735 167,111
Customer Deposits 129,881 180,542
Total Current Liabilities 442,817 472,453
Long Term Liabilities
Notes and Leases Payable
(Notes 3 and 4) - 0 - 2,005
Total Liabilities 442,817 474,458
Stockholders' Equity
Common Stock, Par Value $.001;
25,000,000 Shares Authorized
3,644,800 Issued and Outstanding 3,645 3,645
Additional Paid in Capital 1,249,412 1,249,412
Accumulated Deficit (665,307) (831,006)
Total Equity 587,750 422,051
Total Liabilities and
Stockholders' Equity $1,030,567 $ 896,509
See Accountant's Report and Accompanying Footnotes.
<PAGE 12>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended April 30, 1997, 1996 and 1995
1997 1996 1995
Revenues $2,018,976 $1,653,505 $1,008,339
Cost of Goods Sold 1,430,557 1,143,704 640,827
Gross Profit 588,419 509,801 367,512
General and Administrative
Expenses 416,134 359,975 395,811
Income (Loss) Before Non-recurring
Item and Income Taxes 172,285 149,826 (28,299)
Non-recurring Income (Expense
Forgiveness of Debt (Note 6) - 0 - - 0 - 28,862
Prior Period Write offs - 0 - - 0 - 23,068
- 0 - - 0 - 51,930
Income (Loss) from Operations 172,285 149,826 23,631
Other Income 385 382 434
Interest Expense (6,171) (7,978) (10,983)
Gain on Asset Disposal - 0 - - 0 - 3,000
Currency Gains (Losses) - 0 - - 0 - (828)
(5,786) (7,596) (8,377)
Income (Loss) Before
Income Taxes 166,499 142,230 15,254
Provision for Income Taxes
(Note 1) 800 800 800
Net Income $ 165,699 $ 141,430 $ 14,454
Net Income (Loss) Per Share
(Note 1) $ 0.0455 $ 0.0388 $ 0.0004
See Accountant's Report and Accompanying Footnotes
<PAGE 13>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended April 30, 1997, 1996 and 1995
1997 1996 1995
Cash Flow from Operational
Activities:
Net Income $ 165,699 141,430 $ 14,454
Adjustments to Reconcile
Net Income to Net Cash Used
for Operating Activities:
Depreciation and Amortization 11,803 14,489 22,279
77,502 155,919 36,733
Changes in Assets and Liabilities
(Increase) Decrease in Accounts
Receivable (179,910) (154,353) 144,060
(Increase) Decrease in
Inventory 69,002 (112,263) (7,057)
(Increase) Decrease in Prepaid
Expenses (11,658) 11,406 10,931
(Increase) Decrease in
Deposits - 0 - 7,771 (17,112)
(Increase) Decrease in Cash
Surrender Value - 0 - - 0 - 18,017
Increase (Decrease) in Notes
Payable (69,604) (2,000) 60,546
Increase (Decrease) in Accounts
Payable and Accrued Expenses 88,624 62,841 (326,045)
Increase (Decrease)
in Customer
Deposits (50,661) 100,753 36,829
Net Cash Used in Operational
Activities 23,295 (43,098)
Cash Flows from Investing Activities:
Acquisition of Fixed Assets (6,483) (1,900) - 0 -
Cash Flows from Financing Activities:
Proceeds Leases - 0 - - 0 - 3,475
Net Increase (Decrease) in Cash 16,812 66,705 (39,623)
Cash - Beginning 121,544 54,839 94,462
Cash - Ending $ 138,356 $ 121,544 $ 54,839
See Accountant's Report and Accompanying Footnotes
<PAGE 14>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended April 30, 1997, 1996 and 1995
Common Stock Paid In Accumulated
Shares Amount Capital (Deficit)
Balance April 30, 1993 3,644,800 $3,645 $1,249,412 $(1,121,098)
Net Income 134,208
Balance April 30, 1994 3,644,800 3,645 1,249,412 (986,890)
Net Income 14,454
Balance April 30, 1995 3,644,800 3,645 1,249,412 (972,436)
Income 141,430
Balance April 30, 1996 3,644,800 3,645 1,249,412 (831,006)
Net Income 165,699
Balance April 30, 1997 3,644,800 $3,645 $1,249,412 $ (665,307)
See Accountant's Report and Accompanying Footnotes
<PAGE 15>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997, 1996, AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Organization
Process Equipment, Inc. (formerly PEI, Inc. and Sharon Capital Corporation)
was organized under the laws of the State of Nevada on September 1, 1989.
Process Engineers, Inc. was incorporated October 13, 1966 in the State of
California. The principal business of the Company is the sales, service
and manufacturing of equipment for the wine, food and bio-technology
industry. Process Engineers, Inc. is a wholly owned subsidiary of Process
Equipment, Inc.
Fixed Assets
Fixed Assets are stated at cost and depreciated over their estimated
allowable useful lives (5 to 31.5 years), utilizing both the straight-line
and declining balance methods. Expenditures for major renewals and
betterments that extend the useful lives of fixed assets are capitalized.
Expenditures for maintenance and repairs are charged to expense as
incurred.
Inventory
Inventory is stated at the lower of cost or market determined on the First-in,
First-out basis.
Income Taxes
The Company has elected to be taxed under Subchapter C of the Internal
Revenue Code. For income tax purposes, depreciation is computed using the
accelerated cost recovery method and the modified accelerated cost recovery
system. The Company has federal net operating loss carry forwards, of
approximately $1,080,000 which expire in the year 2,008. The Company also
has California net operating loss carry forwards of approximately $420,000
which expire in the year 2010.
Deferred Taxes
The Company incurs a timing difference in depreciation expense due to the
difference in depreciation methods used for financial and income purposes.
Due to its immateriality, no deferred tax adjustment is made.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiary. The consolidation was treated as a reverse acquisition.
Earnings/Loss Per Share
Primary earnings per common share are computed by dividing the net income
(loss) by the weighted average number of shares of common stock and common
stock equivalents outstanding during the year. The number of shares used
for the fiscal years ended April 30, 1997 was 3,644,800, the same number
as for the fiscal years ended April 30, 1996 and April 30, 1995.
<PAGE 17>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997, 1996, AND 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Customer Deposits
The Company collects deposits from various customers for custom designed
equipment and for certain large orders. The deposits are collected while
the equipment is being designed and manufactured and are shown as a
liability when collected. These funds become revenues when the equipment
is completed and shipped to the customer.
NOTE 2 - PROPERTY, PLANT and EQUIPMENT
1997 1996
Transportation Equipment $ 34,691 $ 34,691
Office Equipment 96,950 114,408
Shop Equipment 36,675 185,695
Leasehold Improvement 36,404 36,404
Total 204,720 371,198
Less: Accumulated Depreciation 158,429 319,586
Net Fixed Assets $ 46,291 $ 51,612
NOTE 3 - LEASING ARRANGEMENTS
Operating Lease
The Company conducts its operations from facilities that are leased
under a five year lease ending July, 1998. The lease calls for monthly
rent payments commencing September, 1993 of $4,670 per month plus
common area maintenance charges which includes a pro-rata share of real
property taxes. The Company negotiated an amendment to this lease
effective August 1, 1994. The terms of this amendment include
forgiveness of an aggregate of $13,854 and the deferral of a like
amount to be repaid in monthly installments commencing August 1, 1995.
The lease contains one five year option.
Rent expense amounted to $61,819, $64,450 and $55,766 for the years
ended April 30, 1997, 1996 and 1995, respectively.
Future Minimum Lease Payments
Future minimum lease payments for capital and operating leases at April
30, 1997 are:
Years Ending Capital Operating
April 30 Lease Lease Total
1998 $ 401 $ 60,797 $ 61,198
1999 - 0 - 15,199 15,199
Total Minimum Payments $ 401 $ 75,996 $ 76,397
<PAGE 17>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED APRIL 30, 1997, 1996, AND 1995
NOTE 4 - NOTES AND LEASES PAYABLE
Note payable consist of the following:
1997 1996
Leases Payable (See Note 3) $ 401 $ 2,005
Notes Payable - Stockholders
Unsecured Notes payable due on demand with
interest payable at a rate of 6%. 56,800 124,800
NOTE 5- CERTAIN TRANSACTIONS WITH MANAGEMENT
On September 15, 1994, the Company borrowed $70,000 from Peter G.
Cortessis, a shareholder, who is also the father of George P.
Cortessis. The Company issued an unsecured promissory note for $70,000
bearing 6% interest per annum to Peter G. Cortessis. During the fiscal
year ended April 30, 1997 principle payments in the amount of $60,000
were made by the company for partial retirement of this note. On April
30, 1997 the remaining principle owed by the company on this note was
$10,000.
On September 15, 1994, the Company borrowed $30,000 from its officer
and director, George P. Cortessis. On September 15, 1994 the Company
issued an unsecured promissory note to George P. Cortessis in the
amount of $54,800, consolidating this borrowing and an outstanding
demand note in the amount of $24,800 held by George P. Cortessis. The
note bears interest at a rate of 6% per annum and is due on demand.
During the fiscal year ended April 30, 1997 principle payments in the
amount of $8,000 were made by the company for partial retirement of
this note. On April 30, 1997 the remaining principle owed by the
company on this note was $46,800.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
Year ended April 30, 1997 1996 1995
Taxes Paid $ 800 $ 800 $ 800
Interest Paid $ 6,171 $ 7,978 $10,983
<PAGE 18>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE 19>
PART III
ITEM 10. DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Executive Officers and Directors
The following table sets forth the name, age and position of each executive
officer and director of the Company. Each individual has served in such
positions since April 1990.
Name Age Position
George P. Corte 37 Secretary, Treasurer
and Director
Directors of the Company are elected annually by the Company's shareholders
and hold office until their successors have been elected and qualified, or
until their death, resignation or removal. Subject to the terms of their
Employment Agreements, the officers of the Company are elected by and serve
at the pleasure of the Board of Directors.
The following table sets forth the name, age and position of each officer
and director of Process Engineers. Each individual has served in such
positions since May 1990.
Name Age Position
Vacant position Chief Executive Officer,
and Chairman of the Board
George P. Cortessis 37 Vice President, Secretary,
Treasurer and Director
Vacant position Chief Financial Officer
George P. Cortessis. Mr. Cortessis joined Process Engineers, Inc. in
September, 1989 and has historically been responsible for the bio-technology
aspect of the Company's business.
Since 1983, Mr. Cortessis has been continuously employed in the bio-technology
and wine industries. Until March, 1985, he was a process engineer for Chiron
Corporation and designed fermentation, cell processing and protein purification
equipment. From March, 1985, until February, 1988, he was a project engineer
furnishing engineering services to customers for fermentation and biochemical
processing equipment. From February, 1988 until joining Process Engineers,
Inc., Mr. Cortessis was a Regional Sales Engineer for L. H. Fermentation,
Inc. of Hayward, California and supervised a bio-reactor sales program for
fourteen western states and Canada.
Mr. Cortessis graduated from the University of California - Berkeley in
1983 with a Bachelor of Science Degree in Chemical Engineering.
<PAGE 20>
ITEM 11. EXECUTIVE COMPENSATION
During the three fiscal years ending April 30, 1996, Dr. Lundak and Mr.
Cortessis each received the following salaries.
Summary of Compensation Table
Name and Principal 1996 1995 1994
Position Salary Salary Salary
Robert L. Lundak $ 0 $ 0 $15,000
President and
Chairman of the
Board (Resigned September 1994)
George P. Cortessis $33,000 $33,000 $28,000
Secretary and
Treasurer
In addition to the cash compensation shown above, executive officers of the
Company may receive indirect compensation in the form of perquisites and
other personal benefits. For each named officer, such indirect compensation
did not exceed 10% of the officer's salary for any year shown above.
<PAGE 21>
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number and percentage of the Company's
shares owned beneficially by its executive officers and directors and by
other persons known to own beneficially 5% or more of the shares as of July
20, 1997.
Number of Percentage
Shares of Shares
Name Owned (a) Outstanding
George P. Cortessis 934,257 25.6%
26569 Corporate Avenue
Hayward, CA 94545
Peter G. Cortessis 264,552 7.3%
26569 Corporate Avenue
Hayward, CA 94545
Paul E. Cahalen 196,000 5.4%
2001 Omega Court, Suite 207-D
San Ramon, CA 94583
All present officers 934,257 25.6%
and directors as a
group (1 person)
(a) Subject to applicable community property laws, all such shares were
owned of record, with sole voting and investment power, by the named
individual and/or by his wife.
<PAGE 22>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sharon Capital Corporation was organized under the laws of the State of
Nevada on September 21, 1989. Its initial officers and directors Deborah A.
Salerno, Gregg D. Swentor and Charles W. Barkley, and one other shareholder
then purchased a total of 500,000 shares of Common Stock at a price of $.006
per share. Ms. Salerno and Mr. Swentor subsequently received salary payments
from the Company of $25,000 and $2,500, respectively. While an officer of
the Company, Mr. Barkley was paid $25,000 in attorney's fees for legal work
relating to the Company's initial public offering.
In September 1989, Dr. Robert L. Lundak, George Cortessis and H. Douglas
Power acquired 94.8% of the outstanding shares of Process Engineers from
Steven H. Jensen, Kenneth F. Brown and Paul E. Cahalen for a total cash
consideration of $260,142.95. Mr. Power had previously acquired 5.2% of the
outstanding Process Engineers shares. In addition, in connection with the
transaction, Process Engineers partially redeemed shares held by Messrs.
Jensen, Brown and Cahalen for promissory notes in the amounts of $37,500,
$37,500 and $25,000 respectively. The notes bore interest at 10% per annum,
payable quarterly, and were satisfied in September 1992. On April 18, 1990,
Dr. Lundak, Mr. Cortessis and Mr. Power exchanged all of the outstanding
shares of Process Engineers for the issuance by the Company to them and their
contractor of 2,144,000 shares of Common Stock. At the time of the exchange,
they were named as officers and directors of the Company.
Dr. Lundak provided personal assets to secure Process Engineer's $50,000
line of credit at the National Bank of Southern California. Process
Engineers did not issue any note or enter any agreement securing the assets
furnished by Dr. Lundak for this line of credit. On June 14, 1991, Process
Engineers borrowed $45,000 from Dr. Lundak to help to repay this line of
credit pursuant to the terms of an unsecured promissory note due on demand,
which bears interest at nine percent per annum. As of August 1, 1994, the
total amount of this note yet owed by the company to Dr. Lundak was $26,862,
including unpaid principle and accrued interest. On August 1, 1994, Dr.
Lundak forgave the entire amount due him by the company.
In September 1990, the Company entered into a $145,000 line of credit with
First Interstate Bank. As of May 31, 1991, Process Engineers borrowed
$145,000 from its shareholders and their associates to repay this line of
credit in full. In connection with such borrowings, the Company issued
unsecured promissory notes for $35,000 and $25,000 to its officer and
director, George P. Cortessis, and its director, H. Douglas Power,
respectively. These notes bear interest at a rate of 9% and are due on
demand. As of April 30, 1994 the Company still owed $21,000 of the note to
George Cortessis, this note was surrendered by George Cortessis in exchange
for the issuance of a new promissory note dated September 15, 1994. Details
of this transaction appear below. During June, 1993, the balance of the
$25,000 note issued to Mr. Power was reduced to $2,500. This balance has
been paid in full to Mr. Power. The Company also issued a 12% promissory
note for $85,000 to Peter Cortessis, who is the father of George P.
Cortessis, in return for a loan of $85,000 to the Company. As of July 15,
1992, this note was paid in full using proceeds from Warrant exercises.
<PAGE 23>
On September 15, 1994, the Company issued an unsecured $70,000 promissory
note bearing 6% per annum interest and payable upon demand to Peter G.
Cortessis in return for the loan of $70,000 to the Company. The principle
balance this note was $10,000 on July 30, 1997.
On September 15, 1994, the Company issued an unsecured $54,800 promissory
note bearing 6% per annum interest and payable to George P. Cortessis in
return for the loan of $30,000 to the company and to consolidate the
remaining principle and interest owed by the Company to Mr. George Cortessis.
The principle balance of this note was $46,800 on July 30, 1997.
<PAGE 24>
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Item Number as per
Item 601 of Regulation S-B
3(a) Articles of Incorporation*
3(b) Certificate of Incorporation*
3(c) Bylaws*
3(d) Certificate of Amendment of Articles of Incorporation*
3(e) Certificate of Amendment of Certificate of Incorporation*
4(c) Sample Stock Certificate*
10(a) Transfer Agent and Registrar Agreement*
10(d) Stock Exchange Agreement, dated as of April 6, 1990, among the
Company, Robert L. Lundak, H. Douglas Power and George B.
Cortessis.*
10(e) 1990 Stock Option Plan*
10(f) Employment Agreement dated as of April 18, 1990 between Process
Engineers and Robert L. Lundak*
10(g) Employment Agreement dated as of April 18, 1990 between Process
Engineers and H. Douglas Power*
10(h) Employment Agreement dated as of April 18, 1990 between Process
Engineers and George P. Cortessis*
10(z) Promissory Note Extensions.*
21 Subsidiary
* Incorporated herein by reference to exhibit of the same number of the
Company's Registration Statement on Form S-18, as amended (Reg. No.
33-31720-NY) declared effective February 25, 1992.
(b) Reports on Form 8-K filed in the Fourth Quarter
Not applicable.
<PAGE 25>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PEI, Inc.
By:___________________
George P. Cortessis
Secretary
Dated: July 29, 1997
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature
Title Date
____________________
George P. Cortessis
Secretary, Treasurer July 29, 1997
and Director
(Principle Accounting and Financial Officer)
<PAGE 26>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
EXHIBIT INDEX
Item Number Page Number
3(a) Articles of Incorporation*
3(b) Certificate of Incorporation*
3(c) Bylaws*
3(d) Certificate of Amendment of Articles of Incorporation*
3(e) Certificate of Amendment of Certificate of Incorporation*
4(c) Sample Stock Certificate*
10(a) Transfer Agent and Registrar Agreement*
10(d) Stock Exchange Agreement, dated as of April 6, 1990, among the
Company, Robert L. Lundak, H. Douglas Power and George B.
Cortessis.*
10(e) 1990 Stock Option Plan*
10(f) Employment Agreement dated as of April 18, 1990 between Process
Engineers and Robert L. Lundak*
10(g) Employment Agreement dated as of April 18, 1990 between Process
Engineers and H. Douglas Power*
10(h) Employment Agreement dated as of April 18, 1990 between Process
Engineers and George P. Cortessis*
10(z) Promissory Note Extension*
21 Subsidiary
* Incorporated herein by reference to exhibit of the same number of
Registrant's Registration Statement on Form S-18 (Reg. No. 33-31720-NY).
<PAGE 27>
