10-K 1 f.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________ FORM 10-KSB Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended Commission File Number April 30, 2002 0-18980 ____________________ PROCESS EQUIPMENT, INC. (formerly PEI, Inc.) (Exact name of registrant as specified in its charter) Nevada 62-1407522 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 26569 Corporate Ave. Hayward, California 94545 (Address of principal executive offices) Registrant's telephone number, including area code: (510) 782-5122 ____________________ Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.001 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The estimated aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of June 30, 2002: $465,000. This estimated market value is based on the average quoted bid and ask prices of such stock on June 30, 2002. The registrant's Common Stock has been sporadically quoted in the over-the-counter market. The quotes reflect inter- dealer trading and are not necessarily representative of actual transactions or of the value of Common stock. The number of shares of the registrant's Common Stock outstanding as of June 30, 2002 is 3,644,800. Documents incorporated by reference: See page #26 PART I ITEM 1. BUSINESS THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. THESE INCLUDE STATEMENTS CONCERNING PLANS, OBJECTIVES, GOALS, STRATEGIES, FUTURE EVENTS OR PERFORMANCE AND ALL OTHER STATEMENTS WHICH ARE OTHER THAN STATEMENTS OF HISTORICAL FACT, INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING WORDS SUCH AS "BELIEVES, "ANTICIPATES," "EXPECTS," "ESTIMATES," "PROJECTS," "WILL," "MAY," "MIGHT" AND WORDS OF A SIMILAR NATURE. THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT REFLECT MANAGEMENT'S CURRENT BELIEFS AND EXPECTATIONS ON THE DATE OF THIS REPORT. ACTUAL RESULTS, PERFORMANCE OR OUTCOMES MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS. History Process Equipment, Inc. (the "Company") was incorporated as Sharon Capital Corporation ("Sharon") on September 21, 1989 under the laws of the State of Nevada. Sharon was a "blind pool/blank check" corporation organized for the purpose of purchasing, merging with or acquiring a business or assets from another company. On March 1, 1990, Sharon completed a public offering of 36,000 Units, the net proceeds from which were approximately $148,760. (See Item 5). In July, 1990, Sharon was changed to PEI, Inc. In November, 1990, PEI was changed to Process Equipment, Inc. On April 18, 1990, Sharon acquired all of the outstanding shares of Common Stock of Process Engineers, Inc., a California corporation ("Process Engineers"), in exchange for the issuance of 2,144,000 shares of Sharon's Common Stock. As part of the acquisition, Sharon's officers and directors resigned and were replaced by the officers and directors of Process Engineers. For present purposes, the business of the Company is the business of Process Engineers Inc., its wholly owned subsidiary. Process Engineers' business was founded in 1957 in Oakland, California. Initially, the principal business was as manufacturer's representative for various tanks, valves, fittings and equipment sold to the dairy industry. In 1966, Process Engineers was incorporated to carry on the business. In 1970, new owners added engineering and manufacturing capabilities to Process Engineers that were targeted on the dairy industry. In 1973, Process Engineers relocated to larger quarters in Hayward, California to commence the manufacture of specialty stainless steel products and systems for the food, wine and dairy industries. It also became a distributor for products of ITT Grinnell, Waukesha, Demoisy, Europress, Pera and Stone. The addition of these lines allowed Process Engineers to engineer systems and distribute components for a wide range of needs in the food and wine industries. In subsequent years, it designed and supplied processing systems to Del Monte and Dole for pineapple processing plants, designed and built an egg custard plant and a turn-key cheese manufacturing facility for the California Dairyman's Co-op. In September 1989, Dr. Robert Lundak, George Cortessis and H. Douglas Power purchased 94.8% of the shares of Process Engineers. Mr. Power had been an officer of the corporation since 1981. Dr. Lundak and Mr. Cortessis had substantial previous experience in other companies with bio-technology products and services. (See Item 10). Mr. Power resigned from the office of President of the Company during July, 1991 and is no longer employed by the Company. On January 1, 1993 he resigned as director of the Company. During the year ended April 30, 1993, 432,000 Class A and 432,000 Class B Common Stock Purchase Warrants and 3,600 Underwriter's Warrants were exercised. The Company received net proceeds of $1,069,074. On September 23, 1994, Dr. Robert Lundak resigned as CEO and Chairman of the Board of Directors and is no longer employed by the Company. Business The Company designs and manufactures sanitary stainless steel systems used for manufacturing processes in the wine, food and bio-technology industries. The Company also serves as a distributor for pumps, valves and other components used in such systems and for winery equipment imported from Europe. In addition, it provides repair and other services related to such equipment and systems. A majority of the Company's revenues have historically come from its business of providing products and services for the wine and food industries, with wineries accounting for most of those revenues. However, the Company in recent years has developed and marketed bio-technology products and services which utilize components and technologies similar to those used in the Company' wine and food business. Currently, approximately 15% of the Company's revenues are from sales of products and services for the biotechnology industry. The wine business is seasonal and the Company's wine-related activities and sales are largely confined to the time periods immediately prior to and during the August-October "crush" season. Sales of winery equipment tend to be concentrated in the months preceding August and servicing of the equipment tends to concentrate during the crush season. Consequently, the Company's winery business is largely dormant during significant portions of the spring and winter months. Manufacturing Components for systems sold by the Company are acquired from various third party suppliers and then modified and combined into systems by the Company's production personnel at the Company's plant in Hayward, California. The Company's employees are particularly skilled in precise welding, machining and other fabrication of stainless steel. The systems are also tested and installed by the Company's personnel. The products distributed by the Company carry various warranties, generally for a one-year period, provided by their manufacturers. At June 30, 2001, the Company had four employees engaged in design, production, testing and field service activities. Marketing At June 30, 2002, the Company's sales force consisted of two employees. The Company has focused its marketing efforts on the wine and bio-technology industries within California. Emphasis has been placed on the Company's knowledge of wine processes and systems engineering, its fabrication capability and its commitment to service. Wineries are typically capital intensive requiring specialized machinery such as destemmers, membrane presses, filter systems, crushers, tanks, pumps, bottling equipment and piping. The wine industry is divided into "premium" and "jug" table wines. The Company has focused its marketing efforts on the premium wine segment. The Company presently has approximately 450 winery customers. The Company has marketed its bio-technology products to smaller bio-tech companies that do not have sufficient in-house expertise to design or fabricate their own equipment or systems. The Company has focused marketing efforts on equipment for fermentation, separation and purification. Marketing is carried out by the Company's sales force and has been concentrated in California, although the Company has executed major bio-tech projects in Washington, Massachusetts and Virginia as well. Competition Numerous companies compete to furnish equipment to the California wineries. Many distributors and manufacturer's representatives are authorized to sell products which compete with those of the Company, additionally many engineering firms can competently design similar products to those designed and built by the Company. The bio-technology equipment and parts industry consists of diverse group of suppliers such as ABEC Inc., New Brunswick Scientific, Millipore Corp, B. Braun Biotech and ITT Sherotec Inc.. Management believes that no single company, or small group of companies, now dominates the market for bio-technology equipment. The market is highly fractured, with numerous small companies that market one or a small number of types of systems. The larger bio-technology companies have the capacity to fabricate their own equipment and parts in-house and smaller companies frequently use engineering firms to custom design and specify components which are then assembled by the companies themselves or by contract fabricators. A small number of fabrication companies exist that will custom build bio-technology systems from the designs or packages furnished by customers. Typically, the fabrication companies provide limited warranties and no ongoing repair, servicing or support. The Company believes that important competitive factors in the markets for winery and bio-technology components and systems marketed by the Company include pricing, product effectiveness and reliability, servicing capabilities and general marketing abilities. Management believes a particular competitive strength of the Company is its capacity to provide complete turn-key systems to its customers. Government Regulation The Company is subject to various state and federal laws, regulations and guidelines relating to safe working conditions and manufacturing practices. While the Company's bio-technology customers are generally subject to extensive regulation by the U.S. Food and Drug Administration, which may affect their specifications for products supplied by the Company, the Company's products and operations are not directly subject to such regulation. Patents and Trade Secrets The Company presently has no patents on its products and does not believe that having patents or other proprietary technology is important to the success of its planned operations. Employees At June 30, 2002, the Company had eight full-time employees. ITEM 2. PROPERTIES Process Engineers leases a 15,600 square foot Building in Hayward, California which contains 3,600 square feet of administrative, engineering and sales space and 12,000 square feet of inventory and manufacturing space. The manufacturing space has been designed to accommodate the special needs of the Company's inert gas welding and large system assembly. Rent payments of $5,507 per month plus common area maintenance charges are owed under the terms of a lease from September 1998 to August 2003, the end of the lease term. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Common Stock The Company's Articles of Incorporation authorize the issuance of 25,000,000 shares of Common Stock, $.001 par value per share. At June 30, 2002, 3,644,600 shares were outstanding. Shares of Common Stock (i) have equal rights to dividends from funds legally available therefor, when, as and if declared by the Company's Board of Directors, (ii) are entitled to share ratably in any remaining assets of the Company available for distribution to shareholders upon the Company's liquidation and (iii) do not have preemptive, subscription or conversion rights. All shares of Common Stock now outstanding are fully paid for and non-assessable. All holders of Common Stock have one vote per share on all matters submitted to a vote of stockholders. Stockholders do not have rights to cumulate their votes in the election of directors under the Company's Articles of Incorporation or applicable provisions of the Nevada General Corporation Law. However, under Section 2115 of the California Corporations Code, specific provisions of the California General Corporation Law, including mandatory cumulative voting rights of shareholders, are made applicable to "pseudo-California" corporations incorporated under laws of other states which meet certain tests. The tests are that the average of specified property, payroll and sales factors (generally relating to the extent of activities in California) exceed 50% on a consolidated basis during the corporation's latest full income year, and that more than one-half of the corporation's outstanding voting securities are held of record by persons having addresses in California. Market for Securities The Company's shares are quoted sporadically in the over-the- counter market with relatively small volumes of actual trading. Market makers and other dealers provide bid and ask quotations for the Company's securities, and list such quotations in the National Daily Quotation Sheets, commonly referred to as the inter-dealer "pink sheets." From completion of the Company's initial public offering on March 1, 1990, the Company's securities were quoted sporadically in the Over-The-Counter (OTC) market, with relatively small volumes of actual trading. Since September 1990, the Company's Common Stock has also been sporadically quoted on the NASD Electronic Bulletin Board under the symbol "PEQM". These quotes were reported in the inter-dealer "pink sheets," and reflect inter-dealer prices without retail mark-up, mark- down or commission; are not necessarily representative of actual transactions or of the value of the Company's securities; and may not be based on any recognized technique of valuation used in the investment banking community. The following table sets forth, for the periods indicated, the high and low sale prices for the Company's Common Stock as reported by the National Quotation Bureau, Inc. FISCAL YEAR ENDED APRIL 30, 2002 LOW HIGH 1st Quarter $ 0.16 $ 0.17 2nd Quarter 0.13 0.16 3rd Quarter 0.17 0.20 4th Quarter 0.14 0.20 FISCAL YEAR ENDED APRIL 30, 2001 LOW HIGH 1st Quarter $ 0.19 $ 0.19 2nd Quarter 0.19 0.19 3rd Quarter 0.19 0.22 4th Quarter 0.15 0.17 As of June 30, 2002, there were approximately 500 holders of record of the Company's then outstanding shares of Common Stock. Transfer Agent The transfer agent for the Common Stock is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005. Dividends The Company does not presently anticipate that it will pay dividends at any time in the foreseeable future. The payment of any dividends will depend, among other things, upon the Company's earnings, assets and general financial condition, and upon other relevant factors. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Results of Operations Year Ended April 30, 2002 Compared to Year Ended April 30, 2001 Total sales of the Company for the year ended April 30, 2002 increased by $25,308 from sales for the year ended April 30, 2001. This gross revenue increase constituted a 1.25% increase as compared to the previous year. This increase was due to a $12,571 decrease (from $$1,723,691 to $1,711,120) in sales of wine and food products and services as well as by a $37,879 increase (from $305,923 to $343,802) in sales of bio-technology products and services. Gross profit for the year ended April 30, 2002 increased by $74,020 compared to the gross profit for the year ended April 30, 2001. This gross profit increase constituted a 14.7% increase as compared to the previous year. Gross profit as a percentage of revenue for the year ended April 30, 2002 increased to 28.1% compared to 24.8% for the year ended April 30, 2001. Management believes that the year over year increases in gross revenue and margin are not indicative of a trend in market conditions for the company's products and services. The generally weak demand for capital equipment in the Food, Wine and Biotechnology industries continues. Management believes the cause of the year to year increase in gross margin percentage was also not the result of a general improvement in the market conditions for the companies products and services, but rather resulted from changes in the product mix constituting the companies sales. Competitive price pressure resulting from weak demand for capital equipment continues. General and administrative expenses increased $69,369 (to $600,550 from $531,181)for the year ended April 30, 2002 as compared to the previous year. This increase represents a 13.1% increase in such expenses year over year. The increase in general and administrative costs were largely the result of increased costs for insurance, including employees health insurance and corporate liability insurance premiums. Significant increases in these expenses are anticipated in the future as well. Year Ended April 30, 2001 Compared to Year Ended April 30, 2000 Total sales of the Company for the year ended April 30, 2001 decreased by $302,320 from sales for the year ended April 30, 2000. This decrease was due to a $127,294 decrease (from $1,850,985 to $1,723,691) in sales of wine and food products and services as well as by a $175,026 decrease (from $480,949 to $305,923) in sales of bio- technology products and services. Cost of goods sold decreased $136,474 and the gross profit decreased by $165,848 for the year April 30, 2001 as compared to the previous year. Gross profit as a percentage of revenue for 2001 fell to 24.8% compared to 28.7% for 2000. Management believes the cause of the year to year decline in gross revenues was a general weakening of demand for capital equipment in the Food, Wine and Biotechnology industries. Management believes the cause of the year to year decline in gross margin was an increase in competitive price pressure resulting from weakened demand for capital equipment. General and administrative expenses increased $30,390 (to $531,181 from $500,791)for the year ended April 30, 2001 as compared to the previous year. The increase in general and administrative expenses reflect increased sales commissions paid (increased by $19,344), and increased marketing expenses (increased by $14,367). Because the company's personnel, processes, equipment, materials and related technology utilized in service to both the Wine/Food and the Bio-technology industries are quite similar, the company makes virtually no distinction in its' sales, marketing, engineering or accounting activities to segment the activities of the company between Wine/Food and Biotechnology industries. The above break- outs of market segment revenues is presented for informational purposes only. Trends in industry specific revenue volume should therefore, not be construed to indicate any information other than historical fact. Liquidity and Capital Resources The Company has in recent years financed its operations primarily with operating revenues. The Company anticipates that revenues from its operations will be sufficient to satisfy the Company's cash requirements for operations during the foreseeable future, except to the extent that increasing orders and sales may require temporary borrowings to finance such expansion and related costs of employee compensation and inventory build-up. No assurance can be given, however, that additional debt or equity financing will not be required or will be available if required. Year-to-year fluctuations in various cash-flow category line items were the result of several factors. Net income decreased as relatively unchanged revenues and somewhat improved gross margins were more than offset by increased general and administrative expenses. Fluctuations in cash-flow category line items such as year over year decreases in accounts receivable, accounts payable and pre-paid expenses are subject to period to period timing differences. Management does not believe these fluctuations are consequential to the substantive performance or financial condition of the company. Management does not believe that these fluctuations are the indicative of any material trend with regard to substantive performance or financial condition of the company. Because of the size and schedule requirements of particular projects undertaken by the company, a significant time lag may occur between inventory build-up related outlays and revenue recognition related to these projects. Due to the variability of the timing of these cash flows as compared with the date certain used for reporting purposes, significant fluctuations of individual line item cash flows year-over- year are apparent. Additionally, the interaction between the size and timing of the placement of customer orders bearing customer deposits and the various schedule requirements attendant to these orders, caused irregularity in reported customer deposit and inventory decrease cash- flows. Management does not believe these fluctuations are consequential to the substantive performance or financial condition of the company. Management does not believe that these fluctuations are the indicative of any material trend with regard to substantive performance or financial condition of the company. Reported pre-paid expenses fluctuated based on the various timing differences existing between the company's fiscal reporting period and the somewhat variable schedules of the required pre-payments for such administrative expenses as health and liability insurance premiums, as well as sales and income tax pre-payments. Management does not believe these fluctuations are consequential to the substantive performance or financial condition of the company. Management does not believe that these fluctuations are the indicative of any material trend with regard to substantive performance or financial condition of the company. Notwithstanding the fact that the company incurred an unprecedented charge during the fiscal year ended April 1999 as a result of bad debt write-offs amounting to $30,161, management believes, based on the historically low (indeed almost non-existent) rate of such defaults, that the $10,000 reserve made against current accounts receivable, in respect of the possibility of such defaults, is adequate. ITEM 7. SELECTED FINANCIAL DATA The following information has been summarized from financial information included elsewhere and should be read in conjunction with such financial statements and notes thereto. Summary of Statements of Operations of Process Equipment (in thousands except for per share amount) Years Ended April 30th 2002 2001 2000 1999 1998 Sales $2,055 $2,030 $2,332 $2,551 $2,554 Gross Profit $576 $ 502 $ 668 $ 769 $ 821 Net Income (Loss) ($12) $ 0 $ 105 $ 116 $ 163 Net Income (Loss) Per Share ($0.00) $ 0.00 $ 0.03 $ 0.03 $ 0.05 Summary of Balance Sheets of Process Equipment (in thousands) April 30, 2002 2001 2000 1999 1998 Working Capital $1,334 $1,127 $1,111 $ 948 $ 780 Total Assets $1,381 $1,446 $1,482 $1,445 $1,279 Stockholders' Equity $1,192 $1,204 $1,205 $1,099 $ 983 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PROCESS EQUIPMENT, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Public Accountants..........................15 Consolidated Balance Sheets at April 30, 2002 and 2001............16-17 Consolidated Statements of Operations for the Years Ended April 30, 2002, 2001 and 2000................ 18 Consolidated Statements of Cash Flow for the Years Ended April 30, 2002, 2001 and 2000.................19 Consolidated Statements of Stockholders' Equity for the Years Ended April 30, 2002, 2001 and 2000.................20 Notes to Consolidated Financial Statements........................21-25 BAUM & COMPANY, P.A. Certified Public Accountants 1515 University Drive - Suite 209 Coral Springs, Florida 33071 (954) 752-1712 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Process Equipment, Inc. and Subsidiary Hayward, California We have audited the accompanying consolidated balance sheets of Process Equipment, Inc. and Subsidiary as of April 30, 2002 and 2001 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended April 30, 2002, 2001 and 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements Based on our audits. We conducted our audits in accordance with standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the over all financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Process Equipment, Inc. and Subsidiary as of April 30, 2002 and 2001 and the results of its operations and its cash flows for the years ended April 30, 2002, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. Coral Springs, Florida /s/ Joel S. Baum ---------------- Joel S. Baum June 25, 2002 Baum & Company, PA PROCESS EQUIPMENT, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS April 30, 2002 and 2001 ASSETS 2002 2001 ----------------------------------- Current Assets Cash $489,247 $424,417 Accounts Receivable (less allowance for doubtful accounts of $10,000 for both 2002 and 2001) 183,825 265,658 Inventory (Note 1) 623,590 646,371 Prepaid Expenses 12,922 28,209 Deposits 14,270 4,670 ------------------ ------------------- Total Current Assets 1,323,854 1,369,325 Property and Equipment (Net) 19,281 38,459 Deferred tax asset 38,372 38,429 -------------------- --------------- Total Assets $1,381,507 1,446,213 ---------------- -------------- See Accountants' Report and Accompanying Footnotes PROCESS EQUIPMENT, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS April 30, 2002 and 2001 LIABILITIES AND STOCKHOLDERS' EQUITY 2002 2001 ------------------------------------------ Current Liabilities Accounts Payable $40,066 $110,125 Accrued Expenses 74,478 41,132 Customer Deposits 75,132 90,666 -------- ------- Total Current Liabilities 189,676 241,923 Total Liabilities 189,676 241,923 -------- ------- 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 Ca 1,249,412 1,249,412 Accumulated Deficit (61,226) (48,767) --------- -------- Total Equity 1,191,831 1,204,290 --------- --------- Total Liabilities and Stockholders' Equity $ 1,381,507 1,446,213 =========== ========= See Accountants' Report and Accompanying Footnotes. PROCESS EQUIPMENT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For The Years Ended April 30, 2002, 2001 and 2000 2002 2001 2000 --------------------------------------------- Revenues $2,054,922 $2,029,614 2,331,934 Cost of Goods 1,478,549 1,527,261 1,663,735 --------- --------- --------- Gross 576,373 502,353 768,200 --------- --------- --------- General and Administrative Expense 600,550 531,181 500,791 Income (Loss) Before Other Income (Expenses) and Provision for Income Taxes (24,177) (28,828) 167,409 ------- ------ ------- Other Income (Expenses) Interest Income (Net) 12,575 29,202 17,942 ------ ------ ------ Total Other Income (Expenses) 12,575 29,202 17,942 ------ ------ ------ Income (Loss) Before Provision for Income Taxes (11,602) 374 183,351 Provision for Income Taxes Current 2,400 (800) (23,994) Deferred (3,257) - 0 - (54,000) Total (857) (800) (77,994) Net Income (Loss) $ (12,459) $( 426) 105,357 ------ ------ ------ Earnings (Loss) Per Share $0.00 $ 0.00 $ 0.03 ------ ----- ---m--- Weighted Average Number of Shares Outstanding 3,644,800 3,644,800 3,644,800 ========= ========= ========= See Accountants' Report and Accompanying Footnotes PROCESS EQUIPMENT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended April 30, 2002, 2001 and 2000 2002 2001 2000 ---------------------------------------- Cash Flow from Operational Activities: Net Income (Loss) $ (12,459) ($ 426) $105,357 Adjustments to Reconcile Net Income to Net Cash Used for Operating Activities: Depreciation and Amortization 19,178 16,029 7,201 Changes in Assets and Liabilities (Increase) Decrease in Accounts Receivable 81,833 118,105 (56,263) (Increase) Decrease in Inventory 22,781 (36,190) (13,663) (Increase) Decrease in Prepaid Expenses 15,287 (14,287) (13,382) (Increase) Decrease in Deposits (9,600) - 0 - - 0 - Decrease in Deferred Tax Asset 58 - 0 - 57,000 Increase (Decrease) in Accounts Payable and Accrued Expenses (36,714) (108,212) (72,447) Increase (Decrease) in Customer Deposits (15,534) 72,693 9,053 -------- ------ -------- Net Cash from Operational Activities 64,830 47,712 22,856 Cash Flow from Investing Activities: Acquisition of Fixed Assets - 0- - 0 - (9,745) ------- ------- ------ Net Increase in Cash 64,830 47,712 13,111 Cash - Beginning 424,417 376,705 363,594 ------- ------- ------- Cash - Ending $489,247 $ 424,417 $376,705 ======== ======== ======== See Accountants' Report and Accompanying Footnotes PROCESS EQUIPMENT, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended April 30, 2002, 2001 and 2000 Common Stock ($0.001 Par Value) Additional Paid In Accumulated Shares Amount Capital (Deficit) ------------------------------------------------------ Balance April 30, 1999 3,644,800 $3,645 $1,249,412 $ (153,698) Net Income - 0 - - 0 - - 0 - 105,357 Balance April 30, 2000 3,644,800 3,645 1,249,412 ( 48,341) Net Income - 0 - - 0 - - 0 - (426) --------- ----- -------- --------- Balance April 30, 2001 3,644,800 $3,645 $1,249,412 $ ( 48,767) Net Income - 0 - - 0 - - 0 - (12,459) --------- ----- -------- --------- Balance April 30, 2002 3,644,800 $3,645 $1,249,412 $ ( 61,226) ========= ====== ========== =========== See Accountants' Report and Accompanying Footnotes PROCESS EQUIPMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 2002, 2001, AND 2000 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. 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. Because virtually all of the goods purchased by the company and stocked as inventory may be resold with or without the addition of labor or material inputs, the segmentation of elements of the company's inventory into classes, such as "raw materials, "work- in-progress" or "finished goods" is impracticable. 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 $38,000 which expire in the year 2008. 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 and or all of the future tax loss benefits. PROCESS EQUIPMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 2002, 2001, AND 2000 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) For presentation of the current comparative financial statements it has been deemed appropriate to fully recognize this benefit for each year presented. Deferred Taxes The Company incurs a timing difference in depreciation expense due to the difference in depreciation methods used for financial and income purposes. 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 Per Share Primary earnings per common share are computed by dividing the net income (loss) by the number of shares of common stock issued and outstanding. The number of shares used for the fiscal years ended April 30, 2002, 2001 and 2000 was 3,644,800. Because the company has outstanding but a single class of equity security (common stock) and is subject to no outstanding stock purchase options, warrants or any other potentially dilutive rights or instruments, diluted earning per share and fully diluted earnings per share are exactly equal to primary (or basic) earnings per share. Customer Deposits and Revenue Recognition 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. As is the case for other more common and straightforward transactions, these customer deposit funds are recognized as revenue when the equipment is completed and title is transferred to the buyer (or to the buyer indirectly via common carrier). In certain unusual cases, a negotiated "retention" fraction of the purchase price of the product is withheld by the buyer pending equipment installation, start-up or qualification for service. In these cases, management exercises judgement, based on specific experience PROCESS EQUIPMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 2002, 2001, AND 2000 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) concerning the type and value of the product, and the identity and requirements of the purchaser, to establish reserve accounts adequate to offset the potential for any additional expenditures which may be required. Generally, these reserve accounts are of the same dollar amount as the "retention" fraction. Therefore, effectively, "retention" amounts are recognized as revenue upon collection of the "retention" funds. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash and Cash Equivalents For purposes of the statement of cash flows, cash equivalents include time deposits, certificates of deposit, and all highly liquid debt instruments with original maturities of three months or less. Long-Lived Assets The Company accounts for long-lived assets under the provisions of SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of, "which states that whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and long-lived assets and certain identifiable intangibles are to be disposed of, they should be reported at the lower of carrying amount of fair value less cost to sell. The Company does not believe that any such changes in circumstances have occurred, other than those recorded for the periods presented. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board, ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 require all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives PROCESS EQUIPMENT, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED APRIL 30, 2002, 2001, AND 2000 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) with no maximum life). The amortization provisions of SFAS No. 142 apply to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS No. 142 effective July 1, 2002. Adoption of SFAS No. 141 will have no effect on the Company's results of operations or financial position. Management does not expect that adoption of SFAS No. 142 will have a material effect on the Company's results of operations or financial position. The effect, if any, would be a reduction in amortization of certain intangible assets the Company has acquired in its "Business Combinations," see also Note 5. In August 2002, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", and provides guidance on lassification and accounting for such assets when held for sale or abandonment. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.Management does not expect the adoption of SFAS No. 144 will have a material effect on the Company's results of operations or financial position. NOTE 2 - PROPERTY and EQUIPMENT April 30 April 30 2002 2001 -------------------------------- Transportation Equipment $ 28,225 $28,225 Office Equipment 37,391 37,391 Shop Equipment 35,261 35,261 Leasehold Improvements 35,894 35,894 ----------- ------------ Total 136,771 136,771 Less: Accumulated Depreciation 117,490 98,312 --------- ------------ Net Fixed Assets $ 19,281 $ 38,459 ======== ========= The depreciation expense for the years ended April 30, 2002, April 30, 2001 and April 30, 2000 was $19,178, $16,029 and $7,201, respectively. NOTE 3 - INVENTORY Inventory consists of the following: Parts Inventory $ 613,660 Finished Goods Inventory 9,930 --------- $ 623,590 ========= NOTE 4 - LEASING ARRANGEMENTS Operating Lease The Company conducts its operations from facilities that are leased under a five year lease ending August, 2003. The lease calls for monthly rent payments commencing September, 1998 of $5,509 per month plus common area maintenance charges which includes a pro-rata share of real property taxes. Rent expense amounted to $ 85,503 and $ 88,492 years ended April 30, 2002 and 2001, respectively. Future Minimum Lease Payments Future minimum lease payments for operating lease at April 30, 2002 are: Years Ending Operating April 30 Lease 2003 $88,492 2004 $29,497 -------- Total Minimum Payments $117,989 ======== NOTE 5- CERTAIN TRANSACTIONS WITH MANAGEMENT A shareholder and officer of the company has received compensation of $65,000, $65,000 and $33,000 during the fiscal years ended April 30, 2002, 2001 and 2000, respectively. NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION Year ended April 30, 2002 2001 2000 ----------------------------------------------- Taxes Paid $2,400 $ 800 $17,362 Interest Paid $ 0 $ 478 $ 172 PART III ITEM 10. DIRECTORS, OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Executive Officers and Directors The following table sets forth the name, age and position of each executive officer and director of the Company. Each individual has served in such positions since April 1990. Name Age Position George P. Cortessis 43 Secretary, Treasurer and Director Directors of the Company are elected by the Company's shareholders and hold office until their successors have been elected and qualified, or until their death, resignation or removal. Subject to the terms of their Employment Agreements, the officers of the Company are elected by and serve at the pleasure of the Board of Directors. The following table sets forth the name, age and position of each officer and director of Process Engineers. Each individual has served in such positions since May 1990. Name Age Position Vacant position Chief Executive Officer, and Chairman of the Board George P. Cortessis 43 Vice President, Secretary, Treasurer and Director Vacant position Chief Financial Officer George P. Cortessis. Mr. Cortessis joined Process Engineers, Inc. in September, 1989 and has historically been responsible for the bio- technology aspect of the Company's business. Since 1983, Mr. Cortessis has been continuously employed in the bio- technology and wine industries. Until March, 1985, he was a process engineer for Chiron Corporation and designed fermentation, cell processing and protein purification equipment. From March, 1985, until February, 1988, he was a project engineer furnishing engineering services to customers for fermentation and biochemical processing equipment. From February, 1988 until joining Process Engineers, Inc., Mr. Cortessis was a Regional Sales Engineer for L. H. Fermentation, Inc. of Hayward, California and supervised a bio-reactor sales program for fourteen western states and Canada. Mr. Cortessis graduated from the University of California - Berkeley in 1983 with a Bachelor of Science Degree in Chemical Engineering. ITEM 11. EXECUTIVE COMPENSATION During the three fiscal years ending April 30, 2000, 2001 & 2002 Mr. Cortessis received the following salaries. Summary of Compensation Table Name and Principal 2002 2001 2000 Position Salary Salary Salary George P. Cortessis $65,000 $65,000 $33,000 Secretary and Treasurer In addition to the cash compensation shown above, executive officers of the Company may receive indirect compensation in the form of perquisites and other personal benefits. For each named officer, such indirect compensation did not exceed 10% of the officer's salary for any year shown above. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the number and percentage of the Company's shares owned beneficially by its executive officers and directors and by other persons known to own beneficially 5% or more of the shares as of July 20, 2002. Number of Percentage Shares of Shares Name Owned (a) Outstanding George P. Cortessis 834,257 22.9% 26569 Corporate Avenue Hayward, CA 94545 Peter G. Cortessis 264,552 7.3% 26569 Corporate Avenue Hayward, CA 94545 Paul E. Cahalen 196,000 5.4% 2001 Omega Court, Suite 207-D San Ramon, CA 94583 All present officers 834,257 22.9% and directors as a group (1 person) (a) Subject to applicable community property laws, all such shares were owned of record, with sole voting and investment power, by the named individual and/or by his wife. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not Applicable PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Item Number as per Item 601 of Regulation S-B 3(a) Articles of Incorporation* 3(b) Certificate of Incorporation* 3(c) Bylaws* 3(d) Certificate of Amendment of Articles of Incorporation* 3(e) Certificate of Amendment of Certificate of Incorporation* 4(c) Sample Stock Certificate* 10(a) Transfer Agent and Registrar Agreement* 10(d) Stock Exchange Agreement, dated as of April 6, 1990, among the Company, Robert L. Lundak, H. Douglas Power and George B. Cortessis.* 10(e) 1990 Stock Option Plan* 10(f) Employment Agreement dated as of April 18, 1990 between Process Engineers and Robert L. Lundak* 10(g) Employment Agreement dated as of April 18, 1990 between Process Engineers and H. Douglas Power* 10(h) Employment Agreement dated as of April 18, 1990 between Process Engineers and George P. Cortessis* 10(z) Promissory Note Extensions.* 21 Subsidiary * * Incorporated herein by reference to exhibit of the same number of the Company's Registration Statement on Form S-18, as amended (Reg. No. 33-31720-NY) declared effective February 25, 1992. (b) Reports on Form 8-K filed in the Fourth Quarter Not applicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be Signed on its behalf by the undersigned, thereunto duly authorized. Process Equipment, Inc. By: /S/ George P. Cortessis ----------------------------- George P. Cortessis Secretary Dated: August 13, 2002 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature /S/ George P. Cortessis ---------------------------- George P. Cortessis Dated: August 13, 2002 Title: Secretary, Treasurer and Director (Principle Accounting and Financial Officer)