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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended October 31, 1998
Commission File No. 33-31720-NY
____________________
PROCESS EQUIPMENT, 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 the number of shares of the issuer's classes of common
stock, as of the latest practicable date.
Class Outstanding as of
October 31, 1998
Common Stock, $.001 par value 3,644,800.
<PAGE 1>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS Page
Consolidated Balance Sheets
at October 31, 1998 and April 30, 1998........................ 3
Consolidated Statements of Operations
for the Six Months Ended October 31, 1998 and
October 31, 1997.............................................. 4
Consolidated Statements of Operations
for the Three Months Ended October 31, 1998 and
October 31, 1997.............................................. 5
Consolidated Statements of Cash Flow
for the Six Months Ended October 31, 1998..................... 6
Consolidated Statements of Stockholders' Equity
for the Six Months Ended October 31, 1998..................... 7
Notes to Consolidated Financial Statements.................... 8-11
<PAGE 2>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
October 31, 1998 and April 30, 1998
(Unaudited)
Assets
October 31, April 30,
1998 1998
Current Assets
Cash $ 263,845 $ 98,996
Accounts Receivable - Trade (less
$10,000 Reserve for Bad Debts) 416,241 543,477
Inventory (Note 1) 578,074 423,480
Prepaid Expenses 250 4,470
Vendor Deposits (Note 2) 0 1,682
Total Current Assets 1,258,410 1,072,105
Property, Plant and Equipment
(Notes 1 and 3) 55,433 62,440
Non-Current Assets:
Deferred Tax Asset (Note 1) 113,370 144,500
Total Assets $ 1,427,213 $ 1,279,045
Liabilities and Stockholders' Equity
Current Liabilities
Notes and Lease payable - current
portion (Notes 5 and 6) $ 17,738 $ 23,540
Accounts Payable and Accrued
Expenses 310,662 252,675
Customer Deposits (Note 1) 16,582 15,533
Total Current Liabilities 344,982 291,748
Long Term Liabilities
Notes and Leases payable
(Notes 5 and 6) 0 3,913
Total Liabilities 344,982 295,661
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 (170,826) (269,673)
Total Equity 1,082,232 983,384
Total Liabilities and
Stockholders' Equity $ 1,427,213 $ 1,279,045
See Accompanying Footnotes
<PAGE 3>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended October 31, 1998 and 1997
(Unaudited)
October 31, October 31,
1998 1997
Sales $ 1,547,590 $ 1,381,056
Commissions 0 0
Total Revenue 1,547,590 1,381,056
Cost of Goods Sold 1,119,937 959,421
Gross Profit 427,653 421,635
Selling, General and Administrative
Expenses 267,482 275,265
Income from Operations 160,171 146,370
Other Income and (Expense)
Other Income 3,849 2
Interest Expense (1,350) (2,915)
Prior Period Write-Offs (10,606) (7,734)
Income Before Income Taxes 154,064 135,723
Provision for Income Taxes
Current Income Taxes 11,163 800
Deferred Tax Provision 42,059 46,703
Net Income $ 98,842 $ 88,220
Net Income Per Share $ 0.03 $ 0.02
See Accompanying Footnotes
<PAGE 4>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended October 31, 1998 and 1997
(Unaudited)
October 31, October 31,
1998 1997
Sales $ 765,197 $ 679,589
Commissions 0 0
Total Revenue 765,197 679,589
Cost of Goods Sold 550,257 517,126
Gross Profit 214,940 162,463
Selling, General and Administrative
Expenses 130,725 96,696
Income from Operations 84,215 65,767
Other Income and (Expense)
Other Income 3,430 0
Interest Expense (209) (1,704)
Prior Period Write-Offs (10,606) 8,246
Income Before Income Taxes 76,830 72,307
Provision for Income Taxes
Current Income Taxes 4,458 0
Deferred Tax Provision 22,610 25,307
Net Income $ 49,762 $ 47,000
Net Income Per Share $ 0.01 $ 0.01
See Accompanying Footnotes
<PAGE 5>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Six Months Ended October 31, 1998
(Unaudited)
October 31,
1998
Cash Flow from Operational Activities:
Net Income $ 98,842
Adjustments to Reconcile
Net Income to Net Cash Used
for Operating Activities:
Depreciation and Amortization 7,012
105,854
Changes in Assets and Liabilities:
Decrease in Accounts Receivable 127,236
Increase in Inventory (154,594)
Decrease in Prepaid Expenses 4,220
Increase in Deferred Tax Asset 31,130
Decrease in Vendor Deposits 1,682
Decrease in Notes Payable (9,715)
Increase in Accts Payable and
Accrued Expenses 57,987
Increase in Customer Deposits 1,049
58,995
Net Cash Flow from Operational Activities 164,849
Net Increase in Cash 164,849
Cash - Beginning 98,996
Cash - Ending $ 263,845
See Accompanying Footnotes
<PAGE 6>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Six Months Ended October 31, 1998
(Unaudited)
Additional Retained
Common Stock Paid In Earnings
Shares Amount Capital (Deficit)
Balance April 30, 1998 3,644,800 $ 3,645 $1,249,412 $(269,673)
Net Income 98,842
Balance Oct. 31, 1998 3,644,800 $ 3,645 $1,249,412 $(170,831)
See Accompanying Footnotes
<PAGE 7>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended October 31, 1998 (Unaudited)
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.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for fair
presentation have been included. Operating results for the six month period
ended October 31, 1998 are not necessarily indicative of the results that may
be expected for the year ending April 30, 1999. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended April 30,
1998.
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 $ 113,370 which expire in the year 2,008.
Under FASB 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
Financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Application of FASB 109 requires an allowance
be recognized if there is a question as to the company's ability to use any
or all of the future tax loss benefits. For presentation of the current
comparative financial statement it has been deemed appropriate to fully
recognize this benefit for each year presented.
<PAGE 8>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended October 31, 1998
(Unaudited)
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 three months ended October
31, 1998 and October 31, 1997.
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 - Vendor Deposits
The Company has funds deposited with foreign vendors for imported
equipment sales.
Note 3 - Property, Plant and Equipment
Transportation Equipment $ 42,114
Office Equipment 104,592
Shop Equipment 37,237
Leasehold Improvement 41,074
Total $ 225,017
Less: Accumulated Depreciation 169,584
$ 55,433
<PAGE 9>
PROCESS EQUIPMENT, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months Ended October 31, 1998 (Unaudited)
Operating Lease
The Company conducts its operations from facilities that are leased under
a five year lease ending September, 2003. The lease calls for monthly rent
payments commencing September, 1998 of $5,509.67 per month plus common area
maintenance charges which includes a pro-rata share of real property taxes.
Rent expense amounted to $ 23,189 and $ 10,793 for the three months ended
October 31, 1998 and October 31, 1997 respectively.
Future Minimum Lease Payments
Future minimum lease payments for capital and operating leases at
July 31, 1998 are:
Years Ending
April 30, Operating Lease
1999 33,189
2000 66,116
2001 66,116
2002 66,116
2003 66,116
2004 22,039
Total Minimum Payments 315,811
Note 6 - Notes and Leases Payable
Notes and Leases payable consists of the following:
Leases Payable (See Note 5) $ 0
Notes Payable Stockholders
Unsecured notes payable due on demand with
interest payable at a rate of 6%. $ 10,000
Total Liabilities $ 10,000
Current Portion $ 10,000
<PAGE 10>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Three Months Ended October 31, 1998 Compared to Three Months Ended October
31, 1997
Total sales of the Company for the three months ended October 31, 1998
increased by $ 85,608 from sales for the three month period ended October 31,
1997.
Cost of goods sold increased $ 33,131 and gross profits increased by
$ 52,477 for the three month period ended October 31, 1998 as compared to the
three month period ended October 31, 1997. The gross profit increase was due
to the increase in sales volume as well as increase in gross margins 28.1%
compared to 24% for the same period of the prior year.
General and administrative expenses increased by $ 34,029 for the three
month period ended October 31, 1998 as compared to the three month period
ended October 31, 1997. The net effect of the increase in gross profits and
increase in general and administrative expenses led to a net profit of
$ 49,762 for the most recent period compared to a net profit of $47,000 for
the year earlier period.
Six Months Ended October 31, 1998 Compared to Six Months Ended October 31,
1997
Total sales of the Company for the six months ended October 31, 1998
increased by $ 166,534 from sales for the six month period ended October 31,
1997.
Cost of goods sold increased by $ 160,516 and gross profit increased by
$ 6,018 for the six month period ended October 31, 1998 as compared to the
six month period ended October 31, 1997. This gross profit increase was due
to the increase in sales volume, as gross margins decreased
somewhat to 27.6% from 30% for the same period of the prior year.
General and administrative expenses decreased by $ 7,783 for the six
month period ended October 31, 1998 as compared to the six month period ended
October 31, 1997. The net effect of the increase in gross profits and
decrease in general and administrative expenses led to a net profit of
$ 98,842 for the six months ended October 31, 1998 compared to a net profit of
$ 88,220 for the six month period ended October 31, 1997.
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.
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 available.
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