SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report
Pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 9, 1998
PERIPHERAL CONNECTIONS, INC.
(Exact name of registrant as specified in charter)
Nevada 33-55254-39 87-0485315
(State or other jurisdiction (Commission file (IRS Employer
of incorporation) Number) Identification Number)
176 John Street
Toronto, Ontario, Canada M5T 1X5
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number (including area code): (416) 593-0859
------------------
AMENDMENT NO. 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of its current report on Form 8-K dated
April 20, 1998 and filed April 21, 1998 as follows:
Item 7
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired.
Audited financial statements of NetKing Limited. (1)
(b) Pro-Forma Financial Information
(c) Appraisal of Intellectual Property of NetKing Limited.
(1) The symbol (#) indicates British Pound Sterling.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
PERIPHERAL CONNECTIONS, INC.
Date: 16 December 1998 By:
Tomas George Wilmot, President
<PAGE>
NETKING LIMITED
REPORT AND CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE PERIOD
27 FEBRUARY 1998 TO 9 APRIL 1998
REGISTERED NUMBER: 3505172 (ENGLAND AND WALES)
<PAGE>
NETKING LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD 27 FEBRUARY 1998 TO 9 APRIL 1998
Contents Pages
Company information 1
Director's report 2-4
Auditors' report 5
Holding company balance sheet 6
Profit and loss account 7
Balance sheet 8
Cash flow statement 9
Notes to the financial statements 10-16
The following pages do not form part of the
statutory financial statements
Detailed trading and profit and loss statement 17-18
<PAGE>
NETKING LIMITED
COMPANY INFORMATION
AS AT 9APRIL 1998
DIRECTOR
Tomas George Wilmot
SECRETARY
Clive Montague Griffiths
REGISTERED OFFICE
31 Southampton Row
London WC1B 5HT
BUSINESS ADDRESS
Link house
259 City Road
London EC1V 1JE
AUDITORS
The Lawrence Woolfson Partnership
Chartered Accountants and Registered Auditor
1 Bentinck Street
London W1M 5RN
SOLICITORS
Cooper Chan
Unicorn Chambers
Victoria Street
Douglas
Isle of Man IM1 2LD
PRINCIPAL BANKERS
Bank of Ireland
P.O Box 2165
20 Berkeley square
London W1A 1TD
Page 1
<PAGE>
NETKING LIMITED
DIRECTOR'S REPORT
The director presents his first report with the consolidated financial
statements of the Company for the period ended 9 April 1998.
Since its incorporation and commencement to trade on 5 February 1998 the company
has:
1. Acquired 100% of the issued share capital of Skynet 2001 Limited on 27
February 1998.
2. Become a wholly-owned subsidiary of Peripheral Connections Inc. ( PEPC :
OTC BB ) on 11 May 1998.
3. Entered into a Strategic Alliance with AMP Inc. on 13 August 1998 to
develop the Skynet Satellite Navigation system used for in-car
communications, information, car-theft security, vehicle location/recovery
and personal protection.
PRINCIPAL ACTIVITIES
The principal activities of the Company in the separate period under review was
that of a holding company.
The Company's subsidiary is Skynet 2001 Limited which develops the Skynet
tracking and anti- theft security system for cars and trucks. The Skynet system
is a platform by which various technologies react and inter-react to receive and
correlate and transmit remote voice and data information which enables vehicles
to be monitored and controlled by a central monitoring station. The first of
these technologies is Global Position System (GPS) which is a satellite-based
system that permits Skynet to pinpoint within a few meters the location of
vehicles anywhere in the European Common Market and most Eastern countries,
Russia included. The second of these technologies is 1800 megahertz GSM (Global
Standard for Mobile Communications) which enables Skynet to be in constant voice
and data communication via cellular telephones with the car or truck. By
coupling GPS with GSM with its proprietary immobilizing system to monitor and
control the vehicle's electronics and engine capabilities from its monitoring
station, the Skynet platform effectively "wraps" the vehicle in a net of radio,
electrical, electronic, mechanical, telematics and satellite protection which
spans national boundaries and continents.
REVIEW OF THE BUSINESS
The results for the period show a net loss after taxation of (#)172,384. The
implementation of the Company's sales and marketing program will require
substantial infusions of new capital into the business. The Company may also
find it necessary to raise capital to fund its long term requirements. While
management is optimistic it can raise short and long term capital, there can be
no assurance it will be able to do so on terms that are satisfactory to the
Company.
TRANSFERS TO RESERVES
Page 2
<PAGE>
It is proposed that the retained loss for the period of (#)172,384 be
transferred to reserves.
POST BALANCE SHEET EVENTS
1. On 11 May 1998, the company became a wholly-owned subsidiary of
Peripheral Connections Inc. in a transaction between Tomas George
Wilmot and publicly-held Peripheral Connections Inc. wherein Mr. Wilmot
sold his 100% shareholding in Netking Limited to Peripheral in return
for the transfer to him by Peripheral of 10,000,000 $0.001 common
shares, representing 68.5% ownership of Peripheral.
2. On 13 August 1998, the company entered into a Strategic Alliance with
AMP Inc. wherein AMP will market and manufacture the Skynet anti-theft
and security system to vehicle manufacturers.
DIRECTORS AND THEIR INTERESTS
The directors in office in the period and their beneficial interests in the
company at the balance sheet date were as follows :
Directors retired during the period:
<TABLE>
<CAPTION>
Number of
Shares 1998
<S> <C> <C> <C>
CDF Formations Limited 9 February 1998 Ordinary Shares Nil
Local Protectors Limited 2 March 1998 Ordinary Shares Nil
Directors appointed during the period :
CDF Formations Limited 5 February 1998 Ordinary Shares Nil
Local Protectors Limited 9 February 1998 Ordinary Shares Nil
Tomas George Wilmot 27 February 1998 Ordinary Shares Nil
</TABLE>
DIRECTOR'S RESPONSIBILITIES
Company law requires the director to prepare financial statements for each
financial year which give a true and fair view of the state of affairs of the
company as at the end of the financial year and of the profits or loss of the
company for that period. In preparing those financial statements, the director
is required to :
- select suitable accounting policies and then apply them consistently;
- make judgments and estimates that are reasonable and prudent;
- state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
financial statements; and
- prepare the financial statements on the going concern basis unless it
is inappropriate to presume the company will continue business.
Page 3
<PAGE>
The director is responsible for maintaining proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and to enable him to ensure that the financial statements comply with
the Companies Act 1985. He is also responsible for safeguarding the assets of
the company and hence for taking responsible steps for the prevention and
detection of fraud and other irregularities.
AUDITORS
The Lawrence Woolfson Partnership were appointed auditors to the group and in
accordance with section 385 of the Companies Act 1985 are willing to be
re-appointed.
Signed by :
Tomas George Wilmot
Director
Date: 9 October 1998
Page 4
<PAGE>
NETKING LIMITED
AUDITORS' REPORT TO THE MEMBERS
We have audited the financial statements on pages 6 to 16 which have been
prepared under the historical cost convention as modified by the revaluation of
intangible fixed assets and on the basis of accounting policies set out on page
10.
RESPECTIVE RESPONSIBILITIES OF THE DIRECTOR AND AUDITORS
As described in the director's report, the company's director is responsible for
the preparation of financial statements. It is our responsibility to form an
independent opinion , based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board. An audit includes examination, on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the significant estimates and judgements made by
the director in the preparation of the financial statements, and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance as to whether the financial
statements are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements give a true and fair view of the state
of affairs of the group as at 9 April 1998 and of its loss for the period then
ended and have been properly prepared in accordance with the Companies Act 1985.
The Lawrence Woolfson Partnership
Chartered Accountants and Registered Auditor
1 Bentinck Street
London W1M 5RN
Date signed: 9th October 1998
Page 5
<PAGE>
NETKING LIMITED
BALANCE SHEET
AT 9 APRIL 1998
<TABLE>
<CAPTION>
Notes (#) (#)
FIXED ASSETS
<S> <C> <C> <C>
Investment
6 4,000,000
CURRENT ASSETS
Debtors 8 2
CREDITORS: amounts falling due
within one year 9 (4,005,500)
-----------------
NET CURRENT LIABILITIES (4,005,498)
-------------
TOTAL ASSETS LESS
CURRENT LIABILITIES (5,498)
============
CAPITAL AND RESERVES
Called up share capital 10 2
Profit and loss account (5,500)
-----------------
TOTAL SHAREHOLDERS' FUNDS 11 (5,498)
=================
</TABLE>
Approved on 9th October 1998 and signed by:
Tomas George Wilmot
Director
The notes on pages 10 to 16 form part of these financial statements.
Page 6
<PAGE>
NETKING LIMITED
CONSOLIDATED PROFIT AND LOSS ACCOUNT
FOR THE PERIOD 27 FEBRUARY 1998 TO 9 APRIL 1998
<TABLE>
<CAPTION>
Notes 1998
(#)
<S> <C> <C>
TURNOVER 9,802
Cost of sale (46,107)
-----------------
GROSS LOSS (36,305)
Selling and distribution costs (13,752)
Administrative expenses (122,327)
-----------------
OPERATING LOSS 2 (172,384)
-----------------
LOSS ON ORDINARY ACTIVITIES BEFORE TAXATION (172,384)
Tax on loss on ordinary activities -
-----------------
LOSS ON ORDINARY ACTIVITIES AFTER TAXATION (172,384)
=================
</TABLE>
All amounts relate to continuing activities which commenced during the period.
There have been no recognised gains or losses, other than the results for the
financial period, and all profits and losses have been accounted for on an
historical cost basis.
The notes on pages 10 to 16 form part of these financial statements.
Page 7
<PAGE>
NETKING LIMITED
CONSOLIDATED BALANCE SHEET
AT 9 APRIL 1998
<TABLE>
<CAPTION>
Notes (#) (#)
FIXED ASSETS
<S> <C> <C> <C>
Intangible assets 4 4,123,327
Tangible assets 5 35,221
-----------------
4,158,548
CURRENT ASSETS
Stocks 7 4,826
Debtors 8 44,097
Cash in hand 14
-----------------
48,937
CREDITORS: amounts falling due within
one year 9 (4,378,563)
-----------------
NET CURRENT LIABILITIES (4,329,626)
-----------------
TOTAL ASSETS LESS CURRENT
LIABILITIES (171,078)
=================
CAPITAL AND RESERVES
Called up share capital 10 2
Reserve on consolidation 1,304
Profit and loss account (172,384)
-----------------
TOTAL SHAREHOLDERS' FUNDS 11 (171,078)
=================
</TABLE>
Approved on 9th October 1998 and signed by:
Tomas George Wilmot
Director
The notes on pages 10 to 16 form part of these financial statements.
Page 8
<PAGE>
NETKING LIMITED
CONSOLIDATED CASH FLOW STATEMENT
FOR THE PERIOD 27 FEBRUARY 1998 TO 9 APRIL 1998
<TABLE>
<CAPTION>
Notes 1998
(#)
NET CASH INFLOW FROM
<S> <C> <C>
OPERATING ACTIVITIES 2 4,179,516
Reserve on consolidation 1,304
-----------------
4,180,820
-----------------
Servicing of finance:
Issue of shares 2
-----------------
NET CASH INFLOW FROM RETURNS
ON INVESTIMENTS AND SERVICING
OF FINANCE 2
-----------------
Investing activities:
Fixed assets acquisition 12 (4,204,825)
-----------------
NET CASH FLOW FROM
INVESTING ACTIVITIES (4,204,825)
-----------------
NET CASH OUTFLOW
BEFORE FINANCING (24,003)
-----------------
DECREASE IN CASH AND
CASH EQUIVALENTS 13 (24,003)
=================
</TABLE>
The notes on pages 10 to 16 form part of these financial statements.
Page 9
<PAGE>
NETKING LIMITED
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD 27 FEBRUARY 1998 TO 9 APRIL 1998
1. STATEMENT OF ACCOUNTING POLICIES
The consolidated financial statements have been prepared under the
historical cost convention modified to include the revaluation of
intangible fixed assets and are in accordance with applicable
accounting standards.
Turnover
Turnover represents the total invoice value, excluding value added tax,
of goods sold and services rendered during the period.
Goodwill on consolidation
Goodwill on consolidation is the net amount paid on the acquisition of
the subsidiary.
Depreciation of tangible fixed assets
Depreciation is provided at the following annual rates in order to
write off each asset over its useful life:
Furniture, fixtures and fittings 10% on net book value
Computer equipment 25% on net book value
Amortisation of intangible fixed assets
Intangible fixed assets are amortised at 10% per annum on net book
value.
Stocks
Stocks are stated at the lower of cost and net realisable value.
Net realisable value is based on estimated selling price less further
costs to completion and disposal.
Foreign currencies
Assets and liabilities in foreign currencies are translated into
sterling at the rates of exchange ruling at the balance sheet date.
Transactions in foreign currencies are translated into sterling at the
rate of exchange ruling at the date of the transaction. Exchange
differences are taken into the profit and loss accounts for the period.
Lease commitments
Lease payments under operating leases, where substantially all the
risks and benefits remain with the lessor, are charged as expenses in
the periods in which they are incurred.
Page 10
<PAGE>
NETKING LIMITED
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD 27 FEBRUARY TO 9 APRIL 1998
Going concern
Whilst the company has incurred losses in this first period of trading
and has continued to do so, it has been developing a new range of
products for launch in October 1998, in consequence of which the
company is expected to achieve profitability in early 1999.
2. OPERATING LOSS
<TABLE>
<CAPTION>
Operating loss 1998
(#)
<S> <C>
After charging:
Depreciation of fixed assets 590
Amortisation of intangible assets 45,687
Directors remuneration -
Auditors' remuneration 8,000
Operating lease rentals
Other 9,637
Motor vehicles 926
=================
Reconciliation of operating loss to
net cash inflow from operating activities
1998
(#)
Operating loss (172,384)
Depreciation 590
Amortisation 45,687
Increase in stocks (4,826)
Increase in debtors (44,097)
Increase in creditors 4,354,546
-----------------
Net cash inflow from operating activities 4,179,516
=================
3. INFORMATION ON DIRECTOR AND EMPLOYEES
1998
(#)
Staff costs
Wages and salaries 34,961
Social security costs 3,374
----------------
38,335
================
</TABLE>
Page 11
<PAGE>
NETKING LIMITED
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD 27 FEBRUARY 1998 TO 9 APRIL 1998
<TABLE>
<CAPTION>
1998
No.
The average number of employees during the period was made up as follows:
<S> <C>
Number of employees - Sales 9
Number of employees - Administration 8
-----------------
17
4. INTANGIBLE FIXED ASSETS
Intellectual
Property Rights
and Brand Name
(#)
Cost:
Additions 4,169,014
Amortisation:
Charge for the period 45,687
-----------------
Net book value:
At 9 April 1998 4,123,327
=================
</TABLE>
Page 12
<PAGE>
NETKING LIMITED
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD 27 FEBRUARY 1998 TO 9 APRIL 1998
5. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
Furniture, Computer Total
Fixtures and Equipment
Fittings
(#) (#) (#)
Cost:
<S> <C> <C> <C>
Additions 23,787 12,024 35,811
------------------ ----------------- -----------------
At 9 April 1998 23,787 12,024 35,811
------------------ ----------------- -----------------
Depreciation
Charge for the period 261 329 590
------------------ ----------------- -----------------
Net book value
At 9 April 1998 23,526 11,695 35,221
================== ================= =================
</TABLE>
6. INVESTMENT
On 27th February 1998 the company acquired 100% of the issued share
capital of Skynet 2001 Limited, a company incorporated in England and
Wales. That company provides vehicle security telecommunication and
vehicle tracking systems using the GSM or PCN networks. The aggregate
amount of share capital and reserves of Skynet 2001 Limited as at 9th
April 1998 was (pound)3,834,420 and the loss in the period to 9th April
was (pound)181,154.
7. STOCKS
<TABLE>
<CAPTION>
Group Holding Company
1998 1998
(#) (#)
Finished goods and goods
<S> <C> <C>
for resale 4,826 -
================== =================
Group Holding
Company
8. DEBTORS 1998 1998
(#) (#)
Trade debtors 15,591 -
Other debtors 14,862 2
Prepayment and accrued income 13,644 -
------------------ -----------------
44,097 2
================== =================
</TABLE>
Page 13
<PAGE>
NETKING LIMITED
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD 27 FEBRUARY 1998 TO 9 APRIL 1998
<TABLE>
<CAPTION>
Group Holding
Company
9. CREDITORS: 1998 1998
amounts falling due within one year (#) (#)
<S> <C> <C>
Bank overdraft 24,017 -
Trade creditors 24,372 -
Amount owed to holding company* 4,000,000 4,000,000
Amount owed to subsidiary company - 5,000
Other creditors 171,291 -
Other taxes and social security costs 35,895 -
Directors loan account 45,478 -
Accruals and deferred income 77,510 500
------------------ -----------------
4,378,563 4,005,500
================== =================
</TABLE>
* This loan replaced a third party promissory note which was satisfied
by the issue of 5,000,000 Peripheral Connections Incorporated Class A
common shares of US $0.001 each at par. Peripheral Connections
Incorporated is the parent company of Netking Limited.
<TABLE>
<CAPTION>
Group Holding
Company
10. SHARE CAPITAL 1998 1998
(#) (#)
Authorised:
Equity interests:
1,000 Ordinary shares
<S> <C> <C> <C>
of(pound)1 each 1,000 1,000
================== =================
Allotted, called up and fully paid
Equity interests:
2 Ordinary shares of(pound)1 each 2 2
================== =================
</TABLE>
Page 14
<PAGE>
NETKING LIMITED
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD 27 FEBRUARY 1998 TO 9 APRIL 1998
11. RECONCILIATION OF MOVEMENTS
IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
Group Holding
Company
1998 1998
(#) (#)
<S> <C> <C>
Loss for the financial period (172,384) (5,500)
Reserve on consolidation 1,304
Net addition to shareholders' funds
Ordinary Shares paid up 2 2
------------------ -----------------
Closing shareholders' funds (171,078) (5,498)
================== =================
Represented by:-
Equity interests (171,078) (5,498)
================== =================
</TABLE>
12. ANALYSIS OF CASH FLOWS FOR HEADINGS
NETTED IN THE CASH FLOW STATEMENT
<TABLE>
<CAPTION>
1998
(#)
Returns on investments and servicing of finance
Capital expenditure
<S> <C>
Purchase of intangible fixed assets (4,169,014)
Purchase of tangible fixed assets (35,811)
-----------------
Net cash outflow from capital expenditure (4,204,825)
=================
</TABLE>
Page 15
<PAGE>
NETKING LIMITED
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD 27 FEBRUARY 1998 TO 9 APRIL 1998
13. ANALYSIS OF CHANGES IN NET DEBT
<TABLE>
<CAPTION>
Cash flow 1998
(#) (#)
<S> <C> <C>
Cash in hand 14 14
Bank overdraft (24,017) (24,017)
----------------- -----------------
(24,003) (24,003)
================= =================
</TABLE>
14. REVENUE COMMITMENTS
At period end the company was committed to make the following payments
during the next year in respect of operating leases.
<TABLE>
<CAPTION>
Land and
buildings Other
1998 1998
(#) (#)
<S> <C> <C>
Within one year 73,644 -
More than one year and less
than five years - 7,389
================= =================
</TABLE>
15. PARENT COMPANY
The parent company is Peripheral Connections Incorporated, a company
incorporated in the state of Nevada, USA whose shares are quoted on
OTC-BB. Tomas George Wilmot holds 68.5% of the issued share capital of
the parent company and is therefore the ultimate controlling party.
Page 16
<PAGE>
NETKING LIMITED
CONSOLIDATED DETAILED TRADING AND PROFIT AND LOSS ACCOUNT
FOR THE PERIOD 27 FEBRUARY 1998 TO 9 APRIL 1998
<TABLE>
<CAPTION>
1998
(#) (#)
SALES 9,802
COST OF SALES
<S> <C> <C>
Purchases 21,130
Freight and distribution 441
Warranty claims 3,830
Wages and national insurance 15,012
Subcontract labour 10,520
-----------------
50,933
Closing stocks (4,826)
-----------------
(46,107)
------------
GROSS LOSS (36,305)
SELLING AND DISTRIBUTION COSTS 13,752
ADMINISTRATIVE EXPENSES 122,327
-----------------
(136,079)
------------
OPERATING LOSS FOR THE PERIOD (172,384)
------------
NET LOSS FOR THE PERIOD (172,384)
============
</TABLE>
Page 17
<PAGE>
NETKING LIMITED
CONSOLIDATED DISTRIBUTION AND ADMINISTRATIVE EXPENSES
FOR THE PERIOD 27 FEBRUARY 1998 TO 9 APRIL 1998
<TABLE>
<CAPTION>
1998
(#)
SELLING AND DISTRIBUTION COSTS
<S> <C>
Advertising, promotions and exhibitions 6,987
Public relations 500
Motor expenses 1,148
Motor vehicle leasing 926
Travel and subsistence 916
Entertaining 3,275
------------
13,752
============
ADMINISTRATIVE EXPENSES
Wages and national insurance 23,323
Redundancy costs 10,000
Rent payable 9,637
Rates 2,600
Insurance 537
Light and heat 650
Repairs and maintenance 73
Cleaning 1,200
Printing, postage and stationary 3,766
Telephone 4,881
Hire of equipment 375
Legal and professional fees 10,868
Audit fees 8,000
Bank charges 71
Sundry expenses 69
Amortisation 45,687
Depreciation 590
-----------------
122,327
=================
</TABLE>
Page 18
<PAGE>
PERIPHERAL CONNECTIONS, INC. AND SUBSIDIARY
(A Development Stage Company)
Unaudited Pro Forma Balance Sheet
<TABLE>
<CAPTION>
March 31, April 9,
1998 1998
Peripheral Netking Consolidated
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
Cash $ 9,253 $ 23 $ 9,276
Accounts receivable 0 50,853 50,853
Inventory 0 8,059 8,059
Prepaid expenses 0 22,785 22,785
------------------ ------------------ -----------------
Total Current Assets 9,253 81,720 90,973
Equipment and software 0 58,819 58,819
Licenses and brand names 0 6,885,956 6,885,956
------------------ ------------------ -----------------
0 6,944,775 6,944,775
------------------ ------------------ -----------------
TOTAL ASSETS $ 9,253 $ 7,026,495 $ 7,035,748
================== ================== =================
LIABILITIES & EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 0 $ 40,701 $ 40,701
Bank overdraft 0 40,108 40,108
Loan payable ** 0 6,680,000 6,680,000
Accrued expenses/deferred income 0 551,390 551,390
------------------ ------------------ -----------------
Total Current Liabilities 0 7,312,199 7,312,199
------------------ ------------------ -----------------
Total Liabilities 0 7,312,199 7,312,199
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock $0.001 par value
Authorized - 25,000,000 shares
Issued and outstanding 3,850,000 shares 3,850 3 13,850*
Additional paid-in capital 282,150 2,174 274,327
Deficit accumulated during the
development stage (276,747) (287,881) (564,628)
------------------ ------------------ -----------------
Total Stockholders' Equity (Deficit) 9,253 (285,704) (276,451)
------------------ ------------------ -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 9,253 $ 7,026,495 $ 7,035,748
================== ================== =================
</TABLE>
* 10,000,000 shares were issued for subsidiary.
** The Creditor later agreed to accept 5,000,000 shares of the Company's
common stock to cancel the debt.
Page 19
<PAGE>
PERIPHERAL CONNECTIONS, INC. AND SUBSIDIARY
(A Development Stage Company)
Unaudited Pro Forma Statement of Operations
Period ended April 9, 1998
<TABLE>
<CAPTION>
March 31, April 9,
1998 1998
Peripheral Netking Consolidated
------------------ ------------------ -----------------
<S> <C> <C> <C>
Sales $ 0 $ 16,369 $ 16,369
Cost of sales 0 76,999 76,999
------------------ ------------------ -----------------
Gross Loss 0 (60,630) (60,630)
Interest income 105 0 105
Expenses
General and administrative 1,817 227,251 229,068
------------------ ------------------ -----------------
1,817 227,251 229,068
Net Loss for Period (1,712) (287,881) (289,593)
Deficit - beginning of Period (275,035) 0 (275,035)
------------------ ------------------ -----------------
Deficit - end of Period (276,747) (287,881) (564,628)
Net Loss per Share .00 (143,941) (.02)
Average shares outstanding used to
calculate net loss per share 3,850,000 2 13,850,000
</TABLE>
Page 20
<PAGE>
APPRAISAL OF THE
INTELLECTUAL PROPERTY OF
NETKING LIMITED
AS OF
JULY 31, 1998
<PAGE>
August 3, 1998
PERSONAL AND CONFIDENTIAL
Mr. Tomas Wilmot, President
Skynet 2001 Limited
Link House, 259 City Road
London EC1V1JE
Dear Mr. Wilmot:
In accordance with your request we have prepared an appraisal of the fair market
value of the intellectual property in the business enterprise known as Netking
Limited, whose principal offices are located in London, England.
The effective date of value is July 31, 1998.
The values herein reported are contingent upon the Scope and Limitations and
Salient Facts and Limiting Conditions as specifically enumerated in the first
section of this report.
Predicated upon the analysis conducted, we are of the opinion that the
intellectual property purchased by Netking Limited, which is used in connection
with the Skynet technology, has a fair market value of not less than $6.6
million (U.S.).
A copy of this report and the data from which it was prepared are available for
your inspection upon request.
Respectfully Submitted,
HOULIHAN VALUATION ADVISORS, INC.
<PAGE>
TABLE OF CONTENTS
Page
LETTER OF TRANSMITTAL
SCOPE AND LIMITATIONS 1
SALIENT FACTS AND LIMITING CONDITIONS 2
BACKGROUND 3
NATURE AND HISTORY 4
THE TELEMATICS INDUSTRY 11
VALUATION OF THE INTELLECTUAL PROPERTY 12
Overview 12
Introduction and Appraisal Procedures 12
Product Development Costs 12
Sales of Peripheral Connections Common Stock 13
Black-Scholes Model 14
Publicly Traded Comparative Analysis 18
Discounted Future Benefits 18
Probability Analysis 20
SUMMARY AND CONCLUSION AS TO VALUE 21
Opinion of Value 21
ADDENDA 22
Exhibit Group I - Guideline Companies 23
Exhibit Group II - Projected Financial Statements 31
Exhibit III - Cost of Capital & DCF Analysis 35
Exhibit IV - Organization Chart 38
Exhibit V - Peripheral Connections, Inc. Stock Trading Chart 40
Exhibit VI - Appraiser Certification 42
Exhibit VII - Appraiser Qualifications 44
<PAGE>
SCOPE AND LIMITATIONS
The purpose of this report is to estimate the Fair Market Value of certain
intellectual property used in the Skynet Technology.
We have been informed that this report will be employed by Peripheral
Connections, Inc. for the following function: balance sheet justification of the
purchase price of the intellectual property.
Our appraisal is valid only for the purpose and function which is stated herein,
as of July 31, 1998. Any other use or reliance by you or third parties is
invalid. You may show our report in its entirety to interested parties outside
your organization; however, you agree not to reference our name or our report,
in whole or in part, in any document distributed to third parties without our
prior written consent. We will, subject to legal orders, maintain the
confidentiality of all conversations, documents provided to us, and our report.
These conditions can only be modified in writing by both parties.
-1-
<PAGE>
SALIENT FACTS AND LIMITING CONDITIONS
3. All facts and data set forth in this report are true and accurate to the
best of the appraiser's knowledge and belief.
4. The fee for the appraisal is not contingent upon the values or the
conclusions reported.
5. Neither the appraiser nor any employees of Houlihan Valuation Advisors,
Inc. has any current or contemplated financial interest in the property
appraised.
6. The appraiser renders no opinion as to legal fee or title, which is assumed
to be good and marketable. Prevailing leases, liens and other encumbrances,
if any, have been disregarded and the property has been appraised as if
free and clear, unless otherwise specifically stated.
7. All financial statements, operating histories and other data relating to
income and expenses attributed to the property have been provided by the
owner or his representative and have been accepted without further
verification, except as specifically set forth in this report.
8. All estimates of value are presented as the appraiser's considered opinion,
based upon the facts and data obtained during the investigation.
9. Testimony or attendance in court by reason of this appraisal shall not be
required unless previous arrangements have been made therefor.
10. Neither all nor any part of the contents of this report shall be conveyed
to the public through advertising, public relations, news, sales, or other
media without the written consent and approval of Houlihan Valuation
Advisors, Inc.
-2-
<PAGE>
BACKGROUND
On March 19, 1998 Peripheral Connections, Inc. (a U.S. publicly traded company -
NASDAQ symbol PEPC) issued 10 million shares of PEPC stock for all of the
outstanding common shares of Netking Limited, an English private company.
Most of all of the assets of Netking are items of intellectual property used in
conjunction with the Skynet 2000 in-vehicle system. Through a somewhat
complicated transaction, PEPC ends up with the Skynet assets.
The intellectual property was originally purchased by Skynet 2001 Limited
(formerly Keymore Limited) from Skynet Corporation PLC in a liquidation
proceeding (which concluded on February 2, 1998). The forthcoming Nature and
History section of this report will present these transactions in a more
detailed fashion.
-3-
<PAGE>
*NATURE AND HISTORY
Business
Peripheral Connections, Inc. (the "Company") was incorporated under the laws of
Nevada on March 14, 1990. The Company is in the developmental stage, and has no
operational history and, prior to the acquisition described below, had not
engaged in business of any kind.
Netking Acquisition
In 1997, management continued to explore potential business ventures. On March
19, 1998, the Company entered into a Stock Purchase and Sale Agreement whereby
the Company agreed to issue 10,000,000 shares of the Company in consideration
for all of the stock of Netking Limited, an English private company ("Netking")
from Tomas George Wilmot ("Seller"), who beneficially owned all of the stock of
Netking. The consideration was determined by arm's length negotiations between
the Company and Seller. On April 9, 1998, the Company beneficially acquired all
of the stock of Netking from Seller. Title to the 10,000,000 newly issued shares
of the common stock of the Company, which is approximately 68.5% of all of the
outstanding stock of the Company after such issuance, is held by Tomas George
Wilmot, individually.
Netking is the beneficial owner of Skynet 2001 Limited, an English private
limited company ("Skynet"). Skynet owns intellectual property comprised of all
and any patents, trade marks, copyright, know-how, computer know-how, and
technical documentation pertaining to all aspects of a product known as the
Skynet 2000 in-vehicle system, as described below, including all enhancements
(the "IPR"). The intellectual property owned by Skynet was originally conceived
by Mr. Mogens Birkelund, the sole beneficial owner of Comware APS, a Danish
corporation.
- --------
*Extracted from PEPC Form 10-KSB.
-4-
<PAGE>
Mr. Birkelund and Comware APS jointly assigned certain intellectual property to
Skynet Services Limited ("Skynet Services") on May 13, 1996. The IPR was
purchased by Skynet, which was formed on January 21, 1998, from Skynet Services,
in a liquidation proceeding concluded February 2, 1998. The stock of Skynet was
subsequently purchased by Netking, which was formed on February 5, 1998. Netking
purchased the stock of Skynet for a (pound) 4,000,000 unsecured promissory note,
which entire amount remains outstanding. The prior owner of Skynet was not
affiliated with Seller or the Company.
Skynet's goal is to provide and market Skynet 2000, a sophisticated vehicle
security system and integrated telecommunications product. The Skynet 2000
system operates using GSM or PCN digital cellular telephone networks. The Skynet
2000 is available in the United Kingdom using the Vodafone GSM digital cellular
network. In addition to the price of the Skynet 2000 system, separate annual
monitoring fees are charged.
The Skynet 2000 system uses advanced communications and security technology
coupled with proprietary software that seamlessly integrates into a single
product that provides protection, security, and information services using
mobile cellular telecommunications via the Skynet 2000 system. The Skynet 2000
system incorporates a GSM (a global system for mobile communica tions,
international standard for digital cellular telephone transmissions) cellular
car telephone, which provides normal cellular telephone capability, together
with a Short Message Service ("SMS"), a remote product status monitoring
facility, and GPS (global positions system). By interfacing its Vecta system,
which is a vehicle security system with crash and unauthorized entry sensors
linked to the vehicle's anti-theft control system, the Skynet 2000 system is
able to provide an in-vehicle remote monitoring/anti-theft tracking control
system. The Skynet 2000 system is further capable of providing an integrated
voice and SMS link between a customer's
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<PAGE>
vehicle and 24 hour a day monitoring for vehicle security, personal distress
alarm, and impact sensor and information services.
The Skynet 2000 system's unit, concealed in the customer's vehicle, is capable
of communicating automatically with the central security-monitoring bureau
independent of the car handset. In the event of an attempted theft which is
sufficient to trigger the alarm sensor, information concerning the location of
the vehicle and its owner is automatically transmitted to its bureau while
within the GSM cellular coverage. A trained operator using a computer based
vehicle mapping system with a database of relevant information will, if
necessary, pass details on to the police, or the appropri ate emergency services
for action. If the driver of the vehicle is in distress (illness, breakdown, or
fear of attack) he or she can communicate by the cellular telephone at the
central bureau, where an operator can take the appropriate action while still
maintaining voice contact with the driver or passengers.
The IPR pertains to, and includes, a product containing 4 components: (i) a GSM
cellular car telephone and remote monitoring/anti-theft control system; (ii) a
global positioning system allowing vehicle location within 30 feet using
satellites; (iii) the gateway from the remote unit to the central bureau
station; and (iv) the interface to the central bureau station. The system
provides 24 hour monitoring of vehicle security, personal distress alarm, and
impact alarm sensor and information service, as well as normal cellular
telephone capability.
The IPR also includes the copyright to the software, which is the gateway from
the GSM system employed to the mapping and tracking systems, and remote control
software enabling the central security-monitoring bureau to have complete and
full two-way communications with the telephone module. The IPR also includes
know-how relating to technical experience, skills, secret processes
-6-
<PAGE>
and technical information regarding the module and software and their
production, as well as enhancements appertaining to the IPR.
The Skynet 2000 system is marketed and sold to vehicle owners. The management of
Skynet Services believes that there is no competitor in the United Kingdom that
sells an integrated product incorporating voice link and SMS facilities using
GMS and PCN networks. There are, however, other vehicle security systems on the
market, and a number of major vehicle manufacturers are or are planning to offer
automobiles with some form of vehicle tracking and assistance service.
Management believes, however, that the Skynet 2000 system, with its integrated
features, currently differentiates the service to be provided from that of its
United Kingdom competitors.
Licenses for the Skynet 2000 system were sold by Skynet Services pursuant to
three license agreements for the territories of Ireland, Canada, and Hong Kong.
Skynet has succeeded Skynet Services as licensor in those agreements. The
license fees received (the first year fees) or to be received (the subsequent
year fees) from these transactions are: a) Ireland - (pound) 150,000 for the
first year with a minimum of (pound) 150,000 annually thereafter; b) Canada -
(pound) 25,000 plus possible royalties for the first year with a minimum of
(pound) 125,000 annually thereafter; and c) Hong Kong - (pound) 25,000 plus
possible royalties for the first year with a minimum of (pound) 125,000 annually
thereafter.
Management anticipates that, due to its limited funds and the limited amount of
its resources, the Company will be restricted to participation in only the
Netking business venture. This lack of diversification should be considered a
substantial risk because it will not permit the Company to offset potential
losses from one venture against gains from another.
-7-
<PAGE>
Netking and its subsidiaries had 18 full-time employees as of March 19, 1998.
Netking and Skynet consider its relationships with its employees to be
satisfactory.
The Company owns no properties and utilizes space in North America on a
rent-free basis in the office of Milton Klyman, a director of the Company and
the Company's secretary and treasurer. Neither Netking nor Skynet currently
leases any real property, although Skynet utilizes the space previously used by
Skynet Services in London on a rent-free basis. A lease is currently being
negotiated and it is anticipated that a formal lease will be entered into soon.
It is also anticipated that the office of the Company will be relocated.
Market of the Registrant's Common Equity and Related Stockholder Matters
A) As of the third quarter of 1997, the Company's common stock has been traded
in the over-the-counter market and is quoted in the NASDAQ electronic bulletin
board under the symbol PEPC. Prior to the third quarter of 1997, there were no
market quotes for the Company's common stock. The following table sets forth the
range of bid prices for the common stock of the Company as reported in the
NASDAQ electronic bulletin board system during the periods indicated, and
represents prices between broker-dealers, which do not include retail mark-ups
and mark-downs, or any commissions to the broker-dealers. The bid prices do not
reflect prices in actual transactions.
Company Common Stock - Bids
High Low
1997
3rd Quarter $.10 $.10
4th Quarter $1.00 $.10
1998
1st Quarter $2.5625 $.5625
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<PAGE>
B) As of April 9, 1998, there were approximately 380 record holders of the
Company's common stock. The Company had not previously declared or paid any
dividends on its common stock and does not anticipate declaring any dividends in
the foreseeable future.
Management Discussion and Analysis or Plan of Operation
The Company has no operational history and has just acquired Netking. Following
its examination of the market place, management feels that Netking is the only
telematix company with a well-developed product that is now being sold and
marketed. Management's principal objective is to have Netking sustain and
capitalize upon this advantage. The Skynet 2000 system is currently actively
selling, fitting, and monitoring the telematix product in the United Kingdom.
During the coming year management plans to expand Netking's telematix business
to other countries, including the United States and Canada. Management is also
optimistic about the coupling of the use of satellite global positing system
("GPS"), mobile telephone GMS technology and ("SMS") short messaging service and
monitoring, the industry known as "telematix." Management believes these
combined technologies have many potential applications. Currently Netking is
exploiting the automobile and personal security market, but management plans to
also exploit ancillary markets of potentially equal size, such as tracking and
monitoring the whereabouts of children, precious items, valuable cargo,
emergency alarms on mobile telephones, boats and ships and their cargo, tracking
of heavy duty plant and machinery, and even controlling the movement of
prisoners.
Netking is currently developing a 1900 mhz car security and personal protection
device for use in areas of the United States which are covered by GSM network.
The largest area is currently California, and management expects Netking to be
able to demonstrate a working prototype telematix product before December 1998,
although there is no assurance that the product will be
-9-
<PAGE>
ready by such date. Although telematix operates through a 24 hour a day
monitoring station, Netking also has a lap top monitoring device which allows
fleet owners to monitor and control their own vehicles, which is another segment
of the market that management also intends to develop in the United Kingdom,
Canada, and the United States.
During the next year management also intends to develop and expand sales and
marketing of telematix vehicle, personal security, and Medi-Care DataPlus
products in Ireland, Switzerland, Hong Kong, Italy, Spain and Germany. With the
exception of Canada, the United States, and the United Kingdom, management feels
that future expansion of corporate operations will be on a license basis,
wherein the territory is sold to a licensee in exchange for royalties.
Management anticipates that each country could produce significant long term
royalties.
Management also plans to move manufacturing from Denmark to the United Kingdom
in 1998, with separate manufacturing in the United States scheduled for early
1999. The implementation of its sales and marketing programs, and the relocation
and construction of new production manufacturing facilities, will require
substantial infusions of new capital into the business. While management
believes that capital can be generated by profitable operations to fund its
short term goals, the Company may also find it necessary to raise additional
capital to satisfy its long term cash requirements, including the building of
production manufacturing facilities. Management is optimistic that it will be
able to meet both its short and long term capital requirements, but interest
rates and terms of such loans have not yet been determined, nor is there any
assurance that such funds will be available, or that such funds would be
available on terms that are satisfactory to the Company.
-10-
<PAGE>
THE TELEMATICS INDUSTRY
The telematics industry, in which the company operates, is expected to
experience explosive growth. We have extracted two comments which capture this
trend. Newsbytes News Network offers the following:
"In this respect, Racal officials are citing a recent report from the
United States GPS (global positioning system) industry council, which
forecasts that, within three years, sales of in-car Telematics will be
worth around $US3 billion."
The president of Motorola, Inc. was attributed to the following statements:
"Motorola (NYSE:MOT) announced today the formation of Telematics
Information Systems (TIS), a new business organization responsible for
leveraging all of the company's leading technologies related to the
emerging telematics market - an industry predicted by many to
accumulate multi-billion dollar sales over the next two decades.
Telematics is a new way of using wireless voice and data to provide
drivers and their passengers with location-specific security,
information, convenience and entertainment services from a central
service center."
Suffice to say, telematics is a dynamic and fast growing industry.
-11-
<PAGE>
VALUATION OF THE INTELLECTUAL PROPERTY
Overview
Virtually all of the assets and business of Peripheral Communications is linked
to the Skynet technology. Therefore, the business enterprise and intellectual
property are virtually indisting uishable, from a valuation perspective. In
other words, the intangible assets are the business.
Our methodology will include estimates of worth using all three appraisal
approaches: cost, market, and income. The cost approach will consider funds
expended to develop the technology. Our market approach will look at both
guideline companies which are publicly traded as well as explore the trading
patterns of PEPC stock. An income analysis using modified discount cash flow
(DCF) methodology will follow.
Introduction
In this section of the report we will briefly outline the appraisal procedure
utilized in valuing the subject intellectual property, discuss the factors
considered, present our conclusions as to the appraisal procedures most
applicable under the existing circumstances, and summarize the result of the
applied procedures.
Appraisal Procedures
There are four rational ways to approach the value of the subject intangible
assets. The first is to consider the funds expended to date on the development
of the product. The second is to analyze common stock trading activities. The
third is to compare PEPC stock to the more frequently traded shares of guideline
companies. The fourth is to apply venture capital style valuation methods to the
projections provided by the company, or as adjusted by the appraiser.
Product Development Costs
-12-
<PAGE>
We have been informed that nearly 7.5 million English pounds had been expended
by the prior owners in the development of Skynet technology. That equates to
roughly $12.3 million US. Certain additional expenditures have been made under
the current management.
Sales of Peripheral Connections Common Stock
Addenda Exhibit V displays the common stock trading history for PEPC shares over
the last year. The recent trading price range has been fairly narrow and the
activity sporadic.
Of the 12.6 million common shares outstanding, only about 1 million are
floatable. At a typical trading price of around $3.00 per share and a capital
share base of 12.6 million, the market capitalization becomes about $38 million.
However, the thinly traded market activity prevents us from accepting "at face"
the suggested market capitalization. Instead, we have opted to apply the
Black-Scholes option pricing model. That application is the subject of the next
section of this report.
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<PAGE>
Black-Scholes Model
Implied Discount of a Market Hedge
Black-Scholes Option Pricing Model (BSOPM)
In this case we have attempted to estimate the cost of hedging the block of
stock over the period necessary to liquidate all shares without depressing the
market price. For this we have made a broad assumption that because of Rule 144
restrictions the block would require an average holding period of 8 years.
The appropriate discount can be inferred from BSOPM of buying put options with a
strike price equal to the market price and a term of 8 years. The price of the
put, relative to the market price, is the effective decrement to value created
by blockage, or the percentage of the market price represented by blockage.
Background on the BSOPM
In 1973, Fisher Black and Myron Scholes derived what is today the most widely
used and best known theoretical model for the valuation of marketable options.
The model is based on the assumption that it is possible to set up a perfectly
hedged position consisting of owning the shares of stock and selling a call
option on the stock. Any movement in the price of the underlying stock will be
offset by an opposite movement in the option's value, resulting in no risk to
the investor. This perfect hedge is riskless and, therefore, should yield the
riskless rate of return. If it does not yield the riskless rate, the option is
mispriced, the hedge is not perfect, and the option should be revalued until the
hedge yields the riskless rate. Black and Scholes inferred that when the option
is correctly priced, the perfect hedge results. The assumptions underlying the
Black-Scholes model are rather specific, nevertheless, it is important to be
aware of them. These assumptions are as follows:
o The short-term interest rate is known and is constant through time.
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<PAGE>
o The stock price follows a random walk in continuous time with a rate of
variance in proportion to the square of the stock price.
o The distribution of possible stock prices at the end of any finite
interval is lognormal.
o The variance of the rate of return on the stock is constant.
o The stock pays no dividends and makes no other distribution.
o The option can be exercised only at maturity.
o There are no commissions or other transaction costs in buying or
selling the stock or option.
o It is possible to borrow any fraction of the price of a security to buy
it, or to hold it, at the short-term interest rate.
o A seller who does not own a security (a short seller) will simply
accept the price of the security from the buyer and agree to settle
with the buyer on some future date by paying him an amount equal to the
price of the security on that date. While this short sale is
outstanding the short seller will have the use of, or interest on, the
proceeds of the sale.
o The tax rate, if any, is identical for all transactions and all market
participants.
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<PAGE>
The Black-Scholes model is expressed as follows:
Call value = SxN(d1) - Eeu x N(d2)
where:
S = Stock price
E = Exercise (strike) price
N( ) = Value of cumulative normal distribution at the point ( )
d1 = In (S/E) + ( r + 0.5[sigma]2)t
[sigma][root]t
d2 = d1 - [root]t
ln = Natural logarithm
r = Short-term riskless rate (continuously compounded)
t = Time to expiration, in years
e = Base of natural logarithms
[sigma] = Annual standard deviation of return (usually referred to
as volatility)
There are many assumptions and computations that need to be made to derive the
option value using the Black-Scholes formula. For example, the model was
developed to value European options. Dividends are ignored and when dividends
are paid, they are paid at one time and not continuously. Also, fluctuations in
the economy preclude rational acceptance of the assumption that investors can
borrow or lend at a constant riskless interest rate. Over the years, much
additional empirical research has been conducted, and adjustments have been made
to the Black- Scholes model in order to correct for the original model's
limitations.
The empirical research that has been done to improve upon the model is,
ultimately, supportive of the Black-Scholes model. Differences between market
prices and the Black-Scholes prices have usually been small when compared to
transaction costs.
The attached table illustrates the application of this particular set of
assumptions and uses the BSOPM to calculate the average price of a hypothetical
put. The cost of the put option is estimated at $1.96 per put option, subtracted
from the share price of $3.00, for a net $1.04 per share.
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<PAGE>
PERIPHERAL COMMUNICATIONS
BLACK-SCHOLES VALUATION MODEL - PUTS
IMPLIED LACK OF MARKETABILITY DISCOUNT
<TABLE>
<CAPTION>
Month Option Holder Ps Px Rf Volatility T(years)
----- ------------------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1 Hypothetical Hedge 3.000 3.000 5.3% 250% 8.00
d1 N(d1) d2 N(d2) Vc Vp
3.5953834 0.999838 -3.4756844 0.0002548 2.9990133 1.963856
</TABLE>
Share Price $3.00
Put Value $1.96
---------
Ps-Vp $1.04
Shares Outstanding 14.6 mil.
Adjusted Market Cap. $15,184,000
Rounded to $15,000,000
===========
Key
3.00 = Ps - Stock Price at valuation date, less PV of expected dividends
3.00 = Px - Exercise Price
5.3% = Rf - Risk free rate
250% = Volatility - estimated annualized standard deviation of the return
of the stock
See above = T - length of option
See above = VC - Value of Call Option
See above = d1 and d2 - deviation in stock price
See above = N(d1-2) - normal probability distribution of d1-2
2.71828 = e - (base of natural logarithms)
-17-
<PAGE>
Publicly Traded Comparative Analysis
Our search and screening has uncovered five companies who could be considered to
be reasonably comparable to PEPC. They are:
o LoJack (LOGN)
o International Elec. (IEIB)
o Napco Security Systems (NSSC)
o Percon (PRCN)
o Rainbow Tech. (RNBO)
Addenda Exhibit I provides a summary analysis and detailed financial
presentation of the companies. We have elected to use the 1999 forecast prepared
by PEPC for base financial numbers. These projections call for the following:
(000 omitted)
Revenues $30,366
Earnings $7,199
Cash Flow $8,041
Our analysis suggests that the appropriate conservative "price to" multiples
might be:
Revenues 250%
Earnings 15x
Cash Flow 12x
Applying the data we arrive at the following value indications:
Criteria Multiplier Indicated Value
Revenues - $30,366 2.5 $75,915
Earnings - $7,199 15 $107,985
Cash Flow - $8,041 12 $96,492
Even if we look at a performance level that's 20% of the forecast we can
anticipate an average value of about $19 million.
Discounted Future Benefits
Projections
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<PAGE>
As is the case with most development stage corporations, the first few years in
business the company displays very little with respect to revenues and large
levels of costs and expenses resulting in operating losses. This is particularly
true with respect to higher technology type enterprises. However, if the company
becomes successful the rewards are generally quite generous.
In order to currently value the subject technology we first must look at the
projections which have been prepared. Our analysis suggests they are quite
optimistic. As a matter of appraisal judgement we only considered a 3-year
forecast period. Addenda Exhibit III presents the projection and the development
of our cash flow model.
<TABLE>
<CAPTION>
2000
Year 1998 1999 (thereafter)
---------------- ---------------- ---------------- ---------------
Net Free Cash
<S> <C> <C> <C>
Flow (000) $(487) $6,887 $28,170
Discount Rate @ 48% .6757 .4565 .9508
Present Value $(329) $3,144 $26,784
Total Value $29,599
-------
Rounded to $30,000
-------
</TABLE>
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<PAGE>
Probability Analysis
We have just concluded that, should the near term projections come remotely
close to fruition, the subject's common stock would have an estimated minimum
value of $30 million. Realistically, this may or may not happen. However, some
investors are purchasing shares at a market cap. of above that figure. The First
Chicago Pricing Model suggests that a Peripheral Connections type venture can
take on any of three directions:
1. Successful: Profitable to the point of being a solid public company.
2. Sideways: Marginally profitable with limited growth - not a viable
public company but able to service debt over a period of
years
3. Failure: Bankruptcy or reorganization
The nature of PEPC is such that direction #2 does not seem possible. It really
looks like a hit or miss proposition. Our impression is that it may hit.
However, the company is in need of capital and it has already failed once. We
give PEPC a decent chance of becoming a category #1 company. We will
subjectively weight what we believe the year end 2000 probable company value to
be. This is presented as follows:
Scenario Probability Weighted Value
----------------- ----------------- --------------
No value 50% 0
$20,000,000 20% $4,000,000
$50,000,000 20% $10,000,000
Over $100,000,000 10% $10,000,000
-----------
Total $24,000,000
===========
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<PAGE>
SUMMARY AND CONCLUSION AS TO VALUE
In the foregoing section of this appraisal report we have utilized professional
valuation approaches designed to provide meaningful indications as to the
probable worth of the intellectual property in the subject business enterprise.
The value methods and their attendant estimates as to worth are summarized in
the following:
Summary of Value Indicators Per Share
Cost Approach $12.3 million
Market Approach - Market Cap. Method $38 million
- Black-Scholes Adjusted $15 million
- Guideline Companies $19 million
Forecasts
Discounted Future Benefits $30 million
Discounted Future Benefits - Probability Adjusted $24 million
Opinion of Value
Inasmuch as all three approaches to value and their underlying methodologies
have produced indications of worth substantially above the purchase price of the
subject intellectual property, we conclude that the fair market value of the
subject assets is not less than Six Million Six Hundred Thousand Dollars as of a
current date.
FAIR MARKET VALUE . . .Not less than $6.6 million
============
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<PAGE>
A D D E N D A
-22-
<PAGE>
EXHIBIT GROUP I
GUIDELINE COMPANIES
-23-
<PAGE>
GUIDELINE COMPANIES
SUMMARY ANALYSIS
<TABLE>
<CAPTION>
Company LoJack Int'l Elect. Napco Sec. Sys. Percon Rainbow Tech.
------ ------------ --------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Trading Symbol LOJN IEIB NSSC PRCN RNBO
Factor
Revenues (mil.) 76.2 9.4 50.9 29.2 99.0
Market Cap. (mil.) 252.2 2.52 23.5 28.6 116.4
Earnings Per Share (current) .61 .28 .28 .87 .75
Earnings Per Share (forecast) .91 N/A N/A 1.09 1.34
Trading Price 14.00 1.68 5.38 7.13 15.00
Multiples - Trading
Price To
Revenues (%) 331 27 46 98 118
Earnings (current) (x) 22.8 6.0 19.2 8.2 20.0
Earnings (forecast ) (x) 15.4 N/A N/A 6.5 11.2
Cash Flow (current) (x) 19.7 3.5 8.8 6.2 10.6
EBDIT Growth Rate (%) 18.4 209.0 17.4 57.4 7.8
</TABLE>
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<PAGE>
Capitalization Rates and Multiples
Guideline Company Analysis
<TABLE>
<CAPTION>
(All Amounts in $000s except per share) LoJack Corp. Int'l Elect. Napco Sec. Systm.
Mean Median Min. Max. LOJN IEIB NSSC
Latest Quarter End 5/31/98 5/31/98 3/31/98
Latest Fiscal Year End 2/28/98 8/31/97 6/30/97
- ------------------------------------------------------------------------------------------------------------------------------------
Latest 12 Months
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues 52,937 50,922 9,385 98,971 76,209 9,385 50,922
Gross Profit 25,113 14,646 4,239 51,446 43,110 4,239 12,124
Earnings Before Depreciation,
Interest and Taxes 10,371 6,519 824 21,572 21,572 824 4,418
Depreciation 1,957 1,440 295 5,185 1,755 295 1,440
Earnings Before Interest and Taxes 8,414 5,408 529 19,818 19,818 529 2,978
Interest 504 58 (578) 1,714 1,714 2 1,323
Pretax Earnings 7,910 5,350 527 18,104 18,104 527 1,655
Income Taxes 3,514 1,870 106 8,108 7,059 106 428
Net Income 4,396 3,480 421 11,045 11,045 421 1,227
Cash Flow 6,353 4,591 716 12,800 12,800 716 2,667
- ------------------------------------------------------------------------------------------------------------------------------------
Working Capital 22,135 15,486 1,174 49,229 15,486 1,174 33,367
Total Assets 43,150 37,165 3,356 98,902 37,165 3,356 58,383
Total Interest Bearing Debt 4,069 1,539 162 16,088 1,539 162 16,088
Long Term Debt 3,659 793 99 15,188 793 99 15,188
Book Value 31,153 23,805 1,672 84,078 23,805 1,672 31,952
- ------------------------------------------------------------------------------------------------------------------------------------
Tax Rate 35.6% 35.0% 20.1% 58.3% 39.0% 20.1% 25.9%
Debt Free Earnings 4,899 3,537 423 12,759 12,759 423 2,550
Debt Free Cash Flow 6,857 4,649 718 14,513 14,513 718 3,990
- ------------------------------------------------------------------------------------------------------------------------------------
7/21/98 8.64 7.13 1.69 15.00 14.00 1.69 5.38
Shares Out 7,133 4,379 1,493 18,018 18,018 1,493 4,379
Market Value of Common Stock 84,661 28,589 2,524 252,259 252,259 2,524 23,538
Total Invested Capital 88,729 39,626 2,686 253,798 253,798 2,686 39,626
- ------------------------------------------------------------------------------------------------------------------------------------
EPS (Simple) 0.56 0.61 0.28 0.87 0.61 0.28 0.28
First Call Forecast EPS - Current FYE 0.54 0.69 0.00 1.11 0.69
First Call Forescast EPS - Next FYE 0.67 0.91 0.00 1.34 0.91
- ------------------------------------------------------------------------------------------------------------------------------------
Liquidity Ratios:
Quick Ratio 2.35 2.10 0.98 3.90 2.10 0.98 1.37
Current Ratio 3.94 4.20 1.74 5.45 3.17 1.74 4.20
Working Capital Turnover 3.80 2.56 1.53 8.00 4.92 8.00 1.53
- ------------------------------------------------------------------------------------------------------------------------------------
Leverage Rations:
Total Liabilities to Net Worth 0.55 0.47 0.18 1.01 0.47 1.01 0.83
Total Interest Bearing Debt to
Net Worth 0.15 0.06 0.02 0.50 0.06 0.10 0.50
Total Interest Bearing Debt to
Market Capitalization 0.16 0.03 0.01 0.68 0.01 0.06 0.68
Interest Coverage 75.74 11.56 (23.07) 293.89 11.56 293.89 2.25
- ------------------------------------------------------------------------------------------------------------------------------------
Activity Rations:
Inventory Turnover 4.33 4.94 1.39 6.78 6.78 4.94 1.39
Asset Turnover 1.67 1.63 0.87 2.80 2.05 2.80 0.87
Accounts Receivable Turnover 6.65 5.52 4.16 9.45 9.44 9.45 4.16
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Rates:
Historical Three Year
Revenues 21.5% 19.1% 5.3% 49.2% 19.1% 19.5% 5.3%
EBDIT 62.0% 18.4% 7.8% 209.0% 18.4% 209.0% 17.4%
EBIT N/A N/A N/A N/A N/A N/A 25.0%
Total Assets N/A N/A N/A N/A N/A N/A 1.3%
Total Interest Bearing Debt N/A N/A N/A N/A N/A N/A -6.6%
</TABLE>
-25-
<PAGE>
Capitalization Rates and Multiples
Profitability Ratios
<TABLE>
<CAPTION>
LoJack Corp. Int'l Elect. Napco Sec. Systm.
Mean Median Min. Max. LOJN IEIB NSSC
Latest Quarter End 5/31/98 5/31/98 3/31/98
Latest Fiscal Year End 2/28/98 8/31/97 6/30/97
- ------------------------------------------------------------------------------------------------------------------------------------
Profitability Ratios:
Gross Profit Margin
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Latest12 Months 45.5% 50.2% 23.8% 56.6% 56.6% 45.2% 23.8%
Fiscal Year End 44.8% 51.1% 24.0% 56.0% 56.0% 40.7% 24.0%
Three Year Average 45.1% 50.8% 23.5% 55.1% 55.1% 41.7% 23.5%
Five Year Average 21.9% 24.0% 0.0% 53.0% 53.0% N/A 24.0%
EBDIT to Sales
Latest12 Months 17.4% 18.7% 8.7% 28.3% 28.3% 8.8% 8.7%
Fiscal Year End 17.1% 22.6% 4.4% 25.2% 25.2% 4.4% 9.5%
Three Year Average 16.3% 18.0% 3.5% 25.7% 25.7% 3.5% 8.7%
Five Year Average 10.3% 6.7% 0.0% 23.6% 21.0% N/A 6.7%
EBDT to Sales
Latest12 Months 16.5% 19.3% 6.1% 26.1% 26.1% 8.8% 6.1%
Fiscal Year End 16.7% 22.4% 4.3% 25.5% 24.3% 4.3% 6.9%
Three Year Average 15.6% 18.2% 3.3% 26.9% 23.7% 3.3% 6.0%
Five Year Average 9.8% 5.1% 0.0% 24.5% 19.5% N/A 5.1%
EBIT to Sales
Latest12 Months 13.9% 13.5% 5.6% 26.0% 26.0% 5.6% 5.8%
Fiscal Year End 13.6% 18.5% 1.3% 22.7% 22.7% 1.3% 6.8%
Three Year Average 12.8% 14.4% 0.2% 22.9% 22.9% 0.2% 5.9%
Five Year Average 8.5% 5.1% 0.0% 20.6% 16.8% N/A 5.1%
Net Income to Sales
Latest12 Months 7.8% 5.9% 2.4% 14.5% 14.5% 4.5% 2.4%
Fiscal Year End 8.2% 12.0% 0.8% 13.3% 13.3% 0.8% 3.1%
Three Year Average 7.9% 8.3% -0.3% 16.4% 16.4% -0.3% 2.1%
Five Year Average 5.6% 2.8% 0.0% 12.8% 12.5% N/A 2.8%
Cash Flow to Sales
Latest12 Months 11.3% 11.1% 5.2% 16.8% 16.8% 7.6% 5.2%
Fiscal Year End 11.7% 15.8% 3.9% 17.2% 15.8% 3.9% 5.8%
Three Year Average 11.4% 11.9% 3.1% 19.3% 19.3% 3.1% 4.9%
Five Year Average 7.4% 4.5% 0.0% 16.7% 16.7% N/A 4.5%
Net Income to Net Worth
Latest12 Months 21.3% 24.4% 3.8% 46.4% 46.4% 25.2% 3.8%
Fiscal Year End 19.1% 13.1% 5.2% 46.0% 46.0% 5.2% 5.3%
Three Year Average 13.2% 13.6% 0.0% 34.5% 34.5% N/A 3.5%
Five Year Average 8.7% 4.7% 0.0% 25.0% 25.0% N/A 4.7%
EBIT to Total Invested Capital
Latest12 Months 12.9% 11.3% 7.5% 19.7% 7.8% 19.7% 7.5%
Fiscal Year End 10.8% 9.9% 4.5% 18.0% 6.7% 4.5% 9.9%
Three Year Average 7.8% 7.9% 1.1% 14.2% 5.7% 1.1% 7.9%
Five Year Average 5.9% 6.2% 0.6% 12.1% 3.9% 0.6% 6.9%
EBIT to Book Value of Capital
Latest12 Months 32.9% 28.8% 6.2% 78.2% 78.2% 28.8% 6.2%
Fiscal Year End 29.8% 19.9% 8.1% 75.8% 75.8% 8.1% 8.2%
Three Year Average 20.8% 21.1% 0.0% 51.6% 51.6% N/A 6.7%
Five Year Average 12.4% 6.0% 0.0% 35.8% 35.8% N/A 6.0%
EBIT to Total Assets
Latest12 Months 23.6% 15.8% 5.1% 53.3% 53.3% 15.8% 5.1%
Fiscal Year End 21.9% 17.0% 3.9% 51.7% 51.7% 3.9% 6.4%
Three Year Average 16.2% 18.2% 0.0% 37.5% 37.5% N/A 5.2%
Five Year Average 9.8% 4.5% 0.0% 26.2% 26.2% N/A 4.5%
EBDIT to Total Assets
Latest12 Months 29.0% 24.5% 7.6% 58.0% 58.0% 24.5% 7.6%
Fiscal Year End 27.6% 21.8% 8.9% 57.5% 57.5% 13.3% 8.9%
Three Year Average 19.6% 22.8% 0.0% 41.9% 41.9% N/A 7.7%
Five Year Average 11.8% 6.0% 0.0% 32.0% 32.0% N/A 6.0%
Debt Free Cash Flow to Total Assets
Latest12 Months 20.7% 21.4% 6.8% 39.1% 39.1% 21.4% 6.8%
Fiscal Year End 19.7% 14.2% 7.8% 38.1% 38.1% 12.1% 7.8%
Three Year Average 14.0% 14.8% 0.0% 32.1% 32.1% N/A 6.7%
Five Year Average 8.9% 5.4% 0.0% 25.9% 25.9% N/A 5.4%
</TABLE>
-26-
<PAGE>
Capitalization Rates and Multiples
Capitalization Rates and Mulitples
<TABLE>
<CAPTION>
LoJack Corp. Int'l Elect. Napco Sec. Systm.
Mean Median Min. Max. LOJN IEIB NSSC
Latest Quarter End 5/31/98 5/31/98 3/31/98
Latest Fiscal Year End 2/28/98 8/31/97 6/30/97
- ------------------------------------------------------------------------------------------------------------------------------------
Capitalization Rates and Multiples:
Price/Earnings
<S> <C> <C> <C> <C> <C> <C> <C>
Latest 12 Months 15.26 19.18 5.99 22.84 22.84 5.99 19.18
Fiscal Year End 18.89 14.36 8.34 35.98 25.51 35.98 14.36
Three Year Average 1,399.13 22.31 11.03 6,920.51 25.19 6,920.51 22.31
Five Year Average 2,898.02 22.59 12.73 11,534.18 11,534.18 17.47
Price/Cash Flow
Latest 12 Months 9.78 8.83 3.53 19.71 19.71 3.53 8.83
Fiscal Year End 9.93 7.14 6.34 21.44 21.44 7.10 7.64
Three Year Average 11.94 9.56 7.84 21.43 21.43 9.47 9.56
Five Year Average 13.86 13.27 9.93 18.98 15.79 10.74
Price/EBIT
Latest 12 Months 7.88 7.90 4.77 12.73 12.73 4.77 7.90
Fiscal Year End 10.98 6.64 5.41 21.47 14.94 21.47 6.46
Three Year Average 20.76 9.49 6.91 61.97 17.49 61.97 7.93
Five Year Average 34.11 12.62 7.93 103.28 103.28 9.43
TIC/EBIT
Latest 12 Months 9.10 8.86 5.08 13.31 12.81 5.08 13.31
Fiscal Year End 12.21 10.87 5.56 22.85 15.03 22.85 10.87
Three Year Average 22.73 13.35 7.02 65.95 17.60 65.95 13.35
Five Year Average 37.53 16.07 8.05 109.92 109.92 15.88
TIC/EBDIT
Latest 12 Months 6.98 6.38 3.26 11.76 11.76 3.26 8.97
Fiscal Year End 7.57 6.66 4.62 13.52 13.52 6.66 7.79
Three Year Average 9.36 8.76 5.59 15.69 15.69 8.76 9.06
Five Year Average 11.55 12.37 6.85 14.59 14.59 11.86
TIC/Debt-Free Earnings
Latest 12 Months 14.54 15.54 6.35 22.60 19.89 6.35 15.54
Fiscal Year End 18.30 13.03 8.45 33.76 24.01 33.76 13.03
Three Year Average 50.24 17.23 12.55 182.39 22.62 182.39 16.39
Five Year Average 91.24 23.51 13.96 303.98 303.98 18.31
TIC/Debt-Free Cash Flow
Latest 12 Months 9.77 9.93 3.74 17.49 17.49 3.74 9.93
Fiscal Year End 10.22 8.07 6.45 20.38 20.38 7.36 8.85
Three Year Average 11.98 10.36 8.62 19.56 19.56 9.57 10.36
Five Year Average 14.86 14.56 10.70 19.62 15.95 13.17
Price/Net Book Value
Latest 12 Months 3.25 1.51 0.74 10.60 10.60 1.51 0.74
Fiscal Year End 3.57 1.87 0.75 11.73 11.73 1.87 0.75
Three Year Average 3.19 2.58 0.79 8.19 8.19 2.88 0.79
Five Year Average 2.91 3.02 0.82 4.80 4.80 0.82
TIC/Revenue
Latest 12 Months 1.32 1.01 0.29 3.33 3.33 0.29 0.78
Fiscal Year End 1.35 1.04 0.29 3.41 3.41 0.29 0.74
Three Year Average 1.60 1.40 0.33 4.04 4.04 0.33 0.79
Five Year Average 1.34 1.23 0.55 2.33 0.55 0.81
Price/First Call Projected Earnings
Current Year 8.31 7.74 0.00 20.29 20.29 N/A N/A
New Year 6.62 6.54 0.00 15.38 15.38 N/A N/A
Indicated Annual Dividend 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Indicated Annual Dividend Yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
</TABLE>
-27-
<PAGE>
Capitalization Rates and Multiples
Guideline Company Analysis
<TABLE>
<CAPTION>
(All Amounts in $000s except per share) Percon, Inc. Rainbow Tech.
PRCN RNBO
Latest Quarter End 3/31/98 3/31/98
Latest Fiscal Year End 12/31/97 12/31/97
- -------------------------------------------------------------------------------------------------------------------
Latest 12 Months
<S> <C> <C>
Revenues 29,201 98,971
Gross Profit 14,646 51,446
Earnings Before Depreciation, Interest and Taxes 6,519 18,521
Depreciation 1,112 5,185
Earnings Before Interest and Taxes 5,408 13,336
Interest 58 (578)
Pretax Earnings 5,350 13,914
Income Taxes 1,870 8,108
Net Income 3,480 5,806
Cash Flow 4,591 10,991
- -------------------------------------------------------------------------------------------------------------------
Working Capital 11,418 49,229
Total Assets 17,944 98,902
Total Interest Bearing Debt 796 1,757
Long Term Debt 708 1,506
Book Value 14,258 84,078
- -------------------------------------------------------------------------------------------------------------------
Tax Rate 35.0% 58.3%
Debt Free Earnings 3,537 5,228
Debt Free Cash Flow 4,649 10,413
- -------------------------------------------------------------------------------------------------------------------
7/21/98 7.13 15.00
Shares Out 4,012 7,760
Market Value of Common Stock 28,589 116,394
Total Invested Capital 29,385 118,151
- -------------------------------------------------------------------------------------------------------------------
EPS (Simple) 0.87 0.75
First Cal Forecast EPS - Current FYE 0.92 1.11
First Call Forecast EPS - Next FYE 1.09 1.34
- -------------------------------------------------------------------------------------------------------------------
Liquidity Ratios:
Quick Ratio 3.42 3.90
Current Ratio 5.45 5.15
Working Capital Turnover 2.56 2.01
- -------------------------------------------------------------------------------------------------------------------
Leverage Ratios:
Total Liabilities to Net Worth 0.26 0.18
Total Interest Bearing Debt to Net Worth 0.06 0.02
Total Interest Bearing Debt to Market Capitalization 0.03 0.02
Interest Coverage 94.05 (23.07)
- -------------------------------------------------------------------------------------------------------------------
Activity Ratios:
Inventory Turnover 3.29 5.26
Asset Turnover 1.63 1.00
Accounts Receivable Turnover 4.68 5.52
- -------------------------------------------------------------------------------------------------------------------
Growth Rates:
Historical Three Year
Revenues 49.2% 14.2%
EBDIT 57.4% 7.8%
EBIT 52.9% 5.6%
Total Assets 23.1% 11.9%
Total Interest Bearing Debt N/A -21.4%
</TABLE>
-28-
<PAGE>
Capitalization Rates and Multiples
Profitability Ratios
<TABLE>
<CAPTION>
Percon, Inc. Rainbow Tech.
PRCN RNBO
Latest Quarter End 3/31/98 3/31/98
Latest Fiscal Year End 12/31/97 12/31/97
- -------------------------------------------------------------------------------------------------------------------
Profitability Ratios:
Gross Profit Margin
<S> <C> <C>
Latest 12 Months 50.2% 52.0%
Fiscal Year End 51.1% 52.2%
Three Year Average 50.8% 54.6%
Five Year Average N/A 32.8%
EBDIT to Sales
Latest 12 Months 22.3% 18.7%
Fiscal Year End 22.6% 23.8%
Three Year Average 18.0% 25.6%
Five Year Average N/A 23.6%
EBDT to Sales
Latest 12 Months 22.1% 19.3%
Fiscal Year End 22.4% 25.5%
Three Year Average 18.2% 26.9%
Five Year Average N/A 24.5%
EBIT to Sales
Latest 12 Months 18.5% 13.5%
Fiscal Year End 18.8% 18.5%
Three Year Average 14.4% 20.4%
Five Year Average N/A 20.6%
Net Income to Sales
Latest 12 Months 11.9% 5.9%
Fiscal Year End 12.2% 12.0%
Three Year Average 8.3% 12.8%
Five Year Average N/A 12.8%
Cash Flow to Sales
Latest 12 Months 15.7% 11.1%
Fiscal Year End 16.0% 17.2%
Three Year Average 11.9% 18.0%
Five Year Average N/A 15.9%
Net Income to Net Worth
Latest 12 Months 24.4% 6.9%
Fiscal Year End 25.7% 13.1%
Three Year Average 14.4% 13.6%
Five Year Average N/A 13.7%
EBIT to Total Invested Capital
Latest 12 Months 18.4% 11.3%
Fiscal Year End 18.0% 14.9%
Three Year Average 10.3% 14.2%
Five Year Average 6.2% 12.1%
EBIT to Book Value of Capital
Latest 12 Months 35.9% 15.5%
Fiscal Year End 37.3% 19.9%
Three Year Average 24.6% 21.1%
Five Year Average N/A 20.1%
EBIT to Total Assets
Latest 12 Months 30.1% 13.5%
Fiscal Year End 30.5% 17.0%
Three Year Average 20.2% 18.2%
Five Year Average N/A 18.3%
EBDIT to Total Assets
Latest 12 Months 36.3% 18.7%
Fiscal Year End 36.7% 21.8%
Three Year Average 25.4% 22.8%
Five Year Average N/A 21.1%
Debt Free Cash Flow to Total Assets
Latest 12 Months 25.9% 10.5%
Fiscal Year End 26.2% 14.2%
Three Year Average 16.5% 14.8%
Five Year Average N/A 13.4%
</TABLE>
-29-
<PAGE>
Capitalization Rates and Multiples
Capitalization Rates and Multiples
<TABLE>
<CAPTION>
Percon, Inc. Rainbow Tech.
PRCN RNBO
Latest Quarter End 3/31/98 3/31/98
Latest Fiscal Year End 12/31/97 12/31/97
- -------------------------------------------------------------------------------------------------------------------
Capitalization Rates and Multiples:
Price/Earnings
<S> <C> <C>
Latest 12 Months 8.22 20.05
Fiscal Year End 8.34 10.27
Three Year Average 16.63 11.03
Five Year Average 27.71 12.73
Price/Cash Flow
Latest 12 Months 6.23 10.59
Fiscal Year End 6.34 7.14
Three Year Average 11.39 7.84
Five Year Average 18.98 9.93
Price/EBIT
Latest 12 Months 5.29 8.73
Fiscal Year End 5.41 6.64
Three Year Average 9.49 6.91
Five Year Average 15.82 7.93
TIC/EBIT
Latest 12 Months 5.43 8.86
Fiscal Year End 5.56 6.74
Three Year Average 9.76 7.02
Five Year Average 16.26 8.05
TIC/EBDIT
Latest 12 Months 4.51 6.38
Fiscal Year End 4.62 5.25
Three Year Average 7.73 5.59
Five Year Average 12.88 6.85
TIC/Debt-Free Earnings
Latest 12 Months 8.31 22.60
Fiscal Year End 8.45 12.23
Three Year Average 17.23 12.55
Five Year Average 28.71 13.96
TIC/Debt-Free Cash Flow
Latest 12 Months 6.32 11.35
Fiscal Year End 6.45 8.07
Three Year Average 11.77 8.62
Five Year Average 19.62 10.70
Price/Net Book Value
Latest 12 Months 2.01 1.38
Fiscal Year End 2.15 1.35
Three Year Average 2.58 1.49
Five Year Average 4.30 1.73
TIC/Revenue
Latest 12 Months 1.01 1.19
Fiscal Year End 1.04 1.25
Three Year Average 1.40 1.42
Five Year Average 2.33 1.64
Price/First Call Projected Earnings
Current Year 7.74 13.51
Next Year 6.54 11.19
Indicated Annual Dividend 0.00 0.00
Indicated Annual Dividend Yield 0.0% 0.0%
</TABLE>
-30-
<PAGE>
EXHIBIT GROUP II
PROJECTED FINANCIAL STATEMENTS
-31-
<PAGE>
Case: Status Quo Pound 1.64770 NETKING Group
Projected Income Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
Projected
1998 1999 2000 2001 2002
Revenue
<S> <C> <C> <C> <C> <C>
Net Sales 3,277 30,366 100,583 206,697 417,670
COGS (Excluding Dep. & Amort.) 1,992 14,764 48,807 97,410 194,820
---------------------------------------------------------------------------
Gross Profit 1,285 15,602 51,776 109,287 222,850
SG&A Expense 1,456 4,327 10,342 18,927 33,505
EBDIAT (171) 11,275 41,433 90,360 189,345
Depreciation & Amortization 609 842 881 939 1,020
---------------------------------------------------------------------------
Operating Profit (780) 10,433 40,552 89,421 188,325
Interest Expense:
Revolver 0 0 0 0 0
Old Term 0 0 0 0 0
Other Debt 0 0 0 0 0
New Term 0 0 0 0 0
---------------------------------------------------------------------------
Total Interest 0 0 0 0 0
Interest Income 0 0 191 1,201 3,291
Other Income (Expense) 0 0 0 0 0
---------------------------------------------------------------------------
Pre-Tax Income (780) 10,433 40,743 90,622 191,616
---------------------------------------------------------------------------
Taxes
Current 0 3,293 12,718 28,210 59,548
Deferred (13) (58) (87) (117) (147)
----------------------------------------------------------------------------
Net Income (767) 7,199 28,113 62,529 132,215
===========================================================================
</TABLE>
-32-
<PAGE>
Case: Status Quo Pound 1.64770 NETKING Group
Projected Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
Projected
------------------------------------------------------------------------------------------
ASSETS Open 1998 1999 2000 2001 2002
- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash & Equivalents 25 824 7,184 40,871 110,522 257,083
Trade Receivables 15 589 2,354 5,886 11,771 24,030
Inventories: 273 601 3,007 6,014 12,176 21,647
Prepaid Expenses 25 25 231 764 1,571 3,174
------------------------------------------------------------------------------------------
Total Current Assets 338 2,039 12,776 53,535 136,041 305,934
Property, Plant & Equipment 5,631 5,960 7,114 7,938 8,761 9,585
Accumulated Depreciation 0 609 1,451 2,332 3,270 4,290
------------------------------------------------------------------------------------------
Net PP&E 5,631 5,351 5,663 5,606 5,491 5,295
Patents 967 967 967 967 967 967
Other Assets (Including Fees) 0 0 0 0 0 0
------------------------------------------------------------------------------------------
Total Assets 6,936 8,357 19,407 60,108 142,499 312,196
==========================================================================================
LIABILITIES & NET WORTH Open 1998 1999 2000 2001 2002
- ------------------------------------
Notes Payable to Banks (178) 395 0 0 0 0
Accounts Payable 0 273 2,023 7,889 18,148 36,295
Accrued Expenses 66 199 1,476 4,881 9,741 19,482
Fed. & State Taxes Payable 59 0 0 0 0 0
Other Current Liabilities 0 199 1,476 4,881 9,741 19,482
------------------------------------------------------------------------------------------
Total Current Liabilities (51) 1,066 4,975 17,651 37,630 75,259
Long-Term Debt:
New Term 0 0 0 0 0 0
------------------------------------------------------------------------------------------
Total L.T.D. 0 0 0 0 0 0
Deferred Taxes 0 (13) (72) (159) (276) (423)
Net Worth:
Common Stock 0 0 0 0 0 0
Paid In Capital 7,126 8,210 8,210 8,210 8,210 8,210
Retained Earnings (139) (906) 6,293 34,406 96,935 229,150
Treasury Stock 0 0 0 0 0 0
------------------------------------------------------------------------------------------
Total Net Worth 6,987 7,304 14,503 42,616 105,145 237,360
------------------------------------------------------------------------------------------
Total L & N.W. 6,936 8,357 19,407 60,108 142,499 312,196
==========================================================================================
Bal. Sheet Proof (0) (0) (0) (0) (0) 0
==========================================================================================
</TABLE>
-33-
<PAGE>
Case: Status Quo Pound 1.64770 NETKING Group
Projected Cash Flow Statements
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
Projected
----------------------------------------------------------------------------
1998 1999 2000 2001 2002
<S> <C> <C> <C> <C> <C>
Net Sales 3,277 30,366 100,583 206,697 417,670
(Inc.) Dec. In Receivables (574) (1,766) (3,531) (5,886) (12,259)
----------------------------------------------------------------------------
Cash From Sales 2,703 28,601 97,051 200,811 405,411
COGS (Excluding Dep. & Amort.) (1,992) (14,764) (48,807) (97,410) (194,820)
Selling, General & Admin. Expenses (1,456) (4,327) (10,342) (18,927) (33,505)
(Inc.) Dec. Inventory (328) (2,406) (3,007) (6,162) (9,470)
(Inc.) Dec. Prepaids 0 (206) (534) (806) (1,603)
Inc. (Dec.) In Accounts Payable 273 1,750 5,867 10,258 18,148
Inc. (Dec.) In Accrued Expenses 133 1,277 3,404 4,860 9,741
Inc. (Dec.) In Other Current Liab. 198 1,277 3,404 4,860 9,741
---------------------------------------------------------------------------
Disbursed From Operations (3,173) (17,399) (50,014) (103,327) (201,769)
----------------------------------------------------------------------------
Operating Cash Pre-Tax (470) 11,202 47,037 97,484 203,641
Taxes Paid (59) (3,293) (12,718) (28,210) (59,548)
----------------------------------------------------------------------------
Net Cash From Operations (529) 7,909 34,319 69,274 144,094
Other L-T Assets & Liabilities 0 0 0 0 0
Other Income (Expenses) 0 0 191 1,201 3,291
---------------------------------------------------------------------------
(529) 7,909 34,510 70,476 147,385
Fixed Assets (Inc.) Dec.:
Additions to PP&E (330) (1,153) (824) (824) (824)
Sale of Equip. Net 0 0 0 0 0
---------------------------------------------------------------------------
Operating Free Cash Flow (859) 6,756 33,686 69,652 146,561
Financing Transactions:
Dividends Paid and Equity Accounts 1,084 0 0 0 0
Interest Paid 0 0 0 0 0
Retire Old Term 0 0 0 0 0
Retire Other Debt 0 0 0 0 0
Retire New Term 0 0 0 0 0
---------------------------------------------------------------------------
Free Cash Flow 225 6,756 33,686 69,652 146,561
Bank Debt Inc. (Dec.) 573 (395) 0 0 0
---------------------------------------------------------------------------
798 6,361 33,686 69,652 146,561
Cash End of Year 25 824 7,184 40,871 110,522 257,083
=========================================================================================
Cash Flow Proof Min Cash 824 1,648 8,239 16,477 82,385
</TABLE>
-34-
<PAGE>
EXHIBIT III
COST OF CAPITAL &
DISCOUNTED NET FREE CASH FLOW ANALYSIS
-35-
<PAGE>
Case: Status Quo Pound 1.64770 NETKING Group
Discounted Net Free Cash Flow Analysis
(Dollars in thousands)
<TABLE>
<CAPTION>
Discounted Net Free Cash Flow Analysis Projected
---------------------------------------------------------------------------
Company Operating Results: 1998 1999 2000 2001 2002
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income $ (767) $ 7,199 $ 28,113 $ 62,529 $ 132,215
Add back Interest Expense 0 0 0 0 0
---------------------------------------------------------------------------
Adjusted Net Income* (767) 7,199 28,113 62,529 132,215
Investing:
Depreciation 609 842 881 939 1,020
Capital Expenditures (330) (1,153) (824) (824) (824)
----------------------------------------------------------------------------
Net Free Cash Flow (NFCF) $ (487) $ 6,887 $ 28,170 $ 62,644 $ 132,411
</TABLE>
* Note - We have excluded cash flows changes in working capital because of
the uncertainty associated with the balance sheet projections.
DCF Pricing:
Discount Rate Assumptions: 48.0% WACC Include Years of Projections 4
<TABLE>
<CAPTION>
Projected
---------------------------------------------------------------------------
1998 - 2002 Forecast Horizon 1998 1999 2000 2001 2002
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discounted Enterprise Free Cash Flow (@48.0%) $ (487) $ 6,887 $ 28,170 $ 62,644 $ 0
Cumulative Discount Enterprise Free CF $ (487) $ 6,400 $ 34,570 $ 97,214 $ 0
2002 Terminal Value: DCF Summary Pricing
2002 Terminal Terminal
NFCF Cap Rate Value '98-'01 Disc. Terminal Enterprise Less Equity
----------- ------------- -------------
132,411 / 48% = $ 275,856 Value: + Value = Value - Debt = Value
-------------------------------------------------------------------------------
97,214 + 275,856 = 373,070 - 0 = 373,070
</TABLE>
-36-
<PAGE>
Case: Status Quo Pound 1.00000 NETKING Group
Theoretical Cost of Capital
(Dollars in thousands)
<TABLE>
<CAPTION>
Assumptions
Most Likely
Cost of Equity: Case
<S> <C>
Capital Asset Pricing Model (CAPM): k(e)=R(f)+B*[(R(m)-R(f)] Risk Free R(f) 5.04%
k(e)= Cost of Equity R(m)-R(f) 9.20%
R(f)= Risk Free Rate Pre-Tax Cost of Debt 10.00%
[(R(m)-R(f)]= Expected Return of Market in Excess of R(f) Marginal Tax Rate 31.00%
B=Beta= Level of Systematic Risk Associated with the Company's Target Debt/Equity Ratio 0.00%
Current Beta (a) 3.00
Levering/Unlevering Beta:
Cost of Equity k(e)
B(l)=Levered Beta B(l)=B(u)*(1+D/E) Most Likely
Case
B(u)=Unlevered Beta B(u)-B(l)*(1+D/E)
Cost of Equity k(e) 32.64%
Weighted Average Cost of Capital: Small Company Risk Premium 5.36%
- ---------------------------------
WACC= [D/TC*[k(d)*(1-t)]=[E/TC*(k(e)] Specific Company Risk Premium 10.00%
k(e)= Cost of Equity Total Cost of Equity k(e) 48.00%
k(d)= Pre-Tax Cost of Debt
D/TC= Debt/(Debt+Equity) WACC
Most Likely
E/TC= Equity/(Debt+Equity) Case
t= Marginal Tax Rate Cost of Equity k(e) 48.00%
After Tax Debt Cost 6.90%
(A) Estimated Beta Equity /(Debt+Equity) 100.0%
Debt/(Debt+Equity)(b) 0.0%
WACC 48.00%
</TABLE>
-37-
<PAGE>
EXHIBIT IV
ORGANIZATION CHART
-38-
<PAGE>
<TABLE>
<CAPTION>
Skynet 2001 Limited
<S> <C> <C> <C> <C> <C> <C>
Tomas G. Wilmot
Managing Director
Gayleen Burkhardt
Personal Assistant
Chris Wilmot Mark Dingley David Grimshaw Graham Hickmott Guy Tingay
Marketing Direc Finance Director National Sales Di IT Manager Operations Director
tor rector
Accounts John Casey Sue Bush Customer Service Skynet Moni
Rita Flanagan Regional Sales Sales Coordinator David Bell toring
Coordinator
</TABLE>
-39-
<PAGE>
EXHIBIT V
PERIPHERAL CONNECTIONS, INC.
STOCK TRADING CHART
-40-
<PAGE>
PERIPHERAL CONNECTIONS, INC.
NASDAQ: PEPC
Open: $3 3/8 High: $3 3/8 Low: $2 7/8
Close: $2 7/8 Change: $-1/2 (down)
Yield: N/A P/E Ratio: N/A 52 wk Range: $9/16 to $3.375
-41-
<PAGE>
EXHIBIT VI
CERTIFICATION
-42-
<PAGE>
CERTIFICATION
I certify that, to the best of my knowledge and belief:
- - The statements of fact contained in this report are true and correct.
- - The reported analyses, opinions, and conclusions are limited only by
the reported assumptions and limiting conditions, and are my personal,
unbiased professional analyses, opinions and conclusions.
- - I have no present or prospective interest in the property that is the
subject of this report, and I have no personal interest or bias
with respect to the parties involved.
- - My compensation is not contingent on an action or event resulting from
the analyses, opinions, or conclusions in, or the use of,
this report.
- - My analyses, opinions and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice.
- - D. Grey Merriman provided significant professional assistance to the
person signing this report.
Allan L. R. Lannom, FASA
-43-
<PAGE>
EXHIBIT VII
APPRAISER QUALIFICATIONS
-44-
<PAGE>
ALLAN L. R. LANNOM
Chicago Office
Academic Degrees M.S., Business Education, Northern Illinois
University
B.S., Marketing, Northern Illinois University
Employment Houlihan Valuation Advisors, Inc.
Principal - 1992 to present.
BDO Seidman
National Technical Director for Business
Valuations - 1988 - 1992
Business Valuation Services, Inc.
President - 1976 - 1988
Herbert C. Hansen, Inc.
Manager of Analysis and Appraisal
1972 - 1976
Marshall & Stevens, Inc.
Assistant to the Senior V.P. - 1969 - 1972
Experience Mr. Lannom has been actively involved in the appraisal profession
since 1969. He has prepared, supervised, or consulted upon appraisal
assignments covering most facets of valuation relative to business
enterprise and intangible property. Appraisals conducted by Mr. Lannom have
been utilized for the purpose of sale/purchase, financing, income tax, ad
valorem tax, estate and inheritance tax, allocation of purchase price,
corporate planning, community property settlement, estate planning,
partnership and corporation recapitalizations, trust creation and
development, and the implementation and continuing reassessment of employee
stock ownership plans.
-45-
<PAGE>
ALLAN L. R. LANNOM
Chicago Office
(Page 2)
Experience
(Continued) His experience includes many sophisticated
engagements involving shareholder disputes,
bankruptcy and solvency.
Expert Testimony Mr. Lannom has rendered expert testimony on over 75
matters in the following jurisdictions:
U.S. Bankruptcy Courts - Various
U.S. District Court - Los Angeles, CA
County Courts - California
- Texas
- Illinois
- Michigan
In addition, Mr. Lannom has on several occasions
provided testimony before members of the American
Arbitration Association and has been the recipient of
many court appointments.
Professional
Affiliations American Society of Appraisers - Fellow designation *FASA
(Business Valuations) (Re-certified through 2002)
Incorporated Society of Valuers & Auctioneers Fellow
(London, England) Designation - FSVA
Institute of Business Appraisers - member
ESOP Association - member - Valuation Advisory Committee
-46-
<PAGE>
ALLAN L. R. LANNOM
Chicago Office
(Page 3)
Other Served as one of a 5 member task force developing
business valuation standards for the Appraisal
Standards Board of the Appraisal Foundation.
Presently serves on the Foundation's Issues Resource
Panel.
*Mr. Lannom served as International President of ASA
during the 1989-1990 year. In 1991 he was elected
into the College of Fellows.
Publications Contributing author - Handbook of Business Valuation
Speaking
Engagements Mr. Lannom speaks to professional and educational
organizations on a regular basis. His presentations
cover a wide variety of appraisal topics.
-47-
