UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14072
PEN INTERCONNECT, INC.
(Exact name of small business issuer as specified in its
charter)
UTAH 87-0430260
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No)
1601 Alton Parkway, Irvine CA. 92606
(Address of Principal Executive Offices) (Zip Code)
(949) 798-5800
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, par value $0.01 per share
Common Stock Warrants
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. check
State issuer's revenues for its most recent fiscal year.
$17,651,838
As of November 29, 1999, there were 9,663,114 shares of the Issuer's
common stock, par value $0.01, issued and outstanding. The aggregate market
value of the Issuer's voting stock held by non-affiliates of the Issuer was
approximately $2,161,543 computed at the closing quotation for the Issuer's
common stock of $0.270 as of November 29, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
See Item 13 - Exhibits and reports on form 8-K
<PAGE>
FORM 10-KSB
PEN INTERCONNECT, INC.
Table of Contents
Page
PART I
1. Description of Business 3
2. Description of Property 8
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Common Equity and Related Stockholder
Matters 9
6. Management's Discussion and Analysis or Plan of
Operation 10
7. Financial Statements 14
8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 15
PART III
9. Directors, Executive Officers, Promoters and Control
Persons;
Compliance With Section 16(a) of the Exchange Act 15
10. Executive Compensation 17
11. Security Ownership of Certain Beneficial Owners and
Management 19
12. Certain Relationships and Related Transactions 20
13. Exhibits and Reports on Form 8-K 21
Signatures 23
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS. This annual report contains certain
forward-looking statements within the meaning of section 27A of the
Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended, that involve risks and uncertainties. In
addition, the Company may from time to time make oral forward-looking
statements. Actual results are uncertain and may be impacted by many
factors. In particular, certain risks and uncertainties that may impact
the accuracy of the forward-looking statements with respect to revenues,
expenses and operating results include without limitation; cycles of
customer orders, general economic and competitive conditions and changing
consumer trends, technological advances and the number and timing of new
product introductions, shipments of products and components from foreign
suppliers, and changes in the mix of products ordered by customers. As a
result, the actual results may differ materially from those projected in
the forward-looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator
of future performance, and investors should not use historical trends to
anticipate results or trends in future periods.
(A) BUSINESS DEVELOPMENT
General
We develop and produce on a turnkey basis, contract manufacturing
solutions for original equipment manufacturers in the computer,
telecommunications, electronic instrument, medical and testing equipment
industries. Original equipment manufacturers are generally referred to by
the initials OEM. For most of FY 99 Pen operated two divisions: 1) the
InCirT division, located in Irvine, California, provides assembly and
testing services for electronic circuit boards; and 2) the PowerStream
division, located in Orem, Utah, designs and manufactures custom power
supplies, battery chargers and UPS systems. In September 1999, we closed
the sale of our MotoSat division, located in Salt Lake City, Utah, to a
company controlled by our former Chairman. On February 5, 1999, we closed
the sale of our Pen Cable division, located in Salt Lake City, Utah, to a
subsidiary of CTG, Inc.
Summary of Current Year Events and Subsequent Events
Since the end of fiscal 1998, Pen has entered into several agreements
which have had, or will have, a material impact on Pen. Over the course of
fiscal 1999, Pen continued to experience a lower level of profitability
than was anticipated at the beginning of the year and Pen has consequently
experienced continued cash flow problems. The lower than expected level of
profitability has been the result of the inability to successfully
complete mergers with new companies and increase sales to cover operating
costs. For most of fiscal 1998, the market price of Pen's stock was
sufficient to raise additional cash to support the negative cash flow from
operations. Pen's stock price has since declined and Pen's securities have
been delisted from the Nasdaq National Market.
3
<PAGE>
In September 1998 Pen entered into discussions with a prospective buyer
for the MotoSat and the Pen Technology Cable divisions because of
continued losses generated by these divisions and the lack of capital to
adequately fund and grow the business of these two divisions. Moreover,
new management determined that the MotoSat business and products did not
strategically fit the goals and directions established by Pen. In
September 1999, Pen completed the sale of the MotoSat division to a
company controlled by James Pendleton, Pen's former Chairman and CEO. The
sale did not generate cash proceeds but eliminated monthly operating
losses associated with MotoSat. All assets and liabilities of the MotoSat
division were transferred to Mr. Pendleton's company in exchange for any
future obligations to make payments under a deferred compensation feature
in Mr. Pendleton's employment contract. The transfer of the MotoSat
division to Mr. Pendleton resulted in a loss to the Company of
approximately $68,000.
In February 1999, Pen closed an Asset Purchase Agreement with Pen Cabling
Technologies, LLC, a wholly owned subsidiary of CTG, Inc. CTG acquired
substantially all of the assets relating to the Cable division. The
purchase price was $1,075,000 and the assumption by CTG of lease
obligations of the Cable division. The purchase price was based upon the
approximate book value of the assets and liabilities divested. Pen, CTG,
and its subsidiary also entered into a Consulting Agreement under which
Pen will receive royalties on future sales of the Cable divisions'
business and products. Of the purchase price, $847,823 was paid to Pen's
principal lender, FINOVA, and $227,177 was paid to satisfy many
outstanding liabilities relating to the Cable division which were not
assumed by CTG. The transaction resulted in a loss for financial reporting
purposes of approximately $1.5 million.
In December 1998, Pen entered into a purchase agreement with Laminating
Technologies, Inc. Under the agreement, a newly formed subsidiary of Pen
would merge into Laminating Technologies and Laminating Technologies would
become a wholly owned subsidiary of Pen. This agreement was terminated by
mutual agreement of the parties in April 1999.
In June 1999, Pen entered into an agreement to merge with Transdigital
Communications Corporation, which is commonly known as TCC. TCC is a
privately held developer of entertainment and database systems for the
transportation markets which includes narrow bodied commercial aircraft
and cruise ships. This agreement was terminated by mutual agreement of Pen
and TCC on September 1, 1999.
In October of 1999 the Company received notice from its primary lender
(Finova) that they were placing the Company's loan in default status for
non-compliance with loan covenants. The Company was originally given until
December 18, 1999 to pay off the loan balance. As of the date of this
report, Finova has extended the deadline to February 28, 2000 but no other
lending arrangements or definitive agreements to sell the Company or any
of its divisions have been made. On December 23, 1999 the Company signed a
letter of intent with a contract manufacturer to sell the InCirT division
and is currently going through due diligence procedures related to this
agreement. It is anticipated that this sale will provide the cash
necessary to pay off the Finova obligation.
The Company is also negotiating to acquire an electronics business.
However, no agreements or commitments have been entered into as of this
date.
4
<PAGE>
On December 28, 1999 the Company signed a letter of intent to sell the
PowerStream division to a private investor. Due diligence is currently
being performed under the terms of the letter of intent.
(B) BUSINESS OF ISSUER
1. Principal Products and Services
Pen focuses on providing services to OEMs interested in utilizing contract
manufacturing for some or all components incorporated in OEM products.
OEMs have been increasing their use of contract manufacturers to provide
components and expertise in order to reduce the capital investment
necessary to manufacture subassemblies thereby enabling the OEMs to focus
their resources on their end products.
Advances in technology of electronic products and increased unit volume
would require OEMs to invest more heavily in internal manufacturing
through increased working capital, capital equipment, labor, systems and
infrastructure. Use of contract manufacturers such as Pen allows OEMs to
maintain advanced manufacturing capabilities while minimizing overall
resource requirements. Contract manufacturers also allow OEMs to focus
more sharply on their own core competencies where they add the greatest
value such as product development and marketing.
Pen markets its products and services to its customers through in-house
salesmen and independent sales representatives. Pen's OEM customers are
located throughout the continental U.S.
The following is a summary of the products and markets of Pen's divisions.
InCirT Division
Pen's InCirT division is engaged in the electronic manufacturing services
industry and provides certified assembly and testing services for
electronic circuit boards. Pen can assemble circuit boards using both
commonly accepted methods. These are surface mount, where the parts are
assembled on the surface of the circuit board, and through-hole, where the
parts are assembled through holes in the circuit board. These products are
used primarily in computer, testing, and medical equipment. Pen's services
are certified by the International Standards Organization, or ISO.
Two new sales contracts (Itec and Xtend) were secured by the InCirT
Division during the third quarter of FY 99. During the fourth quarter,
both new customers developed cash flow problems and were unable to pay the
Company for their credit sales according to the terms specified in their
contracts. The InCirT division has suspended sales or is selling on a COD
basis with these new customers until their cash flow problems are
corrected and their accounts brought current. As a result, sales for the
InCirT division have returned to levels which existed before the securing
of these new contracts.
The Company is currently negotiating with potential buyers of the InCirT
Division. On December 23, 1999 the Company signed a letter of intent to
sell the InCirT division to a contract manufacturer.
5
<PAGE>
PowerStream Division
The PowerStream division designs custom battery chargers and power supply
systems for its customers. If the customer decides to place an order for
the product after approval of the prototype created by the division, the
production is contracted out to contract manufacturers: larger orders are
manufactured at a facility in China to take advantage of lower labor rates
and component costs while production runs of smaller amounts are
manufactured by domestic contract manufacturers.
PowerStream has a major contract with L3 Corporation which suffered delays
in its shipping schedule during FY 99 and resulted in lower sales than
anticipated. PowerStream has worked hard to secure other contracts in
addition to L3 but none have been of such a volume to make PowerStream a
cash contributor to the Company. PowerStream has consumed $452,360 of
Company funds in its operations during FY 99 and $533,124 in FY 98.
On December 28, 1999 the Company signed a letter of intent to sell the
PowerStream division to a private investor. Due diligence is currently
being performed under the terms of the letter of intent.
2. Distribution Methods
The Company receives orders directly from OEM's and ships the product
directly to them. No other distribution method is employed.
3. Status of Publicly Announced New Products
None
4. Competitive Business Conditions
Pen's primary products and services are sold to OEM's in high technology
industries. The computer industry in particular has been under intense
pressure to provide faster and more powerful products at a lower cost.
Consequently, many contracts calling for large production runs are now
being processed in the Pacific Rim countries due to favorable labor rates.
The InCirT division provides services producing products for which the
OEMs do not require large enough quantities to make production in Asia
economical. The InCirT division competes on the basis of price, quality,
speed of production and delivery. Its principal competitors include
Superior Manufacturing, Comtel, and Qtron, among others. InCirT has a more
automated through-hole operation to handle smaller manufacturing
quantities than other competitors of comparable size. Through-hole
assembly amounts to approximately 70% of the sales volume of the InCirT
Division. Combined with the high quality of the product InCirT produces
(only 1% of sales were returned for rework during FY 99), the production
capacity of the through-hole operation creates a competitive edge for
InCirT over its competition. InCirT must also rely on speed of production
and competitive pricing to compete effectively. Incirt's ability to
compete has been hindered by the Company's cash flow problems which has
created delays in purchasing raw materials and
6
<PAGE>
meeting delivery schedules.
The PowerStream division is an engineering design shop and has only a
small number of competitors. PowerStream specializes in providing battery
chargers and power supply units needed for specific applications that
larger manufacturers would not supply in mass quantities due to lower
volumes. Success in competing with the few competitors which do exist for
PowerStream depends on effectively designing products that meet the
customers specifications for performance, flexibility in making changes to
product design as needs change and supplying the product at a competitive
cost.
5. Sources and Availability of Raw Material
There are a large number of vendors for many of the raw materials used by
all of Pen's divisions. Some key component parts used in Pen's products
are available from only one or a limited number of suppliers, and Pen
currently does not have long-term agreements with all suppliers of
components. A reduction or interruption in supply from third-party
contractors would reduce Pen's production unless or until alternative
sources could be established.
The availability of raw materials has been hampered by the lack of cash
flow and the corresponding inability to pay vendors in a timely manner.
Some vendors from time to time have withheld necessary raw materials until
payments have been brought current. The impact of this is potential delays
in meeting customer shipping deadlines, incurring overtime expenses to
comply with customer shipping schedules and more expensive freight costs
to have materials arrive in a timely manner; all of which negatively
impact profitability. Through the divestiture of the Cable and MotoSat
divisions and securing new sales orders through an expanded sales staff,
Pen is attempting to create a positive cash flow which will allow for
timely payment for the raw materials.
6. Dependence on Major Customers
The Company sells its products and services principally to OEMs. Because
the products are not sold at retail to the public, the Company is always
dependent on having supply contracts with OEMs. Consequently, at any given
time the Company can be dependent on one or a few major customers.
During the past fiscal year, 50% of the sales of the InCirT division came
from Alaris Medical Systems. The next largest customer was Triconix with
22% of Incirt's sales. Together these two customers made up 72% of the
sales for the InCirT division and 63% of the Company's total sales for the
year. The Company made efforts to expand its customer base and reduce the
risk of depending on one or two customers but its newer customers incurred
financial difficulty and were unable to perform under their contracts with
the Company.
7. Intellectual Property
The Company currently has no patents or trademarks on its current products
or products under development.
8. Need For Governmental Approval
None of the Company's products require governmental approval.
7
<PAGE>
9. Effect of Governmental Regulation on Business
The Company is not aware of any existing governmental regulation and
does not anticipate any governmental regulation which materially
affects the Company's ability to conduct its business operations.
10. Research and Development
Customers contract with PowerStream to design the custom battery
chargers or power supplies they need in the specific environment they
are to be used in. In almost all cases the customer agrees to
reimburse PowerStream for the time and material used to design the
product. Payment of this fee is generally 50% up front and 50% upon
acceptance of the prototype by the customer after testing. Because of
the nature of PowerStream's business, all overhead related expenses
associated with its operations are treated as research and development
expenses by the Company.
11. Compliance with Environmental Laws
The Company has not incurred, and does not presently anticipate
incurring, any material costs in complying with all federal and state
environmental laws.
12. Employees
As of September 30, 1999, Pen employed approximately 212 full and
part-time employees. Five employees were executive personnel, nine
were technical and engineering personnel, 11 were in marketing, sales,
administrative, accounting, information systems, and clerical and 187
were manufacturing personnel.
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
In July of 1998, the InCirT division moved into a new manufacturing and
office facility in Irvine, California. This new facility consists of
51,400 square feet of which 46,400 is currently being used; 35,000 square
feet of manufacturing space and 11,400 of office space. The expansion
capacity can be converted into both office and manufacturing space as the
need arises. The lease on the property runs until July of 2005.
The PowerStream division's sales and engineering facilities are located in
Orem, Utah, under a lease which expires in February 2001, which management
intends to extend if the Company retains the PowerStream division. The
premises contain approximately 5,200 square feet of space, all of which is
utilized for sales, research, development, prototype production and
administration.
Management believes that the above properties and their contents are
adequately covered by insurance and that the square footage is sufficient
to meet the Company's needs.
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
As of the date of this filing, the Company and it's CEO, Stephen Fryer,
are being sued by a former officer of the Company for fraud and breach of
an employment contract. The name of the case is "Alan Weaver vs. Pen
Interconnect, Inc. and Stephen Fryer" case # 817158 being held in the
Superior Court, County of Orange, State of California.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
There were no matters voted on by the shareholders in the fourth
quarter.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDERS MATTERS
Our common stock and warrants have been traded on the OTC Bulletin Board
since they were delisted from the National Association of Securities
Dealers Automated Quotation system as of March 30, 1999. They are traded
under the symbol "PENC" for the common stock and "PENCW" for the
warrants. The common stock and warrants were first publicly traded on
November 17, 1995. The following table sets forth the range of high and
low bids for our common stock for the last two years.
High Low
Fiscal Year 1999 - Quarter Ended
September 30, 1999 $0.81 $0.52
June 30, 1999 1.19 0.78
March 31, 1999 2.00 0.72
December 31, 1998 2.50 0.77
Fiscal Year 1998 - Quarter Ended
September 30, 1998 $2.22 $0.81
June 30, 1998 3.09 1.88
March 31, 1998 3.19 2.50
December 31, 1997 3.13 1.88
On November 8, 1999, the closing quotation for the common stock on the OTC
Bulletin Board was $0.25 per share. As of November 9, 1999, there were
9,663,114 shares of common stock issued and outstanding, held by
approximately 1,100 shareholders, including several holders who are
nominees for an undetermined number of beneficial owners.
9
<PAGE>
On November 8, 1999, the closing quotation for the warrants was $0.02 per
warrant. As of November 09, 1999, there were issued and outstanding
warrants to purchase 8,117,328 shares.
The trading volume of the common stock and warrants of the Company is
limited, creating significant changes in the trading price of the common
stock and warrants as a result of relatively minor changes in the supply
and demand. Consequently, potential investors should be aware that the
price of the common stock and warrants in the trading market can change
dramatically over short periods as a result of factors unrelated to the
operations, earnings and business activities of the Company.
The Company has not paid any dividends with respect to its common or
preferred stock and does not anticipate paying any dividends in the near
future. The Company's credit facility with its lender prohibits the
payment of dividends without their consent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion and analysis provides certain information which
the Company's management believes is relevant to an assessment and
understanding of the Company's results of operations and financial
condition for the fiscal years ended September 30, 1999 and 1998. This
discussion and analysis should be read in conjunction with the Company's
financial statements and related footnotes.
Results of Operations
Net sales. Net sales for the Company increased $560,406 (3.3%) from
$17,091,432 for fiscal year 1998 to $17,651,838 for the fiscal year ended
September 30, 1999. The net increase is primarily due to $2,935,839 of
sales to two new customers (Itec and Xtend) secured by the InCirT Division
during the third quarter of FY 99. These sales were offset by a decline in
sales of $2,804,387 from the Cable and MotoSat Divisions which were sold
five months into FY 99. Sales from the two new customers at the InCirT
Division in FY 99 were less than what was expected to be realized due to
collection problems incurred by the Company related to these new
customers. The Company began shipments to Itec and Xtend as their sole
assembly and packaging source of product in May of FY99. By July, the
Company became aware of the inability of these new customers to make
payments on their accounts. As a result, the Company suspended further
shipments to Itec and reduced shipments to Xtend to a level more closely
matching what Xtend could pay on a COD basis.
Cost of sales. Cost of sales as a percentage of net sales remained
relatively constant at 94% in fiscal year 1999 compared to 93% in fiscal
year 1998. The slight increase is a net result of numerous factors each
immaterial when considered independently.
10
<PAGE>
Operating expenses. Operating expenses increased from $4,736,421 in 1998
to $10,216,909 in 1999 for a total increase of $5,480,488. This increase
resulted primarily from 1) an increase in impaired asset charges of
$2,028,129 mostly related to the sale of the cable division and the write
off of goodwill associated with the InCirT and PowerStream divisions', 2)
an increase in general and administrative expenses of $4,184,682 due
primarily to the write off of accounts and other receivables totaling
$2,030,833; $769,125 in options granted with an exercise price below
market on the date of issue, $249,722 in fees incurred by the Company in
raising capital to sustain operations and accounting fees associated with
three merger attempts which did not materialize. These were offset by 1) a
decrease in sales and marketing expenses of $359,171 and 2) by a decline
in depreciation expense of $172,356 related to the sale of the Cable and
MotoSat divisions.
Other income and expenses. The Company experienced a $1,040,116 increase
in other expenses from $1,140,078 in fiscal year 1998 to $2,180,194 in
fiscal year 99. This increase stems primarily from the Company sustaining
a combined loss on the sale of the Cable and MotoSat divisions of
$1,575,497. This was offset by a decline in interest expense of $421,784
due primarily to the reduction in the line of credit related to the
receivables and inventory associated with the Cable and MotoSat divisions
which were sold.
Net loss and loss per share. Net losses increased to $12,014,791 or $1.82
per common share in fiscal year 99 from $5,445,383 or $1.24 per common
share in fiscal year 1998; an increase of $6,569,408 or $0.58 per share.
This increased loss per common share resulted from the following: $0.95
from the increase in general and administrative expenses, $0.46 from the
write off of impaired assets, $0.36 from the loss associated with the sale
of the Cable and MotoSat divisions and $0.22 from the impact of accrued
preferred dividends and imputed preferred dividends on the discounted
conversion feature of the preferred shares in calculating the net loss
available to common shareholders. These were offset by $0.10 due to a
decline in interest expense, $0.08 in the decline of marketing expenses
and $1.13 from the effect of the increase in weighted average shares
during the current fiscal year.
Liquidity and Capital Resources
The Company had negative working capital at September 30, 1999 of
$3,197,941 compared to $1,714,606 at September 30, 1998 for an increase in
negative working capital of $1,483,335. This increase was primarily
attributable to an increase in accounts payable of $1,034,615, an increase
in the current maturities of long-term obligations of $549,940 and an
increase in accrued liabilities of $447,372. These were offset by a
noncash conversion of $1,401,429 of subordinated debentures to common
stock at the end of FY 99. A primary reason for the negative working
capital is the Company's failure to comply with covenants related to the
Company's collateralized loan with Finova at the end of FY 98 and FY 99
resulting in the entire loan being classified as a current liability due
to Finova's rights to declare the entire loan due and payable.
Over the course of fiscal 1999, Pen continued to experience cash flow
problems. For most of fiscal 1998, the market price of Pen's stock was
sufficient to raise additional cash to support the negative cash flow from
operations. Pen's stock price has since declined and Pen's securities have
been delisted from the Nasdaq National Market.
11
<PAGE>
In September 1999, Pen completed the sale of the MotoSat division to a
company controlled by James Pendleton, Pen's former Chairman and CEO. The
sale did not generate cash proceeds but eliminates monthly operating
losses associated with MotoSat. All assets and liabilities of the MotoSat
division were transferred to Mr. Pendleton's company in exchange for any
future obligations to make payments under a deferred compensation feature
in Mr. Pendleton's employment contract. The transfer of the MotoSat
division to Mr. Pendleton resulted in a loss to the Company of
approximately $68,000.
In February 1999, Pen closed an Asset Purchase Agreement with Pen Cabling
Technologies, LLC, a wholly-owned subsidiary of CTG, Inc. CTG acquired
substantially all of the assets relating to the Cable division. The
purchase price was $1,075,000 and the assumption by CTG of lease
obligations of the Cable division. The purchase price was based upon the
approximate book value of the assets and liabilities divested. Pen, CTG,
and its subsidiary also entered into a Consulting Agreement under which
Pen will receive royalties on future sales of the Cable divisions'
business and products. Of the purchase price, $847,823 was paid to Pen's
principal lender, FINOVA, and $227,177 was paid to satisfy many
outstanding liabilities relating to the Cable division which were not
assumed by CTG. The transaction resulted in a loss for financial reporting
purposes of approximately $1.5 million.
In June 1999, Pen entered into an agreement to merge with Transdigital
Communications Corporation, which is commonly known as TCC. TCC is a
privately held developer of entertainment and database systems for the
transportation markets which includes narrow bodied commercial aircraft
and cruise ships. This agreement was terminated by mutual agreement of Pen
and TCC on September 1, 1999. Before the agreement was terminated the
Company loaned approximately $500,000 to TCC to help with operations in
anticipation of the merger closing. TCC signed a note for the loan which
calls for repayment as they secure additional financing from other
sources. As of the date of this filing TCC has not obtained other
financing.
With the sale of the MotoSat and Cable division, the InCirT and
PowerStream divisions are the only divisions remaining with the Company
that generate revenue. Of the revenues generated by these two divisions in
FY 99, InCirT generated 95% of those revenues.
Two new sales contracts were secured by the InCirT Division during the
third quarter of FY 99. During the fourth quarter, both new customers
developed cash flow problems and were unable to pay the Company for their
credit sales according to the terms specified in their contracts. The
InCirT division has suspended sales or is selling on a COD basis to these
new customers. As a result, sales for the InCirT division have returned to
levels which existed before the securing of these new contracts and InCirT
has had to write off $1,878,846 of receivables related to these customers
as uncollectable. The Company purchased $1,611,557 of raw material
inventory from both customers at the inception of the contract which was
to be paid off with a note within twelve months or returned to the
customers.
The InCirT division acquired two additional SMT equipment lines totaling
$617,955 with updated technology capabilities that would make InCirT more
competitive in attracting additional PCB customers. One line was acquired
through a lease for $417,955 and the other was purchased from Alaris
(Incirt's major customer) on a note for $200,000 to be applied against
receivables owed InCirT at a rate of $40,000 per month.
12
<PAGE>
In October of 1999 the Company received notice from its primary lender
(Finova) that because of an over-advance from the uncollected receivables
from Itec and Xtend and because of continued losses from operations they
were placing the Company's loan in default status for non compliance with
loan covenants. The Company was given until December 18, 1999 to pay off
the loan balance with Finova. As of the date of this report, Finova has
extended the deadline on paying off the loan balance to February 28, 2000;
however, no other lending arrangements or financing sources have been
obtained.
On December 23, 1999 the Company signed a letter of intent with a contract
manufacturer to sell the InCirT division and is currently going through
due diligence procedures related to this agreement. As a result of the
Company's solvency and liquidity problems, it has written off the
unamortized balance of goodwill associated with the acquisition of the
InCirT and PowerStream divisions to reflect the reduced expected life of
these divisions.
The Company is also negotiating to acquire an electronics business.
However, no agreements or commitments have been entered into as of this
date.
Finova has withheld advances to reduce the over-advance situation with the
Company's line of credit. This has restricted the Company's ability to pay
vendors and obtain raw materials to meet shipping schedules. The Company's
InCirT Division has had to contract with a competitor to purchase raw
materials for Alaris, Incirt's and the Company's major customer. If
Incirt's competitor were to eventually replace InCirT as the supplier to
Alaris, InCirT would lose 50% of its sales which would further limit the
Company's ability to correct its negative cash flow.
To sustain operations, the Company had to raise cash from the capital
markets. The Company secured two bridge loans in the first quarter of FY
99 totaling $900,000. The Company raised an additional $2,800,000 through
the issuance of two series of preferred stock. 1,800 shares of Series A
preferred stock were issued in February raising $1,800,000 and 1,000
shares of Series B preferred stock were issued in April raising another
$1,000,000. Of the total proceeds of $2,800,000; $900,000 was used to
repay the bridge loans made earlier in the year, $249,722 related to the
expenses associated with the issue, $500,000 was loaned to TCC with the
balance being used by the Company to pay vendors. Both issuances of
preferred stock have an annual dividend of $160 per share which the
Company has accrued for but cannot pay without approval from Finova. The
only other monies raised in the capital markets during the fiscal year was
from the exercise of warrants to purchase common stock.
These warrants raised an additional $165,000.
Additional capital infusions are necessary to help the Company sustain
operations at this time. The investors which purchased the subordinated
debentures in FY 98 and the preferred stock in FY 99 have been unwilling
to make any further investments in the Company. Attempts to raise
additional capital from new sources were hindered with the decline in the
market price of the Company's common stock. As of the date of this filing,
the Company has no prospects for new sources of lenders, equity investors
or new sources of working capital to sustain operations of the Company as
it now exists. Pen is seeking to relieve the liquidity problems by
pursuing the sale of its remaining divisions. However, additional capital
would still probably be necessary to fund the operations of a new
business. If Pen cannot raise the additional capital, Pen will continue to
incur losses from its operations and may have to seek bankruptcy
protection.
13
<PAGE>
Seasonality of Business
The Company's InCirT Division usually incurs an approximate 30% drop in
sales during the second quarter of the fiscal year resulting from a
decline in orders from Alaris Medical Systems, the divisions primary
customer. Sales usually resume to normal levels as the third quarter
begins. This seasonal drop in sales adds to the cash flow problems for the
Company due to the Company's position of paying for commitments on prior
sales with funding from current sales. A drop in sales therefore creates
less cash to pay for the expenses of higher sales in previous months.
However this year, because of a large past due backlog, there is expected
to be no seasonal drop in sales.
Backlog of Orders
The only material backlog of orders exists at the InCirT division in
relation to Alaris. The cash flow problems the Company faces has caused
delays in procuring materials to complete production of Alaris orders and
has created a backlog position. The Company anticipates that this backlog
will continue until a positive cash flow is achieved or additional
investments of working capital are secured by the Company. As of the date
of this filing, the PowerStream division has also developed a backlog of
shipments with one of its customers due to the Company's cash flow
problems and inability to pay vendors. Although the sales associated with
this backlog are immaterial to the sales of the Company as a whole, the
customer is the main source of current revenue for PowerStream.
Year 2000 Readiness
In general, the Year 2000 issue relates to computers and other systems
being unable to distinguish between the years 1900 and 2000 because they
use two digits, rather than four, to define the applicable year. Systems
that fail to properly recognize such information will likely generate
erroneous data or cause a system to fail possibly resulting in a
disruption of operations. The Company's products do not incorporate such
date coding so the Company's efforts to address the Year 2000 issue fall
in the following three areas: (i) the Company's information technology
("IT") systems; (ii) the Company's non-IT systems (i.e., machinery,
equipment and devices which utilize technology which is "built in" such as
embedded microcontrollers); and (iii) third-party suppliers. The Company
has completed its evaluation of its IT systems and believes that these
systems are Year 2000 compliant. The Company's non-IT systems are not date
sensitive and therefore pose no risk in relation to Year 2000 issues.
Third party suppliers and customers present a different problem in that
the Company cannot control the efforts of such third parties to be Year
2000 compliant. The Company has completed its review of critical customers
and believes that they are year 2000 compliant. The Company has not
completed its review of critical vendors and does not anticipate that this
review will be complete before the year 2000. Costs were expensed as
incurred and do not appear to have been material. The foregoing
14
<PAGE>
statements are based upon management's current assumptions.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data are included beginning at
page F1.
15
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE AC
Directors and Executive Officers.
The Company's directors and executive officers, and their respective ages
and positions with the Company, are set forth below in tabular form.
Biographical information on each person is set forth following the tabular
information. There are no family relationships between any of the
Company's directors or executive officers. The Company's board of
directors is currently comprised of five members, each of whom is elected
for a term of one year. Executive officers are chosen by and serve at the
discretion of the Board of Directors.
Name Age Position
Stephen J Fryer 61 Chief Executive Officer
and Principal Accounting
Officer
Wayne R. Wright 61 Director; Vice Chairman
of the Board of Directors
James E. Harward 47 Director
Milton Haber 76 Director
Brian Bonar 52 Director
Danieli Reni 48 Vice President of
Engineering; President of
PowerStream Division
Stephen J. Fryer has served as Chief Executive Officer of the Company
since 1999 and as a director of the Company since 1997. He served as
Senior Vice President of Sales and Marketing from October 1996 to October
1997. From 1989 to 1996, Mr. Fryer was a principal in Ventana
International, Ltd., an Irvine, California based venture capital and
private investment banking firm. Mr. Fryer graduated from the University
of Southern California in 1960 with a Bachelors Degree in Mechanical
Engineering and has spent over twenty-eight years in the computer business
in the United States, Asia and Europe.
16
<PAGE>
Wayne R. Wright has served as Vice Chairman of the Board of Directors
since 1985. From 1985 to 1998, he was Chief Financial Officer of the
Company. From 1984 to 1985, he was Vice President and Chief Financial
Officer of PenTec Enterprises. From 1968 to 1984, he was Controller, Vice
President of Operations and Division General Manager for Beehive
International, a computer peripheral company. From 1967 to 1968, Mr.
Wright was the General Accounting Manager for Litton Data Systems. From
1961 to 1968, he was employed by Beeline/Frontier Refinery as Division
Office Manager. Mr. Wright received his Bachelor of Science Degree in
Accounting and Finance from the University of Utah.
James E. Harward received his B.A. from Brigham Young University and
his J.D. from the University of California, Hastings School of Law. He was
in private practice for the following six years. For five years he was an
Administrative Law Judge for the Utah State Tax Commission after which he
became Director of Legal Affairs for the Utah State Industrial Commission.
For the two years following that, he was corporate attorney for Sinclair
Oil, and since 1997 he has been President of ELM Management and Leasing.
He has been a director of the Company since February, 1997.
Milton Haber has been the CFO of Airline Management Corporation since
1996 and is a private investor. From 1949 through 1983 Mr. Haber was a
business consultant, small business owner and a private investor. He
attended Brooklyn College from 1946 through 1948 after serving in the
United States Air Force during World War II. Mr. Haber joined the
Company's Board of Directors in February 1998.
Brian Bonar was appointed a director of the Company on November 30,
1999. Mr. Bonar currently serves as CEO and President of Imaging
Technologies Corporation (Itec) and has held this position since April
1998. Prior to his appointment as CEO of Itec, Mr. Bonar served in other
capacities with Itec since August 1992. From 1991 to 1992 Mr. Bonar was
Vice President of Worldwide Sales and Marketing for Bezsier Systems, Inc.
From 1990 to 1991 he was Worldwide Sales Manager for Adaptec, Inc. From
1988 to 1990 Mr. Bonar was Vice President of Sales and Marketing for Rastek
Corporation. From 1984 to 1988 Mr. Bonar was employed as Executive Director
of Engineering at QMS, Inc. Prior to these appointments, Mr. Bonar was
employed by IBM, U.K. Ltd. for approximately 17 years.
Danieli Reni joined the Company in April of 1997 as President of the
PowerStream Technology Division of the Company and was appointed the Vice
President of Engineering of the Company in 1998. From 1978 to 1980 he was
self-employed as an electronic engineer consultant. From 1980 to 1981, he
was a Design Engineer for General Dynamics and from 1981 to 1984, he was
Design Engineer for Teledyne Systems. He was Project Engineer from 1984 to
1987 in the R&D Department at Quoltron Systems and from 1987 to 1991, he
was the Project Engineer for Power Products for Apple Computer. He became
President and Owner of PowerStream Technology, Inc. in 1991 and operated
the company until his employment with the Company in 1997.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934, and the rules and
regulations promulgated thereunder, require the Company's executive
officers and directors, and persons who beneficially own more than ten
percent of a registered class of the Company's equity securities, to file
reports of ownership and changes in ownership with the Securities and
Exchange Commission and to furnish the Company with copies thereof.
17
<PAGE>
Based on its review of the copies of such forms received by the Company,
Mr. James Pendleton, the Company's Chairman until November 11, 1999, is
late in filing forms related to the donation of stock to a charitable
organization and Mr. Steve Fryer, the Company's current Chairman and CEO
is late in filing forms related to the issuance of options by the
Company.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the compensation paid by the Company to its
current Chairman and Chief Executive Officer, and the Company's other most
highly paid executive officer. None of the other executive officer's total
annual salary and bonus exceeded $100,000 for the years presented.
Summary Compensation Table
Annual Compensation
Name and Principal
Position Fiscal Year Salary Bonus
James S. Pendleton 1999 $139,666 0
Chairman 1998 $139,000 0
1997 $144,236 $6,000
Stephen J. Fryer 1999 $156,304 0
President 1998 $108,000 0
1997 $67,053 $45,000
* The tables above do not include certain insurance, the use of a car,
and other personal benefits, the total value of which does not exceed
$50,000 or 10% of such person's salary and bonus.
Option/SAR Grants in Fiscal Year 1999
Number of Percent of Total
Securities Options Granted Exercise
Underlying to Employees in Price per Expiration
Name Opetions Granted Fiscal Year 1998 Share Date
Stephen J. Fryer 250,000 570,000 $0.6500 Apr 2004
18
<PAGE>
Aggregated Option/SAR Exercises in Fiscal
Year 1999 and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Value of
Number of Unexercised
Securities Options at/
Shares Unexercised Fiscal Year/
Acquired Options End Year/
on Exercisable / Exercisable /
Name Exercise Value Realized Unexercised / Unexercised /
<S> <C> <C> <C> <C>
James S. Pendleton -0- None 450,000/450,000 $0.00
Stephen J. Fryer -0- None 278,500/278,500 $0.00
</TABLE>
19
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS
AND MANAGEMENT
The following table sets forth the number of shares of the Company's
common stock beneficially owned as of November 29, 1999, (i) by each
person who is known by the Company to own beneficially more than 5% of the
Company's common stock, (ii) by each director and director nominee, (iii)
by each of the Company's named executive officers, and (iv) by all
directors, director nominees and executive officers, as a group, as
reported by each such person. Unless otherwise indicated, each
stockholder's address is c/o the Company, 1601 Alton Parkway, Irvine, Ca.
92606.
<TABLE>
<CAPTION>
Amount and Amountcial Percentage of
Nature of Issuable on Outstanding
Beneficial Exercise of Commonn
Name and Address of Ownericial Optionse stock
Beneficial Owner
Directors and Executive officers
<S> <C> <C> <C>
James S. Pendleton (1)(2) 1,376,703 1,015,408 12.9%
James S. Pendleton Family Trust 256,441 0 2.7
Stephen J. Fryer 580,500 492,500 5.7
Wayne R. Wright (3) 1,441,029 1,243,920 13.2
Milton Haber 47,222 35,000 0.5
James E. Harward 10,000 10,000 0.1
AMRO International, S.A (4) 3,905,727 3,905,727 28.8
Gossmunster Platz 26
Zurich, Switzerland
Austost Anstalt Schaan (4) 1,952,863 1,952,863 16.8
Landstrasse 163
Vaduz, Liechenstein
Balmore Funds, S.A. (4) 1,952,863 1,952,863 16.8
Trident Chanbers
Road Town, Tortola
British Virgin Islands
RBB Bank AG (4) 3,168,200 3,168,200 24.7
Burgring 16
Graz, Austria
Peter Benz 1,326,667 906.667 12.6
All Officers and Directors as a
Group (4 persons) (3) (4) 2,078,751 1,781,420 18.2
</TABLE>
20
<PAGE>
(1) Includes 256,441 shares of Common Stock held by the James S. Pendleton
Family Trust of which Mr. Pendleton is a trustee and beneficiary and 15,144
shares in Mr. Pendleton's account in the Company's ESOP.
(2) Includes 89,710 shares held by the Virginia C.G. Pendleton Family
Trust. Mr. Pendleton has voting control of these shares but disclaims
beneficial ownership.
(3) Includes 100,000 shares held by the Wayne R. Wright Family Trust,
50,000 shares held by the LaRae Wright Family Trust, of which Mr. Wright is
a trustee and beneficiary, and 7,109 shares in Mr. Wright's account in the
Company's ESOP.
(4) In addition to shares issuable on exercise of warrants, consists of
shares issuable upon conversion of shares of Series A preferred stock and
Series B preferred stock based on a market price equal to $0.34 per share.
The terms of the Series A and Series B preferred stock prevent the holders
from converting their shares of preferred stock if the conversion would
cause the holder to be deemed the beneficial owner of more than 9.9% of
Pen's common stock, except with the prior consent of the holder.
Except as set forth above, the Company knows of no beneficial owner of five
percent or more of the Company's Common Stock, and does not know of any
arrangement which may at a subsequent date result in a change of control of
the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The following information summarizes certain transactions, either
engaged in within the last two (2) years or proposed to be engaged in by
the Company and the individuals described.
During fiscal year 1999, the Company sold its MotoSat division to a
company owned by James Pendleton who at that time was serving as Chairman
and CEO of the Company. The terms of the sale were such that the Company
would transfer all assets and liabilities of the MotoSat division to Mr.
Pendleton in exchange for any rights of deferred compensation and /or
retirement benefits as stated in Mr. Pendleton's employment contract with
the Company. The net assets of the MotoSat division on February 1, 1999,
the date of the sale, were $68,437.
During FY 99, the Company had sales of $1,719,093 to Imaging Technologies
Corporation (Itec), of which $949,328 have been written off as
uncollectable. The Company discontinued sales to Itec in July of 1999. In
November 1999, Mr. Brian Bonar became a director of the Company. Mr. Bonar
is the President and CEO of Itec. The Company has explored acquiring
certain assets and operations of Itec but no agreements and commitments
have been made as of the date of this report.
21
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the three
months ended September 30, 1999.
(b)
INDEX OF EXHIBITS
Exhibit Description
No.
1. Form of Underwriter's Warrant Agreement including Form of
Underwriter's Warrant, incorporated by reference to the Company's
Registration Statement filed on Form SB-2, SEC File No. 33-96444.
3. Articles of incorporation and By-laws, incorporated by reference
to the Company's Registration Statement filed on Form SB-2, SEC
File No. 33-96444.
4.1 Certificate of Amendment creating Series A Convertible Preferred
Stock as filed February 10, 1999. See Exhibits to Report on Form
8-k filed on February 17, 1999.
4.2 Certificate of Amendment creating Series B Convertible Preferred
Stock as amended.
10.1 Asset Purchase Agreement for the purchase of InCirT Technology
from the Cerplex Group, Inc. See Exhibit to Report on Form 10-QSB
dated June 30, 1996.
10.2 Employment Agreement between James S. Pendleton and the Company.
See Exhibit to Report on Form 10-QSB dated June 30, 1996.
10.3 Employment Agreement between Wayne R. Wright and the Company. See
Exhibit to Report on Form 10-QSB dated June 30, 1996.
10.4 Form of Warrant between the Registrant and JW Charles Securities,
Inc., BMC Bach International Ltd., Gordon Mundy, Louis Centofanti
and Heracles Holdings, See Registration Statement filed on Form
S-3, SEC File No. 333-60451.
10.5 Form of 1995 Stock Option Plan. See Registration Statement filed
on Form SB-2, SEC File No. 33-96444.
10.6 Asset Purchase Agreement dated November 12, 1996 for the sale of
the San Jose Division between Touche Electronics, Inc. a
subsidiary of TMCI Electronics, Inc. and the Company. See Exhibit
to Report on Form 10-QSB dated December 31, 1996.
10.7 Loan and Security Agreement between FINOVA and the Company. See
Exhibit to Report on Form 10-KSB, dated September 30, 1997.
10.8 Employment Agreement between Stephen J. Fryer and the Company.
See Exhibit to Report on Form 10-KSB, dated September 30, 1997.
10.9 Employment Agreement between Danieli Reni and the Company. See
Exhibit to Report on Form 10-KSB, dated September 30, 1997.
22
10.10 Agreement and Plan of Reorganization through Acquisition dated
April 1, 1997 between PowerStream Technology, Inc. and the
Company. See Exhibit to Report on Form 10- KSB, dated September
30, 1997.
10.11 Finder's Agreement between the Registrant and JW Charles
Securities, Inc., dated June 2, 1998. See Registration Statement
filed on Form S-3, SEC File No. 333-60451.
10.12 Convertible Preferred Stock and Warrant Purchase Agreement
between Pen, RBB Bank AG, Austost Anstalt Schaan, Balmore Funds,
S.A. and AMRO International, S.A. dated as of February 12, 1999.
See Exhibits to Report on Form 8-k filed February 17, 1999.
10.13 Amendment in Total and Complete Restatement of the Deferred
Compensation Salary Continuation Plan and Employment Agreement
between Pen and James S. Pendleton dated as of July 23, 1999.
10.14 Amendment in Total and Complete Restatement of the Deferred
Compensation Salary Continuation Plan and Employment Agreement
between Pen, Wayne R. Wright, and Rent A Professional dated as of
October 1, 1999.
23.1 Consent of Grant Thornton LLP.
27. Financial Data Schedule
23
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: January 14, 2000 PEN INTERCONNECT, INC.
By:_________________________
Stephen J. Fryer
CEO and Chairman
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and
on the dates indicated below.
Date: January 14, 2000
By:_________________________
Date: January 14, 2000 By:_________________________
Stephen J. Fryer
Chairman and CEO and
Chief Accounting Officer
Date: January 14, 2000 By:_________________________
Wayne R. Wright
Director
Date: January 14, 2000 By:_________________________
James E. Harward
Director
Date: January 14, 2000 By:_________________________
Brian Bonnar
Director
Date: January 14, 2000 By:_________________________
Milton Haber
Director
24
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
PEN INTERCONNECT, INC.
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets as of September 30, 1999 and 1998 F-3
Statements of Operations for the Years Ended
September 30, 1999 and 1998 F-5
Statement of Stockholders' Equity (Deficit) for the Years Ended
September 30, 1999 and 1998 F-6
Statements of Cash Flows for the Years Ended
September 30, 1999 and 1998 F-7
Notes to Financial Statements F-11
F-1
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Pen Interconnect, Inc.
We have audited the accompanying balance sheets of Pen Interconnect, Inc. (a
Utah Corporation), as of September 30, 1999 and 1998, and the related statements
of operations, stockholders' equity (deficit), and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide 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 Pen Interconnect, Inc., as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and as of September 30, 1999, the Company has a stockholders' deficit of
$1,810,128 and its current liabilities exceeded its current assets by
$3,197,941. These factors, among others, as discussed in Note B to the financial
statements, raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note B. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Grant Thornton LLP
Salt Lake City, Utah
December 23, 1999
F-2
<PAGE>
FINANCIAL STATEMENTS
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS
September 30,
ASSETS
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 177,214 $ 657,777
Receivables (Notes D and G)
Trade accounts, less allowance for doubtful accounts
of $1,890,576 in 1999 and $108,575 in 1998 2,708,567 3,350,970
Current maturities of notes receivable (Notes C and E) 575,112 35,675
Inventories, net (Notes F, G, and H) 4,250,661 3,680,169
Prepaid expenses and other current assets 130,977 261,375
Investments (Note O) - 242,739
Deferred income taxes (Note J) - 41,324
-------------- --------------
Total current assets 7,842,531 8,270,029
-------------- --------------
PROPERTY AND EQUIPMENT, AT COST
(Notes G, H, and I)
Production equipment 1,450,494 2,624,513
Furniture and fixtures 167,169 837,594
Transportation equipment 22,149 83,522
Leasehold improvements 273,733 613,248
-------------- --------------
1,913,545 4,158,877
Less accumulated depreciation 376,681 1,680,266
-------------- --------------
1,536,864 2,478,611
OTHER ASSETS
Notes receivable, less current maturities (Notes C and E) 150,000 3,989
Deferred income taxes (Note J) - 725,667
Goodwill and other intangibles, net of accumulated
amortization (Note O) - 2,031,685
Investments (Note O) - 482,220
Other - 98,455
-------------- --------------
150,000 3,342,016
-------------- --------------
$ 9,529,395 $ 14,090,565
============== ==============
</TABLE>
The Accompanying notes are an integral part of these statements.
F-3
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS - CONTINUED
September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
CURRENT LIABILITIES
<S> <C> <C>
Line of credit (Note G) $ 4,436,562 $ 4,064,361
Subordinated debentures (Note N) - 1,401,429
Current maturities of long-term obligations (Notes G and H) 1,682,478 1,132,538
Current maturities of capital leases (Note I) 122,759 69,621
Accounts payable 3,961,412 2,926,797
Accrued liabilities 837,261 389,889
-------------- --------------
Total current liabilities 11,040,472 9,984,635
LONG-TERM OBLIGATIONS, less current maturities (Notes G and H) - 51,965
CAPITAL LEASE OBLIGATIONS, less current maturities (Note I) 299,051 22,333
DEFERRED INCOME TAXES (Note J) - 165,755
-------------- --------------
Total liabilities 11,339,523 10,224,688
COMMITMENTS AND CONTINGENCIES (Notes I, K, and L) - -
STOCKHOLDERS' EQUITY (DEFICIT) (Notes K, M, and P)
Convertible preferred stock, $0.01 par value,
authorized 5,000,000 shares
Series A; issued and outstanding 1,800 shares in 1999 18 -
Series B; issued and outstanding 1,000 shares in 1999 10 -
Common stock, $0.01 par value, authorized 50,000,000 shares;
issued and outstanding 9,638,114 shares in 1999 and
5,018,437 shares in 1998 96,381 50,184
Additional paid-in capital 17,447,876 10,890,022
Accumulated deficit (19,354,413) (7,074,238)
-------------- --------------
Total stockholders' equity (deficit) (1,810,128) 3,865,968
-------------- --------------
$ 9,529,395 $ 14,090,656
============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
Year ended September 30,
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Net sales (Note D) $ 17,651,838 $ 17,091,432
Cost of sales 16,668,290 15,892,456
-------------- --------------
Gross profit 983,548 1,198,976
Operating expenses
Sales and marketing 206,014 565,185
Research and development 350,047 550,843
General and administrative 6,558,557 2,373,875
Asset impairment charges (Note O) 2,598,894 570,765
Depreciation and amortization 503,397 675,753
-------------- --------------
Total operating expenses 10,216,909 4,736,421
-------------- --------------
Operating loss (9,233,361) (3,537,445)
Other income (expense)
Interest expense (Note N) (678,966) (1,100,717)
Loss on sale of divisions (Note C) (1,575,497) -
Other income (expense) net 74,236 (39,361)
-------------- --------------
(2,180,194) (1,140,078)
-------------- --------------
Loss before income taxes (11,413,555) (4,677,523)
Income tax expense (Note J) 601,236 767,860
-------------- --------------
NET LOSS $ (12,014,791) $ (5,445,383)
============== ==============
Loss per common share (Note M)
Basic $ (1.82) $ (1.24)
Diluted (1.82) (1.24)
Weighted-average common and dilutive common
equivalent shares outstanding
Basic 7,133,344 4,397,490
Diluted 7,133,344 4,397,490
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Pen Interconnect, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Retained
Common Stock Preferred Stock Additional earnings
Number Number paid-in (accumulated
of shares Amount of shares Amount capital deficit) Total
---------- ---------- --------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at October 1, 1997 4,072,863 $ 40,729 - $ - $ 8,733,126 $ (1,628,855 $ 7,145,000
Common stock issued for services 10,833 108 - - 28,953 - 29,061
Common stock issued upon
conversion of subordinated
debentures 689,332 6,893 - - 993,107 - 1,000,000
Common stock issued upon
exercise of warrants 245,000 2,450 - - 487,549 - 489,999
Favorable conversion feature
of subordinated debentures - - - - 639,623 - 639,623
Common stock issued as interest
on subordinated debentures 409 4 - - 7,664 - 7,668
Net loss - - - - - (5,445,383) (5,445,383)
---------- ---------- --------- --------- ----------- ------------ ------------
Balances at September 30, 1998 5,018,437 50,184 - - 10,890,022 (7,074,238) 3,865,968
Common stock issued upon
conversion of subordinated
debentures 2,092,671 20,927 - - 1,479,073 - 1,500,000
Common stock issued upon
exercise of warrants 523,750 5,237 - - 387,561 - 392,798
Common stock issued upon
exercise of options 1,260,000 12,600 - - 365,400 - 378,000
Common stock issued as
interest on subordinated
debentures 4,089 41 - - 7,628 - 7,669
Common stock issued for
services 739,167 7,392 - - 749,095 - 756,487
Issuance of Series A Preferred
stock - - 1,800 18 1,799,982 - 1,800,000
Issuance of Series B Preferred
stock - - 1,000 10 999,990 - 1,000,000
Dividends on Preferred stock - - - - - (265,384) (265,384)
Stock options granted at below
the fair market value of the
stock on the date of the grant - - - - 769,125 - 769,125
Net loss - - - - - (12,014,791) (12,014,791)
---------- ---------- --------- --------- ----------- ------------ ------------
Balances at September 30, 1999 9,638,114 $ 96,381 2,800 $ 28 $17,447,876 $(19,354,413) $ (1,810,128)
========== ========== ========= ========= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
Years ended September 30,
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (12,014,791) $ (5,445,383)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 503,397 675,753
Amortization of favorable conversion feature on
subordinated debentures charged to interest expense 98,571 541,052
Allowance for bad debts 1,782,001 (28,482)
Allowance for obsolete inventory (248,689) 634,497
Deferred income taxes 601,236 766,991
Loss on disposal of property and equipment 11,425 (2,779)
Asset impairment charges 2,598,894 570,765
Common stock issued for services 756,487 29,061
Common stock issued in payment of interest 7,669 7,668
Stock options issued for services at below the fair market
value of the stock on the date of the grant 769,125 -
Loss on sale of divisions 1,575,497 -
Changes in assets and liabilities
Trade accounts receivable (1,960,961) (1,269,432)
Inventories 63,218 (958,795)
Prepaid expenses and other current assets 5,665 (168,165)
Other assets 66,065 30,760
Accounts payable 1,170,432 873,449
Accrued liabilities 191,133 (91,467)
-------------- --------------
Total adjustments 7,991,165 1,610,876
-------------- --------------
Net cash used in operating activities (4,023,626) (3,834,507)
-------------- --------------
Cash flows from investing activities
Purchase of property and equipment (208,712) (449,814)
Issuance of notes receivable (575,112) -
Collection on notes receivable 6,287 24,866
Proceeds from sale of divisions 1,075,000 395,690
-------------- --------------
Net cash provided by (used in) investing activities 297,463 (29,258)
-------------- --------------
</TABLE>
(Continued)
F-7
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended September 30,
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from financing activities
Proceeds from issuance of preferred stock 2,800,000 -
Preceeds from issuance of subordinated debentures - 2,500,000
Net change in line of credit 615,249 1,826,671
Proceeds from long-term obligations - 500,000
Principal payments on long-term obligations (883,201) (260,474)
Principal payments on notes payable - (641,505)
Proceeds from bridge loans 900,000 -
Principal payments on bridge loans (900,000) (100,000)
Principal payments on capital leases (57,246) (65,297)
Exercise of warrants 392,798 489,999
Exercise of stock options 378,000 -
-------------- --------------
Net cash provided by financing activities 3,245,600 4,249,394
-------------- --------------
Net (decrease) increase in cash and cash equivalents (480,563) 385,629
Cash and cash equivalents at beginning of year 657,777 272,148
-------------- --------------
Cash and cash equivalents at end of year $ 177,214 $ 657,777
============== ==============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 593,374 $ 605,627
Income taxes - 869
</TABLE>
Noncash investing and financing activities
Favorable conversion feature of subordinated debentures
As discussed in Note N - Subordinated Debentures, the Company recognized charges
related to the favorable conversion feature of the subordinated debentures
issued during fiscal 1999. The favorable conversion feature was recognized as a
deferred charge against the subordinated debenture balance with an offset to
additional paid-in capital. The deferred charge is being amortized over a period
corresponding to the time restrictions on conversion of the debentures into
stock. The amortization of the favorable conversion feature is recognized as
interest expense. Recognition of the favorable conversion feature and subsequent
amortization has resulted in an increase in interest expense of $98,571 in 1999
and $541,052 in 1998. At September 30, 1998, the favorable conversion feature
resulted in a $98,571 decrease in subordinated debentures, and a $639,623
increase in additional paid-in capital.
(Continued)
F-8
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended September 30, 1999 and 1998
Noncash investing and financing activities - continued
- ------------------------------------------------------
Conversion of subordinated debentures and notes payable
- -------------------------------------------------------
During fiscal 1999, convertible debentures in the amount of $1,500,000 were
converted into 2,092,671 shares of common stock. During fiscal 1998, convertible
debentures in the amount of $1,000,000 were converted into 689,332 shares of
common stock.
Notes receivable and investments
- --------------------------------
During fiscal 1998, the Company received stock in another company with a
guaranteed value of $1,024,000 as satisfaction for $900,000 of notes receivable,
$84,000 of accrued interest, and $40,000 of accounts receivable.
Sale of Divisions
- -----------------
On January 31, 1999, the Company sold substantially all of the assets and
certain liabilities of its Cable Division (Note C). Assets and Liabilities sold
were as follows:
Accounts receivable, net $ 310,467
Inventories 917,760
Prepaid expenses 17,509
Other assets 32,390
Property and equipment, net 1,496,459
Capital leases (42,526)
------------
Assets sold, net 2,732,059
Less considerations received
Note receivable $ 150,000
Cash 1,075,000
-------------
1,225,000
------------
Loss on sale of division $ (1,507,059)
============
On September 30, 1999, the Company sold substantially all of the assets and
liabilities of its MOTO-SAT Division (Note C). Assets and liabilities sold were
as follows:
Accounts receivable, net $ 180,896
Inventories 206,689
Notes receivable 33,377
Property and equipment, net 33,780
Accounts payable (56,507)
Accrued liabilities (9,145)
Other debt obligations (320,652)
------------
Assets sold, net 68,438
Proceeds received -
------------
Loss on sale of division $ (68,438)
============
(Continued)
F-9
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended September 30, 1999 and 1998
Noncash investing and financing activities - continued
- ------------------------------------------------------
Sale of Divisions - continued
- -----------------------------
The following unaudited proforma summary represents the results of operations as
if the disposition of the Cable and MOTO-SAT Divisions had occurred at the
beginning of the period presented, and does not purport to be indicative of what
would have occurred had the transaction actually occurred on that date, or of
results which may occure in the future. The pro forma weighted shares are
reported as if outstanding at the beginning of the period.
Fiscal year ended
September 30, 1999
(in thousands except
per share amount)
----------------------
Net sales $ 16,307
Operating loss (8,854)
Net loss (11,709)
Loss applicable to common stock (12,697)
Loss per share - basic (1.78)
Weighted shares outstanding 7,133
The accompanying notes are an integral part of these statements.
F-10
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying financial statements follows:
1. Business activity
Pen Interconnect, Inc. (the Company) was incorporated on September 30,
1985, in the State of Utah. The Company is a total interconnection
solution provider offering electronic manufacturing services industry
(EMSI) manufacturing (circuit board assembly) and custom design and
manufacturing of battery chargers, power supplies and uninterrupted power
supply (UPS) systems for original equipment manufacturers ("OEMs") in the
computer, peripherals, telecommunications, instrumentation, medical and
testing equipment industries. Most of the Company's sales consist of
printed circuit boards. The Company's customers include OEMs of computers
including mainframes, desktops, notebooks, pens and palmtops, as well as,
OEMs of computer peripheral equipment such as modems, memory cards, LAN
adapters, cellular phones, faxes and printers. Other customers include
OEMs of telecommunications, instrumentation and testing equipment.
2. Inventories
Inventories consist primarily of components and boards and are valued at
the lower of cost or market (first-in, first-out basis). Costs include
materials, labor, and overhead.
3. Property and equipment
Property and equipment are recorded at cost. Expenditures for additions
and major improvements are capitalized. Expenditures for repairs and
maintenance and minor improvements are charged to expense as incurred.
Gains or losses from retirements and disposals are recorded as other
income or expense.
Property and equipment are depreciated over their estimated useful lives.
Leasehold improvements and assets financed under capital leases are
amortized over their estimated useful lives or the lease term, whichever
is shorter. Depreciation and amortization are calculated using
straight-line and accelerated methods over the following estimated useful
lives:
Years
Production equipment 5-6
Furniture and fixtures 10
Transportation equipment 10
Leasehold improvements 5
F-11
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
4. Goodwill and other intangibles
The Company capitalized as goodwill, the excess acquisition costs over
the fair value of net assets acquired, in connection with business
acquisitions, which costs are being amortized on a straight-line method
over 15 years. The carrying value of goodwill is reviewed periodically
based on the undiscounted cash flows of the entities acquired over the
remaining amortization period. Should this review indicate that goodwill
is impaired, the Company's carrying value of the goodwill will be reduced
by the estimated shortfall of undiscounted cash flows.
5. Income taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to
reverse. An allowance against deferred tax assets is recorded when it is
more likely than not that such tax benefits will not be realized.
6. Revenue recognition
Revenue is recognized when products are shipped.
7. Cash and cash equivalents
For financial statement purposes, the Company considers all highly liquid
investments with an original maturity of three months or less when
purchased to be cash equivalents.
8. Research and development
Research and development costs are expensed as incurred.
9. Earnings (loss) per common share
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS
No. 128 established new standards for computing and presenting earnings
per share (EPS). SFAS No. 128 requires the presentation of basic and
diluted EPS. Basic EPS are calculated by dividing earnings (loss)
available to common stockholders by the weighted-average number of common
shares outstanding during each period. Diluted EPS are similarly
calculated, except that the weighted-average number of common shares
outstanding includes common shares that may be issued subject to existing
rights with dilutive potential.
F-12
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
10. 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, liabilities,
revenues and expenses during the reporting period. Estimates also affect
the disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
Such estimates of significant accounting sensitivity include the
allowance for doubtful accounts and the allowance for inventory overstock
or obsolescence, and the estimated useful lives of goodwill and other
intangibles.
On an ongoing basis, management reviews such estimates, and if necessary,
makes changes to them. The effect of changes in estimates are reflected
in the financial statements in the period of the change. Management
believes the estimates used in determining carrying values of assets as
of the respective balance sheet dates were reasonable at the dates the
estimates were made. During 1999 adjustments to certain estimates were
recognized.
11. Segment information
The Company adopted Statement of Financial Accounting Standards No. 131
(SFAS No. 131), "Disclosures about Segments of the Enterprise and Related
Information" in fiscal 1999. This statement requires an entity to report
financial and descriptive information about their reportable operating
segments. An operating segment is a component of an entity for which
financial information is developed and evaluated by the entity's chief
operating decision maker to assess performance and to make decisions
about resource allocation. The adoption of SFAS No. 131 did not have an
effect on the Company's financial position or results of operations, but
did affect the disclosure of segment information, as presented in Note Q.
12. Fair value of financial instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires certain disclosures regarding the fair value of financial
instruments. Cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities are reflected in the financial statements
at fair value because of the short-term maturity of these instruments.
Because of the unique aspects of the subordinated debentures and
long-term debt fair values cannot readily be determined.
13. Stock options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options rather than
adopting the alternative fair value accounting provided for under FASB
No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123).
F-13
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
14. Reclassifications
Certain reclassifications have been made to the 1998 financial statements
to conform with the 1999 presentation.
NOTE B - FINANCIAL RESULTS AND LIQUIDITY
The Company has incurred net losses of $12,014,791, $5,445,383, and
$1,735,483 in 1999, 1998, and 1997, respectively. In addition, the
Company has a stockholders' deficit of $1,810,128 and a working capital
deficit of $3,197,941 as of September 30, 1999. These factors, among
others, raise substantial doubt about the Company's ability to continue
as a going concern.
During 1999, the Company sold it's unprofitable Cable and MOTO-SAT
Divisions. However, the Company's operations continued to generate
operating losses and to use rather than provide cash flow. This has
caused the Company to be in violation of certain of its debt covenants
(Note G). The Company has issued preferred stock, debentures and
increased other borrowings to provide working capital to help meet
current obligations. However, the Company still currently does not
generate enough cash to fund operations, and to service it's debt
requirements.
The Company's plans to satisfy its operating and debt service
requirements are focused primarily on sale or merger opportunities
involving all or a portion of the Company. As disclosed in Note R, the
Company is in the process of negotiating certain sale agreements. In
connection with these plans, the Company's major lender has not exercised
it's right to foreclose on the Company's assets.
There can be no assurance that the Company will be successful in its
attempt to sell or merge all or a portion of the Company.
NOTE C - DISPOSITIONS
Cable Division
Effective January 31, 1999, the Company sold substantially all of the
assets and certain of the liabilities of its Cable Division to Cables To
Go, Inc (CTG). Net assets of $2,732,059 were sold for $1,075,000 in cash
and a royalty payment contingent upon the future revenues of the Cable
Division. $150,000 of the royalty payment was guaranteed and has been
recorded by the Company as a note receivable from CTG. CTG agreed to use
and compensate the Company for an additional $558,747 of the net assets
contingent upon certain of its future operating needs. The Company
originally recorded a loss of $948,312 upon disposition of the Cable
Division but has adjusted the loss to $1,507,059 based on its present
determination that CTG will not use nor compensate the Company for the
additional $558,747 of net assets.
F-14
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE C - DISPOSITIONS - CONTINUED
MOTO-SAT Division
Effective September 30, 1999, the Company sold substantially all of the
assets and liabilities of its MOTO-SAT Division to James Pendleton, the
Company's former CEO and Chairman. The net assets of $68,438 were sold in
exchange for Mr. Pendleton's agreement to waive any claim to
post-employment, deferred compensation, or retirement benefits. The
Company recognized a loss of $68,438 upon disposition of the MOTO-SAT
Division.
NOTE D - MAJOR CUSTOMERS AND CREDIT CONCENTRATION
Financial instruments, which potentially subject the Company to credit
risk, consist primarily of trade accounts receivable. The Company sells
to customers in the various technology industries located throughout the
United States. Sales have historically been concentrated with several
large original equipment manufacturers (OEMs) on a turnkey basis. To
reduce credit risk the Company performs ongoing credit evaluations of its
customers' financial condition and generally does not require collateral.
The majority of its trade receivables are unsecured. Allowances are
maintained for potential credit losses. The resulting losses have been
charged against the allowances.
Revenue from shipments to the largest customers (customers representing
over 10 percent of total sales) were 10, 19, and 44 percent of sales in
fiscal 1999 (10 percent, 24 percent and 59 percent of sales in fiscal
1998).
At September 30, 1999, the Company had accounts receivable due from the
above largest customers representing approximately 62 percent of
receivables and from a fourth customer representing an additional 27
percent of accounts receivable. The Company's concentration of accounts
receivable among the 4 largest customers is approximately 89 percent of
total accounts receivable (75 percent at September 30, 1998). Remaining
accounts receivable at September 30, 1999, were due from a variety of
other customers under normal credit terms.
NOTE E - NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
8% note receivable due on June 30, 2000 with monthly interest only
payments; unsecured. $ 552,612 $ -
</TABLE>
F-15
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE E - NOTES RECEIVABLE - CONTINUED
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Note receivable from a company, due in monthly payments as determined by
a royalty agreement; secured by a royalty agreement. 150,000 -
Note receivable due on demand following the registration of certain
shares of the Company's stock; unsecured. 22,500 -
10% note receivable due in monthly payments of $1,500 including interest,
collateralized by inventory, accounts receivable, machinery, and
equipment - 33,377
10% note receivable due in monthly payments of $1,297 including interest,
collateralized by inventory, accounts receivable, machinery, and
equipment - 6,287
----------- ----------
725,112 39,664
Less current maturities 575,112 35,675
----------- ----------
$ 150,000 $ 3,989
=========== ==========
</TABLE>
NOTE F - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Raw material $ 3,253,574 $ 3,070,958
Work-in-process 1,507,108 1,391,664
Finished goods 59,315 35,572
----------- -----------
4,819,997 4,498,194
Less allowance for obsolete inventory (569,336) (818,025)
----------- -----------
$ 4,250,661 $ 3,680,169
=========== ===========
</TABLE>
F-16
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE G - CREDIT FACILITY
The Company has entered into a financing agreement with a bank for
$6,300,000, which expires in September 2001. The agreement consists of a
$5,000,000 revolving credit line and two term loans for $800,000 ("Loan
A") and $500,000 ("Loan B"), respectively. The revolving credit loan is
at prime plus 1.75 percent and is collateralized by accounts receivable
and inventory. The revolving credit loan is subject to a default interest
rate should the Company become in violation of any of the loan covenants.
Loan A is at a fixed rate of 10.16 percent and is collateralized by
machinery and equipment. Loan B is at a fixed rate of 10.32 percent and
is collateralized by machinery and equipment of the Company and personal
guarantees of certain officers of the Company. The amount available on
the revolving credit line is calculated by applying certain percentages
to the Company's collateralized assets (borrowing base) subject to the
ceiling amount of $5,000,000. This agreement requires that the Company
maintain certain financial ratios, meet specific minimum levels of
earnings and net worth; restricts employee advances, capital
expenditures, compensation, and additional indebtedness; and restricts
the payment of dividends. The Company has borrowed $4,436,562 under the
line of credit at September 30, 1999 ($4,064,361 at September 30, 1998).
At times, including at September 30, 1999, the Company has been in
violation of certain of the covenants of this credit facility. The
Company operated under a forbearance agreement during all of fiscal 1999.
As of September 30, 1999, the Company has not received a waiver from the
lender and all obligations under this credit facility are payable on
demand of the lender and are classified as current liabilities in the
balance sheet. Subsequent to September 30, 1999, the lender declared the
loan agreement in default and notified the Company of its intention to
declare all indebtedness due and payable on February 28, 2000.
NOTE H - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Noninterest-bearing note, payable in 12 monthly installments of $74,509,
maturing in July 2000, collateralized by inventory $ 844,104 $ -
Noninterest-bearing note, payable in 12 monthly installments of $51,280,
maturing in June 2000, collateralized by inventory 415,366 -
10.32% note to a financial institution, payable in 48 monthly
installments of $10,417 plus interest, due on demand, collateralized by
substantially all of the Company's property and equipment and personal
guarantees of certain officers of the Company (Note G) 214,579 489,583
</TABLE>
F-17
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE H - LONG-TERM OBLIGATIONS - CONTINUED
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
7.50% note, past due 13,617 -
Noninterest-bearing note, due in October 1999 100,000 -
10.16% note to a financial institution, payable in 48 monthly
installments of $16,667 plus interest, due on demand, collateralized by
substantially all of the Company's property and equipment (Note G) 79,992 599,996
Noninterest-bearing note to a parts vendor, past due 11,720 11,720
11.25% note to a financial institution, past due 3,100 3,100
Note to an individual with interest imputed at 10% per annum, payable in
monthly payments of $2,500 - 80,104
----------- -----------
1,682,478 1,184,503
Less current maturities 1,682,478 1,132,538
----------- -----------
$ - $ 51,965
=========== ===========
</TABLE>
As of September 30, 1999, all of the Company's obligations are classified
as current. $294,571 of obligations are due on demand because the Company
is in violation of certain loan covenants as described in Note G. The
balance of the Company's obligations come due in fiscal 2000.
NOTE I - LEASES
1. Operating leases
The Company conducts a portion of its operations in leased facilities
under noncancelable operating leases expiring through 2005. The minimum
future rental commitments under operating leases are as follows:
Year ending September 30,
2001 $ 373,783
2002 376,733
2003 371,183
2004 391,283
2005 395,303
Thereafter 305,522
------------
$ 2,213,807
============
F-18
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE I - LEASES - CONTINUED
The leases generally provide that property taxes, insurance and
maintenance expenses are obligations of the Company. It is expected that
in the normal course of business, operating leases that expire will be
renewed or replaced by leases on other properties. Rental expense for all
operating leases was $558,492 and $565,490 for the years ended September
30, 1999 and 1998, respectively.
2. Capital leases
Maturities of capital lease obligations are as follows:
Year ending September 30,
2000 $ 161,935
2001 150,515
2002 112,326
2003 78,153
Thereafter -
---------
Total minimum lease payments 502,929
Less amount representing interest 81,119
---------
Present value of net minimum lease payments 421,810
Less current portion 122,759
---------
$ 299,051
=========
Included in property and equipment is $462,063 of equipment under capital
leases at September 30, 1999. The related accumulated amortization is
$16,590.
NOTE J - INCOME TAXES (BENEFIT)
Income tax expense (benefit) consists of the following:
1999 1998
--------- ---------
Current
Federal $ - $ -
State - -
--------- ---------
- -
Deferred
Federal 518,265 636,762
State 82,971 131,098
--------- ---------
601,236 767,860
--------- ---------
$ 601,236 $ 767,860
========= =========
F-19
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE J - INCOME TAXES (BENEFIT) - CONTINUED
Reconciliation of income taxes (benefit) computed at the federal
statutory rate of 34 percent is as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Federal income taxes (benefit) at statutory rate $ (3,880,608) $ (1,590,358)
State income taxes (benefit), net of federal tax benefit (537,932) (219,431)
Permanent differences 4,842 9,373
Increase in valuation allowance 5,014,934 2,568,276
------------- -------------
Income taxes $ 601,236 $ 767,860
============= =============
Deferred tax assets and liabilities consist of the following:
1999 1998
------------- -------------
Deferred tax assets (liabilities)
Depreciation and amortization $ 763,404 $ (130,832)
Net operating loss 5,619,324 2,505,871
Reserve for inventory obsolescence 220,442 316,731
Allowance for doubtful accounts 732,014 138,411
Impairment of investment - 117,454
Reserve for vacation 38,934 12,785
------------- -------------
Deferred tax asset 7,374,118 2,960,420
Valuation allowance (7,374,118) (2,359,184)
------------- -------------
Net deferred tax asset $ - $ 601,236
============ =============
</TABLE>
The Company sustained net operating losses in each of th periods
presented. Deferred tax assets and income tax benefits were recorded in
1998 for net deductible temporary differences and net operating loss
carryforwards. For 1999, there were no deferred tax assets or income tax
benefits recorded in the financial statements for net deductible
temporary differences or net operating loss carryforwards because the
likelihood of realization of the related tax benefits cannot be fully
established. A valuation allowance of $7,374,118 has been recorded in
1999 ($2,359,184 in 1998) to reduce the net deferred tax assets to their
estimated net realizable value. The change in the valuation allowance was
$5,014,934 and $2,568,276 for the years ended September 30, 1999 and
1998, respectively.
As of September 30, 1999, the Company had net operating loss
carryforwards for tax reporting purposes of approximately $14,500,000
expiring in various years through 2020.
F-20
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE K - STOCK OPTION PLAN
The Company has a Stock Option Plan (the Plan). The Plan provides for the
granting of both Incentive Stock Options (ISOs) or NonQualified Options
(NQOs) to purchase shares of common stock. ISOs are granted at not less
than market value on the date of grant, whereas NQOs may be granted at
not less than 85 percent of market value on the date of the grant.
Options may be granted under the Plan to all officers, directors, and
employees of the Company. In addition, NQOs may be granted to other
parties who perform services for the Company.
The Company also issues warrants in conjunction with various transactions
with third parties.
The Company accounts for the Plan under APB 25 and related
interpretations. Accordingly, no compensation costs are recognized for
options granted under the Plan at or in excess of the fair market value
of the stock on the date of the grant. During 1999, the Company granted
3,326,667 options to consultants at below the fair market value of the
stock on the date of grant and recorded an expense of $769,125. All other
stock options were granted at prices at or in excess of the fair market
value of the stock. Also during 1999, the Company re-priced certain
options and warrants to the fair market value of stock on the date of the
re-pricing. 982,000 options and 523,750 warrants were re-priced reducing
the weighted average exercise price of these options and warrants from
$1.82 to $0.71. Had compensation cost for the Plan been determined based
on the fair value of the options at the grant dates for awards under the
Plan consistent with the method prescribed by FAS No. 123, the Company's
net loss and loss per common share would have been increased to the pro
forma amounts indicated below:
1999 1998
------------ --------------
Net loss
As reported $ (12,017,791) $ (5,445,383)
Pro forma (13,175,657) (6,112,600)
Loss per common share
As reported - basic $ (1.82) $ (1.24)
Pro forma - basic (1.99) (1.39)
The fair value of these options and warrants was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1999 and 1998, respectively: expected
volatility of 131.86 and 79.07 percent; weighted-average risk-free
interest rate of 5.50 and 5.26 percent; and expected life equal to the
actual life for both periods. The weighted-average fair value of options
and warrants granted was $0.33 and $0.83 for 1999 and 1998, respectively.
F-21
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE K - STOCK OPTION PLAN - CONTINUED
The following is a summary of the activity relating to options and
warrants through September 30, 1999:
Weighted-
Warrants average
and stock Exercise exercise
options price price
----------- ----------- --------
Outstanding at October 1, 1997 6,069,000 1.38-6.50 4.08
Granted 2,305,000 1.00-2.50 2.06
Canceled (59,000) 1.38-6.00 1.83
Exercised (245,000) 2.00 2.00
-----------
Outstanding at September 30, 1998 8,070,000 1.38-6.50 3.88
Granted 6,131,667 0.30-1.37 .056
Expired/Canceled (1,331,250) 1.38-3.00 1.52
Exercised (1,783,750) 0.30-0.75 0.43
-----------
Outstanding at September 30, 1999 11,086,667 0.30-6.50 2.45
===========
Exercisable at September 30, 1999 10,791.767 0.30-6.50 2.49
===========
The following table summarizes information concerning currently
outstanding options and warrants:
Options and Warrants Outstanding:
---------------------------------
Weighted-Average
Range of Remaining
Exercise Number Contractual Weighted-Average
Price Outstanding Life (Years) Exercise Price
----------- ------------ ------------- --------------
$ 0.30-1.00 5,888,667 3.29 $ 0.63
1.28-2.00 1,635,000 5.46 1.87
2.13-3.00 713,000 2.17 2.55
6.50 2,850,000 1.09 6.50
----------
11,086,667
==========
F-22
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE K - STOCK OPTION PLAN - CONTINUED
The following table summarizes information concerning currently
exercisable options and warrants:
Options and Warrants Exercisable:
---------------------------------
Weighted-Average
Range of Remaining
Exercise Number Contractual Weighted-Average
Price Outstanding Life (Years) Exercise Price
----------- ------------ ------------- --------------
$0.30-1.00 5,613,167 3.25 $ 0.63
1.28-2.00 1,635,000 5.46 1.87
2.13-3.00 693,600 2.20 2.54
6.50 2,850,000 1.09 6.50
----------
10,791,767
==========
NOTE L - COMMITMENTS AND CONTINGENCIES
1. Employment agreements
The Company has entered into agreements with five key employees and
officers which provide for annual salaries and incentive bonuses.
Incentive bonuses are calculated as a percentage of gross profits and/or
sales of the Company.
Annual salaries under these employment agreements, in the aggregate, are
as follows:
Year ending September 30,
2001 $ 292,346
2002 195,000
2003 125,000
Thereafter -
------------
$ 612,346
============
Certain of the employment agreements provide for automobile allowances
and other forms of compensation not included in the above amounts.
2. Litigation
From time to time the Company is engaged in various lawsuits or disputes
as plaintiff or defendant arising in the normal course of business. In
the opinion of management, based upon advice of counsel, the ultimate
outcome of these matters will not have a material impact on the Company's
financial position or results of operations.
F-23
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE M - LOSS PER SHARE
The following data shows the amounts used in computing net loss per
common share, including the effect on net loss for preferred stock
dividends and a beneficial conversion feature associated with preferred
stock. The following data also shows the weighted average number of
shares and dilutive potential common stock. For 1999, net loss applicable
to common stock includes a noncash imputed dividend to the preferred
stockholders related to the beneficial conversion feature on the Series A
and Series B preferred stock (see Note P). The beneficial conversion
feature is computed as the difference between the market value of the
common stock into which the Series A and Series B preferred stock can be
converted and the value assigned to the Series A and Series B preferred
stock in the private placement. The imputed dividend is a one-time,
noncash charge against the net loss per common share.
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Net loss $ (12,014,791) $ (5,445,383)
Dividends on preferred stock (265,384) -
Imputed dividends from beneficial conversion feature (722,832) -
-------------- -------------
Loss applicable to common stock $ (13,003,007) $ (5,445,383)
============== =============
Common shares outstanding during the entire period 5,018,437 4,072,863
Weighted-average common shares issued during the period 2,114,907 324,627
-------------- -------------
Weighted-average number of common shares used in basic EPS 7,133,344 4,397,490
Dilutive effect of stock options, warrants, and convertible
preferred stock - -
-------------- -------------
Weighted-average number of common shares and dilutive
potential common stock used in diluted EPS $ 7,133,344 $ 4,397,490
============== =============
</TABLE>
For the years ended September 30, 1999 and 1998, all of the options and
warrants that were outstanding, as described in Note K, were not included
in the computation of diluted EPS because to do so would have been
anti-dilutive.
F24
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE N - SUBORDINATED DEBENTURES
On October 22, 1997, the Board of Directors of the Company approved the
issuance of up to $1,500,000 of 3 percent convertible Debentures with a
maximum term of 24 months. On June 16, 1998, the Board of Directors of
the Company approved the issuance of up to $1,000,000 of additional three
percent convertible debentures with a maximum term of 24 months. The
convertible debentures (the "Debentures") mature, unless earlier
converted by the holders, into shares of common stock of the Company. The
Company filed a registration statement with the United States Securities
and Exchange Commission with respect to the common stock of the Company
into which the Debentures may be converted.
The Debentures were convertible by the holders thereof into the number of
shares of common stock equal to the face amount of the Debentures being
converted divided by the lesser of (i) eighty percent (80 percent) of the
closing bid price of the Company's common stock as reported on the NASDAQ
Small Cap market on the day of conversion, or (ii) $2.75. The Debentures
could be converted in three equal installments beginning on the earlier
of (i) the 75th day of their issuance, and continuing through the 135th
day of their issuance, or (ii) the day following the effective date of
the Registration Statement, through the 60th day following the effective
date of the Registration Statement. The Company could cause the
Debentures to be converted into shares of common stock after the 110th
day following the effective date of the Registration Statement, if the
common stock traded at or above $5.50 per share for 20 consecutive days.
As of September 30, 1998, the Company had issued all $2,500,000 of these
convertible Debentures and $1,000,000 had been converted to 689,332
shares of common stock. As of September 30, 1999, the remaining
$1,500,000 of convertible Debentures had been converted into 2,092,671
shares of common stock.
Because of the favorable conversion feature of the Debentures, the
Company has recognized interest expense relating to the price below
market at which the Debentures can be converted into common shares of
stock. The interest is initially set up as a deferred charge against the
subordinated debenture balance with an offset to additional paid-in
capital. The deferred interest is amortized over a period corresponding
to time restrictions as to when the Debentures can be converted into
stock. The resulting charge to interest expense increases the effective
interest rate of the Debentures. Deferred interest expense of $250,032
was recorded on the $1,000,000 in Debenture issue relative to the
favorable conversion feature and was amortized over four months and
charged to interest expense. Amortization of the $250,032 deferred charge
totaled $98,571 in fiscal 1999 ($151,461 in fiscal 1998). This interest
along with the stated 3 percent interest rate in the Debentures results
in an inherent interest rate of 31 percent.
In connection with the $1,500,000 Debenture issue, the Company recorded
$389,591 of deferred interest expense related to the beneficial
conversion feature. The entire deferred charge was amortized and charged
to interest expense as of September 30, 1998. This interest when added to
the stated 3 percent interest rate of the Debenture results in an
inherent interest rate of 28 percent.
F-25
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE O - ASSET IMPAIRMENT CHARGES
On an ongoing basis, management reviews the valuation of long-lived
assets, including intangible assets, to determine possible impairment by
comparing the carrying value to the undiscounted estimated future cash
flows of the related assets and necessary adjustments, if any, are
recorded. Based upon operating losses from certain divisions, continued
cash flow problems and managements decision to negotiate the sale of
other divisions, the Company reduced the carrying costs of certain of its
long-lived assets by $2,598,894 in 1999 ($570,765 in 1998) to better
reflect management's current expectations for the realization of these
assets. The adjustments relate to assets of the Company's various
divisions.
The following is a summary of the assets charged-off to impairment:
1999 1998
-------------- ------------
Goodwill $ 1,873,935 $ 267,414
Investments 724,959 303,351
-------------- ------------
$ 2,598,894 $ 570,765
============== ============
NOTE P - CONVERTIBLE PREFERRED STOCK
During 1999, the Company issued two series of preferred stock. Series A,
consisting of 1,800 shares with a par value of $0.01 per share, was
issued in February 1999 for $1,000 per share and has a liquidation value
of $1,000 per share. Series B, consisting of 1,000 shares, was issued in
March 1999 at the same price and par value as the Series A issue and also
has a liquidation value of $1,000 per share. The Company paid
approximately $250,000 in fees and expenses to issue both series of
preferred stock. Both series of preferred stock carry a 16 percent
dividend rate, which is to be paid quarterly. If and when the Company's
stock is listed again on NASDAQ, the dividend rate will drop to 8
percent.
Both issuances of preferred stock are convertible into shares of the
Company's Common Stock. Each share of Series A preferred stock is
convertible into an amount of shares of the Company's common stock equal
to $1,000 divided by the average of the two lowest closing bid prices of
the Company's common stock during the period of 22 consecutive trading
days ending with the last trading day before the date of conversion,
after discounting that market price by 15 percent for Series A and 20
percent for Series B (the "Conversion Price"). The maximum Conversion
Price for the Series A preferred stock was $1.17 per share. The shares of
Series B preferred stock are convertible into common stock at the same
Conversion Price as the Series A preferred stock except that the maximum
Conversion Price was $0.79 per share. In September 1999, the maximum
Conversion Price was reduced to $0.53 per share.
F-26
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE Q - SEGMENT INFORMATION
During 1999, the Company adopted SFAS No. 131, which establishes
standards for reporting information about operating segments. Operating
segment are components of an enterprise about which separate financial
information is available that is evaluated on a regular basis by the
chief operating decision maker in deciding how to allocate resources to
an individual segment and in assessing the performance of a segment. The
Company considers its separate divisions to be operating segments because
of the different products produced by each.
The Company generally evaluates operating segments based on sales and
gross profit. Information about the Company's operating segments are as
follows:
1999 1998
--------------- ---------------
Revenues:
InCirT Division $ 15,516,431 $ 11,843,402
Cable Division 1,052,538 3,662,717
Other Divisions 1,082,869 1,585,313
--------------- ---------------
$ 17,651,838 $ 17,091,432
=============== ===============
Gross Profit:
InCirT Division $ 936,420 $ 1,092,924
Cable Division 7,888 (113,564)
Other Divisions 39,240 219,616
--------------- ---------------
$ 983,548 $ 1,198,976
=============== ===============
Indentifiable Assets:
InCirT Division $ 8,137,540 $ 7,371,248
Cable Division - 4,536,643
Other Divisions 386,091 1,457,098
--------------- ---------------
$ 8,523,631 $ 13,364,989
============== ==============
Included in the "Other Divisions" are the Company's MOTO-SAT and
PowerStream divisions.
The following table reconciles the identifiable assets aggregated above
to the total assets reported in these financial statements:
1999 1998
--------------- ---------------
Above aggregated identifiable
assets $ 8,523,631 $ 13,364,989
Unallocated corporate assets:
Cash 176,299 -
Notes receivable 725,112 -
Deferred income taxes - 725,667
Other 104,353 -
------------- ---------------
$ 9,529,395 $ 14,090,656
============= ==============
F-27
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999 and 1998
NOTE R - SUBSEQUENT EVENTS
In December 1999, the Company signed a letter of intent with a company to
negotiate the sale of the Company's InCirT Division. The letter of intent
serves as a basis for the parties to negotiate formal, definitive
agreements, memorializing all the terms of the merger. Also in December
1999, the Company signed a letter of intent with a company to negotiate
the sale of the Company's PowerStream Division.
NOTE S - SUMMARIZED QUARTERLY INFORMATION (UNAUDITED)
Following is a summary of quarterly results of operation for the years
ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
Fiscal 1999 December 31 March 31 June 30 September 30
-------------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 4,757,839 $ 2,828,078 $ 5,098,525 $ 4,967,396
Gross profit (loss) 166,621 403,634 892,615 (479,322)
Net loss (1,245,235) (2,398,526) (716,235) (7,654,795)
Loss per share -
basic and diluted (0.22) (0.46) (0.19) (0.95)
Fiscal 1998
Net sales 3,904,717 3,698,727 4,510,112 4,977,876
Gross profit (loss) 894,344 856,579 975,660 (1,482,607)
Net earnings (loss) (55,966) (192,170) 358 (5,197,605)
Loss per share -
basic and diluted (0.01) (0.05) - (1.18)
</TABLE>
The fiscal 1999 figures include certain significant fourth quarter
adjustments including asset impairment charges of $1,873,935, an increase
to the allowance for doubtful accounts of $1,434,693, expense related to
the issuance of certain stock options of $769,125, additional loss on
sale of divisions of $558,747, an increase to the allowance for obsolete
inventory of $496,371, a write-down of inventory based on resetting
standard costs of $251,981, and income tax expense relating to an
increase in the deferred tax asset valuation allowance of $217,740.
The fiscal 1998 figures include certain significant fourth quarter
adjustments including a write-down of inventory based on resetting
standard costs of $930,145, income tax expense relating to an increase in
the deferred tax asset valuation allowance of $766,991, asset impairment
charges of $570,765, an increase to the allowance for obsolete inventory
of $278,901, interest expense and amortization related to the favorable
conversion feature of convertible debentures of $250,000 and the
write-off of obsolete inventory of $219,209.
F-28
<PAGE>
Rev 4 AMENDMENT IN TOTAL AND COMPLETE
RESTATEMENT OF THE DEFERRED COMPENSATION
SALARY CONTINUATION PLAN AND
EMPLOYMENT AGREEMENT
This Amendment in Total and Complete Restatement of The Deferred Compensation
Salary Continuation Plan and Employment Agreement is entered into effective the
23rd day of July, 1999 by and between Pen Interconnect, Inc., a Utah Corporation
(hereinafter referred to as the "Company"), and by James S. Pendleton
(hereinafter referred to as "Pendleton").
WHEREAS, effective the 31st day of December, 1995 the Company and Pendleton
entered into a Deferred Compensation Salary Continuation Plan which was Amended
on the 1st day of July, 1998 (hereinafter referred to as the "Deferred
Compensation Plan");
WHEREAS, effective the 1st day of April, 1996 the Company and Pendleton entered
into am Employment Agreement, which Employment Agreement was Amended on the 1st
day of July, 1998 (hereinafter referred to as the "Employment Agreement");
WHEREAS, the Company is in the process of corporate restructuring and desires to
modify the Company's obligations under the Deferred Compensation Plan and the
Employment Agreement;
WHEREAS, the Company and Pendleton are changing their rights and
responsibilities pursuant to the Deferred Compensation Plan the Employment
Agreement which changes benefit both the Company and Pendleton;
NOW, THEREFORE, for and in consideration of the mutual covenants, conditions and
promises contained herein the Company and Pendleton agree that the Deferred
Compensation Plan and the Employment Agreement as presently in force are
terminated and the following terms and conditions are in substitution therefor:
1. CONSULTING CONTRACT. Company and Pendleton hereby enter into an Independent
Consulting Contract wherein Pendleton shall provide to the Company consulting
services from June 1, 1999 through December 30, 1999. The company shall pay
Pendleton for his services under this Consulting Agreement the total amount of
$450,830.00 payable as follows:
DATE OF PAYMENT AMOUNT OF PAYMENT
June 15, 1999 $ 6,571.00
June 30, 1999 $ 6,571.00
July 15, 1999 $ 6,571.00
July 31, 1999 $ 6,571.00
August 15, 1999 $ 6,571.00
DATE OF PAYMENT AMOUNT OF PAYMENT
August 31, 1999 $ 6,571.00
September 15, 1999 $ 6,571.00
September 30, 1999 $ 6,571.00
October 15, 1999 $ 6,571.00
October 30, 1999 $ 6,571.00
November 15, 1999 $ 6,571.00
November 30, 1999 $ 6,571.00
December 15, 1999 $ 6,571.00
December 30, 1999 $ 6,571.00
If the Company fails to timely make any of the above payments, a 10% penalty
shall be added to the amount due.
<PAGE>
December 01, 1999 315,408 shares of Registered
Common Stock for payment of
contract payment for January
2000 through December 2000
2. CABLES TO GO ASSIGNMENTS. In addition to the amounts set forth in paragraph 1
above and as additional compensation for the consulting services, the Company
shall pay to Pendleton the first $367,976.00 of the proceeds received from
Cables To Go under the contract between the Company and Cables to Go (the
"Cables Contract"). The Company will also pay to Pendleton fifty percent (50%)
of all amounts received under the Cables Contract after receipt of the first
$367,976.00. The Company will use all reasonable efforts and expend reasonable
amounts to collect all amounts due under the Cables Contract. The Company and
Pendleton acknowledge that the amounts receivable under the Cables Contract are
variable and there is no guarantee that the Company will be entitled to any
amounts from which to pay Pendleton. The Company will provide for a modification
of the Cables Contract so that the first $367,976.00 of the amounts to be paid
under the Cables Contract and fifty percent of the amounts to be paid under the
Cables Contract in excess of $367,976.00 will be paid directly to Pendleton. The
annual contract amount due from January 1, 2000 through December 31, 2000 is
$157,704.00. The Company agrees to issue to Pendleton 315,408 shares of the
Company's common stock fully registered with the right to sell at any time,
without restriction, in lieu of the contract payment for year 2000 in the amount
of $157,704, which will be considered to be part of the $450,830.00 total due
Pendleton. The stock shall be registered in the SB 2 submitted to the SEC in
June of 1999 and revised in October 1999. The Company shall issue the registered
common stock before December 1 1999. The Company agrees to pay the sum of
$13,142.00 per month for each additional month that the company delays the
issuance of the registered common stock after December 1, 1999. The Company
guarantees that the amount received from the sale of the stock shall not be less
than $158,704. If the amount received for the sale of the stock is less than
this amount the Company will pay in cash to Pendleton the short fall amount. In
the event that the amount received for the sale of the stock is more than
$270,000 Pendleton will pay the Company 50% of the proceeds received in excess
of the $270,000.
In addition to the above, the Company will assign to Pendleton fifty percent of
the proceeds received from the sale of the consigned inventory now held by
Cables to Go. Part of the duties under the Consulting Contract set forth in
paragraph 1 above, shall be the responsibility for the disposition of the
consigned inventory.
3. FINOVA OBLIGATIONS. The Company agrees to pay in full its Term Loan B with
FINOVA on or before December 31, 1999. In addition, the Company shall indemnify
and hold Pendleton harmless from any and all FINOVA obligations. The Company
shall obtain a complete release of Pendleton from any obligations to FINOVA on
or before December 31, 1999. In the event the Company is not able to payoff the
Term Loan B and/or obtain a release from FINOVA by December 31, 1999, the
Company and Mr. Pendleton shall agree to extend the date on a month by month
bases, not to exceed 90 days.
4. KEY MAN INSURANCE. The Company agrees to continue in full force and effect
and pay all premiums on the one million dollar life insurance policy with
Pendleton as insured through December 31, 1999 or until the Term Loan B is paid
in full and /or the release of obligations is received from FINOVA. On or before
December 31, 1999 the Company shall transfer to Pendleton the ownership of such
policy and all values contained therein. The transfer shall not effect the
Company's obligation to make all premium payments on the policy through December
31, 1999 or until the Term Loan B is paid in full or the release of the
obligation to FINOVA is received.
5. ISSUANCE OF NEW WARRANTS. The Company shall issue to Pendleton or his
designee warrants to purchase 250,000 shares of the Company's common stock at a
price of sixty five cents
<PAGE>
$.65) per share. The warrants shall be exercisable by Pendleton or his designee
at any time beginning upon issuance and continuing for ten years thereafter. The
Company agrees to give Pendleton or his designee piggy back registration rights
and agrees to register the warrants and the underlying stock, within 12 months
from the date of this agreement.
6. MODIFICATION OF EXISTING OPTIONS. The Company shall modify the options
presently held by Pendleton to purchase 200,000 shares of the Company's common
stock so that the exercise price is sixty five cents ($.65) per share with an
exercise period commencing upon the effective date of this Agreement and
continuing until ten years from the effective date of this Agreement. The
Company agrees to register 66,666 of these options and the underlying common
stock with the Company's SB 2 registration to be filed in June, 1999 and shall
register the remaining options on or before December 9, 1999.
7. OBLIGATION TO ASSIST IN SALE OF STOCK AND PIGGY BACK RIGHTS. Once the price
of the common stock of the Company reaches a price of $1.50 to $2.00 per share,
the Company agrees to assist Pendleton in selling all or part off 200,000 shares
of the Company's common stock now owned by Pendleton as determined by Pendleton,
in either a public or private sale. The Company agrees to assist Pendleton in
selling 100,000 shares of the Company's common stock for $1.00 or more and will
replace the stock with Rule 144 stock in the amount of 50,000 shares with piggy
back registration rights with the next registration of Pen Interconnect stock at
no cost to Pendleton. The Company will assist in Pendleton selling all or such
part of the 100,000 shares of the Company's common stock now owned by Pendleton,
as determined by Pendleton, in either a public or private sale. In addition,
whenever the Company registers stock of the Company for sale in a public
offering, the Company shall grant to Pendleton the right to act as a selling
shareholder in the public offering, if the underwriter will permit.. The Company
shall bear the expenses of the public offering excepting usual and ordinary
Underwriter's commissions. Pendleton shall be able to sell in the public
offering all or any portion of the 100,000 shares referenced above in this
paragraph which have not been previously sold, and an additional 200,000 shares
purchased or to be purchased by Pendleton pursuant to any of the warrants
granted to Pendleton or options modified pursuant to this Agreement or the sale
of common stock issued in the amount of 315,408 in lieu of the contract payment.
Pendleton shall have the right to designate which shares, options or warrants
will be subject to the piggy back rights.
8. EXPENSE ACCOUNT REIMBURSEMENT. The Company agrees to reimburse Pendleton for
Company expenses paid or incurred by Pendleton in the amount of $25,832.80 plus
interest which shall be paid on or before December 15, 1999. Company agrees to
make monthly interest and principal payment of $466.00 per month Starting
October 15,1999 until paid in full.
9. MOTOSAT DIVISION. As additional consideration for the modification of the
Deferred Compensation Agreement, the Company and Pendleton agree to enter into
and carry into effect the Asset Purchase Agreement between the Company and Mobil
Technology, Inc., a copy of which is attached hereto as Exhibit "A" and made a
part hereof providing for the sale of the Motosat Division.
10. VESTING. Pendleton's right to receive the Benefits hereunder are fully
vested.
11. MERGER OR CONSOLIDATION. The Company shall not merge or consolidate with any
other corporation or entity or reorganize unless and until such succeeding and
continuing entity agrees to assume and discharge the obligations of the Company
under this Agreement. In the event the Company shall reorganize, consolidate or
merge with any other company this Agreement shall become an obligation of the
new company or of any company taking over the duties and responsibilities of the
Company. In such event, the Company may assign the obligations hereunder to the
successor or
<PAGE>
urviving company. Upon such assumption, the term "Company" as used in this
Agreement shall be deemed to refer to such successor entity.
12. RECAPITALIZATION AND/OR REORGANIZATION. In the event that the shares of
common stock of the Company, as presently constituted, shall be changed into or
exchanged for a different number or kind of shares of stock or other securities
of the Company or of another company (whether by reason of merger,
consolidation, recapitalization, reclassification, split up, combination of
shares or otherwise), or if the number of such shares of common stock shall be
increased through the payment of a stock dividend, and an equitable adjustment
in the number of shares is appropriate to give effect to the intent of this
Agreement, then such adjustment shall be made.
13. AMENDMENT. This Agreement may be amended or revoked, in whole or part, only
upon the written agreement of all of the parties.
14. BINDING EFFECT. This Agreement shall be binding upon the parties hereto,
their heirs, assigns, successors, executors, administrators and they shall agree
to execute any and all instruments necessary for the fulfillment of the terms of
this Agreement.
15. ATTORNEY'S FEES. If any legal action or other proceeding is brought for the
enforcement of this Agreement, or because of an alleged dispute, breach,
default, or misrepresentation in connection with any of the provisions of this
Agreement, the successful or prevailing party or parties shall be entitled to
recover reasonable attorney's fees and other fees and costs incurred in that
action or proceedings, in addition to any other relief to which it or they may
be entitled.
16. APPLICABLE LAW. This Agreement shall be construed in accordance with and
governed by the laws of the State of Utah.
IN WITNESS WHEREOF, the parties hereto have set their hands the day and year
first above written. COMPANY:
Pen Interconnect, Inc.
By:
Its President
Pendleton:
<PAGE>
Rev-12a AMENDMENT IN TOTAL AND COMPLETE
RESTATEMENT OF THE DEFERRED COMPENSATION
SALARY CONTINUATION PLAN AND
EMPLOYMENT AGREEMENT
This Amendment in Total and Complete Restatement of The Deferred
Compensation Salary Continuation Plan and Employment Agreement is
entered into effective the 1st day of October, 1999 by and between
Pen Interconnect, Inc., a Utah Corporation (hereinafter referred to
as the "Company"), and by Wayne R. Wright (hereinafter referred to as
"Wright").
WHEREAS, effective the 31st day of December, 1995 the Company
and Wright entered into a Deferred Compensation Salary Continuation
Plan which was Amended on the 1st day of July, 1998 (hereinafter
referred to as the "Deferred Compensation Plan");
WHEREAS, effective the 1st day of April, 1996 the Company and
Wright entered into am Employment Agreement, which Employment
Agreement was Amended on the 1st day of July, 1998 (hereinafter
referred to as the "Employment Agreement");
WHEREAS, the Company is in the process of corporate
restructuring and desires to modify the Company's obligations under
the Deferred Compensation Plan and the Employment Agreement;
WHEREAS, the Company and Wright are changing their rights
and responsibilities pursuant to the Deferred Compensation Plan the
Employment Agreement which changes benefit both the Company and
<PAGE>
Wright;
WHEREAS, Wright has formed a consulting business, Rent A
Professional, which provides consulting services of a professional
nature.
NOW, THEREFORE, for and in consideration of the mutual
covenants, conditions and promises contained herein the Company and
Wright agree that the Deferred Compensation Plan and the Employment
Agreement as presently in force are terminated and the following
terms and conditions are in substitution therefor:
1. CONSULTING CONTRACT. Company and Rent a Professional
hereby enter into an Independent Consulting Contract wherein Rent a
Professional shall provide to the Company consulting services from
October 1, 1999 through January 31, 2000 . Rent A Professional shall
provide the services of Wright. Rent A Professional shall provide to
the Company the services of Wright and provide 10 hours per month for
the months of October 1, 1999 through January 1, 2000. The company
shall pay Rent a Professional for its services under this Consulting
Agreement the total amount of $216,380.00 payable as follows:
<PAGE>
LUMP SUM PAYMENT
DATE OF PAYMENT AMOUNT OF PAYMENT AFTER MONTHLY PAYMENT
October 1, 1999 (monthly) $ 6,980.00 $ 209,400
November 1, 1999 (monthly) $ 6,980.00 $ 202.420
December 1, 1999 (monthly) $ 6,980.00 $ 195,440
January 1, 1999 (monthly) $ 6,980.00 $ 188,460
December 1, 1999 376,920 shares of Registered Common Stock
in Lieu of Lump sum payment.
The Company agrees to issue to Wright or his designee 376,920
shares of the company's common stock fully registered with the right
to sell at any time, without restriction, in lieu of the lump sum
payment of $188,460. The stock shall be registered in the SB 2
submitted to the SEC in June of 1999 and revised in October of 1999.
The Company shall issue the registered common stock before December
1, 1999. The Company agrees to pay $6980.00 per month for each
additional month that the company delays the issuance of the
registered common stock after December 31, 1999. The Company
guarantees that the amount received from the sale of the stock shall
not be less than $188,460. If the amount received for the sale of the
stock is less than this amount the Company will pay in cash to Wright
or his designee the short fall amount. In the event that the amount
<PAGE>
received for the sale of the stock is more than the $290,000 Wright
or his designee will pay to the Company 50% of the proceeds received
in excess of the $290,000.
2. FINOVA OBLIGATIONS. The Company agrees to pay in full its
Term Loan B with FINOVA on or before December 31, 1999. In addition,
the Company shall indemnify and hold Wright harmless from any and all
FINOVA obligations. The Company shall obtain a complete release of
Wright from any obligations to FINOVA on or before December 31, 1999.
The rights and obligations pursuant to paragraph 1 of this Agreement,
especially the failure to reduce the lump sum amount owing under the
Consulting Contract, shall not effect the Company's obligation to
indemnify and hold Wright harmless from nor to pay the Term Loan B
FINOVA obligation which obligations shall not be eliminated even if
there is no reductions under the Consulting Contract. In the event
the Company is not able to payoff the Term Loan B and/or obtain a
release from FINOVA by December 31, 1999, the Company and Mr. Wright
shall may agree to extend the date on a month by month bases, not to
exceed 90 days.
3. KEY MAN INSURANCE. The Company agrees to continue in full
force and effect and pay all premiums on the one million dollar life
<PAGE>
insurance policy with Wright as insured through December 31, 1999 or
until the Term Loan B with FINOVA is paid and releases given by
FINOVA. On or before December 31, 1999 the Company shall transfer to
Wright or his designee the ownership of such policy and all values
contained therein. The transfer shall not effect the Company's
obligation to make all premium payments on the policy through
December 31, 1999 or until the Term Loan B is paid in full and
releases given by FINOVA.
4. ISSUANCE OF NEW WARRANTS. The Company shall issue to
Wright or his designee warrants to purchase 350,000 shares of the
Company's common stock at a price of sixty five cents ($.65) per
share. The warrants shall be exercisable by Wright or his designee
at any time beginning upon issuance and continuing for ten years.
The Company agrees to give Wright or his designee piggy back
registration rights and further agrees to register the warrants and
the underlying stock within 12 months of this agreement.
5. MODIFICATION OF EXISTING OPTIONS. The Company shall modify
the options presently held by Wright to purchase 267,000 shares of
the Company's common stock so that the exercise price is sixty five
($.65) per share with an exercise period commencing upon the
<PAGE>
effective date of this Agreement and continuing until ten years from
the effective date of this Agreement. The Company agrees to register
89,000 of these options and the underlying common stock with the
Company's
SB 2 registration to be filed in June, 1999 and shall register the
remaining options on or before December 9, 1999.
6. OBLIGATION TO ASSIST IN SALE OF STOCK AND PIGGY BACK
RIGHTS. Once the price of the common stock of the Company reaches a
price of $1.00 or above per share, the Company agrees to assist
Wright in selling all or such part of the 194,709 shares of the
Company's common stock now owned by Wright, as determined by Wright,
in either a public or private sale and in addition to the above
common stock the company agrees to assist and help place the 376,920
shares of common stock issued to Wright or his designee as payment in
lieu of the lump sum payment . The Company agrees to assist Wright in
selling or placing with a broker, market maker or other interested
parties . In addition, whenever the Company registers stock of the
Company for sale in a public offering, the Company shall grant to
Wright the right to act as a selling shareholder in the public
offering subject to underwriter approval. The Company shall bear the
<PAGE>
expenses of the public offering excepting usual and ordinary
Underwriter's commissions. Wright shall be able to sell in the
public offering all or any portion of the 194,709 shares and 376,920
shares referenced above in this paragraph which have not been
previously sold, and an additional 200,000 shares purchased or to be
purchased by Wright pursuant to any of the warrants granted to Wright
or options modified pursuant to this Agreement. Wright shall have
the right to designate which shares, options or warrants will be
subject to the piggy back rights.
7. CABLES TO GO ASSIGNMENTS. The Company shall pay to Wright,
fifty percent of the proceeds received from Cables To Go under the
contract between the Company and Cables to Go (the "Cables
Contract"), after receipt of the first $367,976.00, if any, under the
Cables Contract. The Company will use all reasonable efforts and
expend reasonable amounts to collect all amounts due under the Cables
Contract. The Company and Wright acknowledge that the amounts
receivable under the Cables Contract are variable and there is no
guarantee that the Company will be entitled to any amounts from which
to pay Wright. The Company will provide for a modification of the
Cables Contract so that fifty percent of the amounts to be paid under
the Cables Contract in excess of $367,976.00 will be paid directly to
Wright. In addition to the above, the Company will assign to Wright
<PAGE>
fifty percent of the proceeds received from the sale of the consigned
inventory now held by Cables to Go. Part of the duties under the
Consulting Contract set forth in paragraph 1 above, shall be the
responsibility for the disposition of the consigned inventory.
8. VESTING. Wright's right to receive the Benefits hereunder
are fully vested.
9. MERGER OR CONSOLIDATION. The Company shall not merge or
consolidate with any other corporation or entity or reorganize unless
and until such succeeding and continuing entity agrees to assume and
discharge the obligations of the Company under this Agreement and
agrees to issue Wright share on the same basis all other stock
holders. In the event the Company shall reorganize, consolidate or
merge with any other company this Agreement shall become an
obligation of the new company or of any company taking over the
duties and responsibilities of the Company. In such event, the
Company may assign the obligations hereunder to the successor or
surviving company. Upon such assumption, the term "Company" as used
in this Agreement shall be deemed to refer to such successor entity.
10. RECAPITALIZATION AND/OR REORGANIZATION. In the event that
the shares of common stock of the Company, as presently constituted,
shall be changed into or exchanged for a different number or kind of
shares of stock or other securities of the Company or of another
<PAGE>
company (whether by reason of merger, consolidation,
recapitalization, reclassification, split up, combination of shares
or otherwise), or if the number of such shares of common stock shall
be increased through the payment of a stock dividend, and an
equitable adjustment in the number of shares is appropriate to give
effect to the intent of this Agreement, then such adjustment shall be
made.
11. AMENDMENT. This Agreement may be amended or revoked, in
whole or part, only upon the written agreement of all of the parties.
12. BINDING EFFECT. This Agreement shall be binding upon the
parties hereto, their heirs, assigns, successors, executors,
administrators and they shall agree to execute any and all
instruments necessary for the fulfillment of the terms of this
Agreement.
13. ATTORNEY'S FEES. If any legal action or other proceeding
is brought for the enforcement of this Agreement, or because of an
alleged dispute, breach, default, or misrepresentation in connection
with any of the provisions of this Agreement, the successful or
prevailing party or parties shall be entitled to recover reasonable
attorney's fees and other fees and costs incurred in that action or
proceedings, in addition to any other relief to which it or they may
be entitled.
<PAGE>
14. APPLICABLE LAW. This Agreement shall be construed in
accordance with and governed by the laws of the State of Utah.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have set their hands the
day and year first above written.
COMPANY:
Pen Interconnect, Inc.
By:
Its President
WRIGHT:
Wayne R. Wright
RENT A PROFESSIONAL
By:
Its
<PAGE>
Exhibit 23.1
CONSENT
We have issued our report dated December 23, 1999, accompanying the financial
statements of Pen Interconnect, Inc. appearing in the 1999 Annual Report on Form
10-KSB for the year ended September 30, 1999. We hereby consent to the
incorporation by reference of the aforementioned report in the Registration
Statements of Pen Interconnect, Inc. on Forms S-3 (File No. 33-96444-D,
effective August 4, 1997; File No. 333-29927, effective August 29, 1997; File
No. 333-297, effective February 5, 1998; and File No. 333-06451, effective
August 31, 1998 and amended October 2, 1998) and on Forms S-8 (File No.
333-2618, effective March 22, 1996, and file No. 333-87297 effective September
17, 1999).
GRANT THORNTON LLP
Salt Lake City, Utah
December 23, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Pen
Interconnect, Inc. September 30, 1999 financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001000266
<NAME> Pen Interconnect, Inc.
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.00
<CASH> 177,214
<SECURITIES> 0
<RECEIVABLES> 5,174,255
<ALLOWANCES> (1,890,576)
<INVENTORY> 4,250,661
<CURRENT-ASSETS> 7,842,531
<PP&E> 1,913,545
<DEPRECIATION> (376,681)
<TOTAL-ASSETS> 9,529,395
<CURRENT-LIABILITIES> 11,040,472
<BONDS> 0
0
28
<COMMON> 96,381
<OTHER-SE> (1,906,537)
<TOTAL-LIABILITY-AND-EQUITY> 9,529,395
<SALES> 17,651,838
<TOTAL-REVENUES> 17,651,838
<CGS> 16,668,290
<TOTAL-COSTS> 10,216,909
<OTHER-EXPENSES> 1,501,261
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 678,933
<INCOME-PRETAX> (11,413,555)
<INCOME-TAX> 601,236
<INCOME-CONTINUING> (12,014,791)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,014,791)
<EPS-BASIC> (1.82)
<EPS-DILUTED> (1.82)
</TABLE>
