UNITED STATES
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
------------------
[] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
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 (I.R.S. Employer Identification No)
incorporation or organization)
1601 Alton Parkway Irvice, Ca. 92606
(Address of Principal Executive Offices) (Zip Code)
(Issuer's telephone number) (949) 798-5800
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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 _____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
As of March 31, 2000 the issuer had 20,917,514 shares of its common
stock, par value $0.01 per share, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
1
<PAGE>
FORM 10-QSB
PEN INTERCONNECT, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Financial Information 3
Balance Sheets at March 31, 2000
(unaudited) and September 30, 1999 4-5
Statements of Operations for the three months
ended March 31, 2000 and 1999 (unaudited) and 6
six month periods ended March 31, 2000 and
1999 (unaudited)
Statements of Cash Flows for the six months
ended March 31, 2000 and 1999 (unaudited) 7-9
Notes to Condensed Financial Statements (unaudited) 10-14
Item 2 Management's Discussion and Analysis or
Plan of Operation 15-18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 2 Changes in the Securities and Use of Proceeds 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6(a). Exhibits 19
Item 6(b). Reports on Form 8-K 19
Signatures 20
2
<PAGE>
PEN INTERCONNECT, INC.
PART I
FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED FINANCIAL STATEMENTS
Pen Interconnect, Inc. (the "Company"), has included the unaudited condensed
balance sheet of the Company as of March 31, 2000 and audited balance sheet as
of September 30, 1999 (the Company's most recent fiscal year), unaudited
condensed statements of operations for the three and six months ended March 31,
2000 and 1999, and unaudited condensed statements of cash flows for the six
months ended March 31, 2000 and 1999, together with unaudited condensed notes
thereto. In the opinion of management of the Company, the financial statements
reflect all adjustments, all of which are normal recurring adjustments,
considered necessary to fairly present the financial condition, results of
operations and cash flows of the Company for the interim periods presented. The
financial statements included in this report on Form 10-QSB should be read in
conjunction with the audited financial statements of the Company and the notes
thereto included in the annual report of the Company on Form 10-KSB for the year
ended September 30, 1999. The results of operations for the six months ended
March 31, 2000 may not be indicative of the results that may be expected for the
year ending September 30, 2000.
3
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---------------- ------------------
(unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,031 $ 177,214
Escrowed investor cash (Note F) 201,881 0
Trade accounts less allowance for
doubtful accounts of $0 at March 31, 2000 and $1,890,576 0 2,708,567
at September 31, 1999
Current maturities of notes receivable 0 575,112
Inventories 0 4,250,661
Prepaid expenses and other current assets 17,610 130,977
---------------- ------------------
Total current assets 221,522 7,842,531
Production equipment (including capitalized leased 469,030 1,450,494
equipment of $450,390)
Furniture and fixtures 1,028 167,169
Transportation equipment 0 22,149
Leasehold improvements 0 273,733
---------------- ------------------
470,058 1,913,545
Less accumulated depreciation 34,969 376,681
---------------- ------------------
435,089 1,536,864
OTHER ASSETS
Notes receivable, less current maturities 0 150,000
Other 9,000 0
---------------- ------------------
Total other assets 9,000 150,000
---------------- ------------------
$ 665,611 $ 9,529,395
================ ==================
</TABLE>
The accompanying notes are an integral part of
these statements.
4
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---------------- ------------------
(unaudited)
CURRENT LIABILITIES
<S> <C>
Line of credit $ 0 $ 4,436,562
Current maturities of long-term obligations 54,450 1,682,478
Current maturities of capital leases 341,140 122,759
Accounts payable 3,236,303 3,961,412
Accrued liabilities 406,914 837,261
---------------- ------------------
Total current liabilities 4,038,807 11,040,472
CAPITAL LEASE OBLIGATIONS, less
current maturities 0 299,051
---------------- ------------------
Total liabilities 4,038,807 11,339,523
STOCKHOLDERS' EQUITY
Convertible preferred stock, $0.01 par value
Authorized 5,000,000 shares, Series A: 381
issued and outstanding at March 31, 2000;
1800 issued and outstanding at September 30, 4 18
1999 10 10
Series B: issued and outstanding 1,000 shares
Common stock, $0.01 par value,
authorized 50,000,000 shares, issued and 209,173 96,381
outstanding 20,917,514 shares at March 31,
2000 and 9,638,114 at September 30, 1999
Additional paid-in capital 18,166,782 17,447,876
Accumulated deficit (21,749,165) (19,354,413)
---------------- ------------------
Total stockholders' equity (deficit) (3,373,196) (1,810,128)
---------------- ------------------
$ 665,611 $9,529,395
================ ==================
</TABLE>
The accompanying notes are an integral part of
these statements.
5
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
(Uaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
---------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 0 $2,828,078 $ 0 $7,585,916
Cost of sales 0 2,424,444 0 7,015,662
---------------- --------------- -------------- -------------
Gross profit 0 403,634 0 570,254
Operating expenses
Sales and marketing 0 55,692 0 137,411
Research and development 0 94,806 0 262,503
General and administrative 571,017 1,257,576 612,462 2,026,309
Depreciation and amortization 26 94,590 52 221,207
---------------- --------------- -------------- -------------
Total Operating Expenses 571,043 1,502,664 612,514 2,647,430
---------------- --------------- -------------- -------------
Operating income (loss)from (571,043) (1,099,030) (612,514) (2,077,176)
continued operations
Discontinued Operations:
-----------------------
Loss from operations of
discontinued Powerstream Division (53,552) (269,356)
Gain on sale of Powerstream 186,643 186,643
Loss from operations of
discontinued InCirT Division (114,346) (222,611)
Loss on repossession of assets (Note D) (900,008) (900,008)
Loss on disposal of Cables To Go (948,312) (948,312)
---------------- --------------- -------------- -------------
Loss from discontinued operations (881,263) (948,312) (1,205,332) (948,312)
Other income (expense)
Interest expense (131,891) (192,903) (308,102) (385,775)
Other income (expense), net (77,558) (158,281) (66,036) (232,499)
---------------- --------------- -------------- -------------
Total other income (expense) (209,449) (351,184) (374,138) (618,274)
---------------- --------------- -------------- -------------
Earnings (loss) before income taxes (1,661,755) (2,398,526) (2,191,984) (3,643,762)
Income tax expense 900 0 900 0
---------------- --------------- -------------- -------------
Net earnings (loss) $(1,662,655) $(2,398,526) $(2,192,884) $(3,643,762)
================ =============== ============== =============
Earnings (loss) per common share
Basic $(.12) $(0.46) $(.20) $ (0.70)
Diluted $(.12) $(0.46) $(.20) $ (0.70)
Weighted average common shares
outstanding
Basic 13,584,534 6,321,553 11,626,602 5,932,173
Diluted 13,584,534 6,321,553 11,626,602 5,932,173
</TABLE>
The accompanying notes are an integral part of
these statements.
6
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
(Uaudited)
<TABLE>
<CAPTION>
Six months ended
March 31, March 31,
2000 1999
--------------- ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
<S> <C> <C>
Net loss $(2,192,884) $ (3,643,762)
Adjustments to reconcile net loss to net cash
Depreciation and amortization 90,463 221,937
Bad debts 0 13,247
Interest on debenture conversion 0 98,571
Loss on disposal of divisions (Note A) 305,324 948,312
Loss on transfer of assets (Notes A & D) 900,008 0
Changes in asset and liabilities
Trade accounts receivable 0 1,047,510
Accounts receivable offset to customers' accounts payable 2,439,266 0
Inventories 0 334,370
Net assets transferred to lender 3,238,079 0
Prepaid expenses and other assets (7,892) (84,031)
Accounts payable (725,109) (728,260)
Accrued liabilities (393,014) 599,882
--------------- ---------------
Net cash generated (used) in
operating activities 3,654,241 (1,192,954)
--------------- ---------------
Cash flows from investing activities
Purchase of property and equipment (15,500) (92,985)
Issuance of notes receivable 19,410 (614,920)
Proceeds from disposal of division (Note A) 74,324 1,075,000
--------------- ---------------
Net cash provided by (used in)
investing activities 78,234 367,095
--------------- ---------------
</TABLE>
(Continued)
7
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINED
(Uaudited)
<TABLE>
<CAPTION>
Six months ended
March 31, March 31,
2000 1999
---------------- ---------------
Cash flows from financing activities
<S> <C> <C>
Net change in line of credit (4,436,562) (1,087,426)
Accrued dividends on preferred shares 137,288 0
Principal payments on long-term obligations (167,786) (1,349,459)
Principal payments on capital lease obligations (71,916) (49,428)
Proceeds from issuance of long-term obligations 0 900,000
Discount on exercised common shares options 294,171 0
Discount on warrant conversion to common stock 89,941 0
Proceeds from sale of common stock 340,341 213,076
Proceeds from issuance of short term note payable 54,450 0
Proceeds from issuance of preferred stock 0 1,800,000
---------------- ---------------
Net cash consumed in financing activities (3,760,073) 426,763
---------------- ---------------
Net increase in cash and cash equivalents 26,698 (399,096)
Cash and cash equivalents at beginning of period 177,214 657,777
---------------- ---------------
Cash and cash equivalents at end of period 203,912 $ 258,681
================ ===============
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest expense $ 308,102 $ 287,204
Income tax expense $ 900 $ 0
</TABLE>
Noncash investing and financing activities
During the first and second quarters of FY 99, $1,175,000 of subordinated
debentures were converted into 1,566,741 shares of common stock. Along with the
conversion on the debentures, $98,571 of unamortized interest on the
subordinated debentures was charged to interest expense.
During the second quarter of FY 99, $1,800,000 of Series A Preferred Stock was
issued. Of this amount, $800,000 was used directly to pay off $800,000 of bridge
loans made to the Company during the first quarter of FY 99.
During the quarter Series A preferred shareholders converted 1419 preferred
shares into 7,848,661 common shares at an average conversion price of $.185 per
common share. Under the conversion terms of the convertible preferred shares, a
holder has the right to convert preferred shares into common shares at
eighty-five (85%) percent of the average of the two lowest closing bid prices
during the last twenty-two (22) consecutive trading days prior to conversion.
Additionally, a preferred shareholder exercised warrants attached to preferred
stock and received 313,866 common shares in return for a waiver of certain
covenants relative to registration of the convertible preferred shares. The
waiver was expensed at the value of the conversion of $89,941.
8
<PAGE>
Pen Interconnect, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - ACQUISITIONS/DISPOSITIONS
Laminating Technologies Inc.
On December 23, 1998, the Company signed a definitive agreement to merge
with Laminating Technologies Inc. (LTI). On April 2, 1999 the Company and
LTI mutually terminated this definitive agreement to merge.
Cables To Go Inc.
Effectively January 31, 1999, the Company sold substantially all of the
assets and certain 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, as of September 30, 1999, the loss to
$1,507,059 based on its present determination that CTG will not use nor
compensate the Company for the additional net assets.
Mobile Technology Inc.
On February 1, 1999 the Company signed a letter of intent with Mobile
Technology Inc. (MTI) to sell all assets and liabilities of the MotoSat
division. MTI's principal owner is James Pendleton, a former Chairman and
CEO of the Company. Effective September 30, 1999, the Company sold
substantially all the assets and liabilities of its MOTO-SAT Division to
James Pendleton. 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.
PowerStream Division
On January 21st, 2000 the Company sold its Powerstream Division to Lund
Instrument Engineering of Orem, UT., which purchased certain assets and
assumed certain liabilities of PowerStream Division. Lund remitted
$74,324 to the Company as a partial payment for the acquisition. The
Company is to receive for three years royalties of a) sixteen (16%)
percent of the gross profits generated from sales generated from a
contract with L3 Communications, less any customer advances and b) eight
(8%) percent of gross profits on all other sales contracts in place at
closing. The Company recognized a gain of $186,643 on the sale, not
including any possible future royalty payments.
9
<PAGE>
Pen Corporate and InCirT Division
The Company had been operating under a default notice with its
asset-based lender, Finova Capital, since September 1999, when the
Company began seeking buyers for its two remaining divisions PowerStream
and InCirT. In February a Letter of Intent to sell the InCirT division to
another contract manufacturer was terminated. The Company solicited a
competitor to purchase most of the assets and to negotiate a supplier
agreement with the Company's largest account as part of a voluntary
foreclosure of all the remaining assets of the Company, for which Finova
had a perfected security interest. The Company's March 31, 2000 balance
sheet reflects the transfer of all collateral assets to Finova to which
the Company has recognized an offset of the bank's line of credit balance
and term loans owed by the Company. As required by FASB Statement 15, the
Company estimated a loss on transfer of assets of $(900,008). This
estimate may change and is dependent upon the liquidation value achieved
in the disposition of the assets transferred to the lender.
NOTE B - INVENTORIES
Inventories consist of the following:
Allinventory has transferred to Finova Capital on March 2, March 31,
September 30, 2000 as part of voluntary foreclosure agreement.
2000 1999
------------- ----------------
Raw materials (net of allowance) $ 0 $ 2,684,238
Work-in-process 0 1,507,108
Finished goods 0 59,315
------------- ----------------
$ 0 $ 4,250,661
============= ================
NOTE C - BRIDGE LOANS
During the 1st quarter of FY 1999, the Company secured two bridge loans
both of which were to be repaid with funds to be received from the merger
with LTI. The term of each loan was 90 days and carried an interest rate
of 8 percent. One bridge loan was secured in November for $500,000 and
the other in December for $400,000. Both bridge loans were subsequently
repaid from proceeds received from the issuance of preferred stock. (See
Note F).
Note D - CREDIT FACILITY
On March 3, 2000 the Company and its secured asset based lender, Finova
Capital, entered into a voluntary foreclosure in which all collateral
secured under Finova's perfected security interest was transferred to
Finova to satisfy the revolving credit and term loans held by the bank.
As of March 31, 2000 the outstanding line of credit and term loans
amounted to $3,934,432. Finova has sold some of the assets to ADTI, a
subsidiary of Comtel Holdings for promissory notes, which will be paid
down according to usage of inventory and periodic payments for equipment.
The Company's loan will be reduced by the payments made by ADTI as well
as collections of other accounts receivable and sales of other inventory
to third parties. The Company's March 31, 2000 balance sheet reflects the
transfer of all collateral assets to Finova to which the Company has
recognized an offset of the bank's line of credit balance and term loans
owed by the Company. In accordance with FASB 15, the Company recognized a
loss on transfer of assets of $(900,008).
10
<PAGE>
NOTE E - OPTIONS/WARRANTS TO PURCHASE COMMON STOCK
During the first quarter of FY 1999 the Company issued warrants to
purchase 490,000 shares of the Company's common stock. The following
table outlines the features of these warrants:
Number of Exercise Expiration
warrants Price date
---------------- ------------- -------------------
150,000 $1.000 October 2002
125,000 $0.875 October 2002
215,000 $0.875 November 2001
During the second quarter of FY 1999, the Company issued warrants to
purchase 160,000 shares of common stock in conjunction with the issuing
of Series A Preferred Stock. The terms of the conversion of the warrants
to shares of common stock are discussed in Note F.
In March 2000 the Board of Directors approved the issuance of 430,000
five-year options shares to key employees at an exercise price of $.30
per share - the market price at the time of issuance. Additionally, the
Board approved 492,500 option shares previously issued to Mr. Stephen J.
Fryer and 105,000 option shares previously issued to Mr. Mehrdad
Mobasseri become fully vested and re-priced to market price of $.30 per
common share.
In March 2000 the Board of Directors approved the issuance of 100,000
warrants be issued to each of the members of the Board at an exercise
price of $.30 per common share.
Options representing 275,000 common shares were exercised in December
1999 at a price of $.134 per share. The option shares were originally
priced at $.30 per share. Proceeds ($36,850) were utilized for corporate
operations.
During the second quarter of FY2000, certain options were re-priced by
the Company. Options representing 1,876,668 common shares were exercised
at a weighted average exercise price of $.097 per share, which generated
$182,866 in proceeds. The Company recognized $294,171 in compensation
expense as a result of the options being exercised below market price.
During the second quarter of FY 2000, the Company re-priced certain
warrants as an inducement to exercise the warrants. Warrants representing
965,000 common shares were exercised at an average weighted exercise
price of $.125 per share.
In light of the financial condition of the Company and the Company's bank
unwillingness to continue funding operations, the exercise of the
warrants and options was completed with the proviso that the funds be
escrowed and that the use of funds be limited to keeping the Company's
administrative operations in tact while the Company found an qualified
acquisition for its previously announced new business strategy. The
Company has signed a non-binding letter of intent to acquire
perFORMplace.com, an Internet based entertainment industry application
service provider. Remaining escrowed funds will be utilized for ongoing
administrative expenses and professional fees in conjunction with the
acquisition and required public filings.
11
<PAGE>
Note F - Preferred Stock
The Company issued two series of Preferred Stock. Series A was issued in
February 1999 consisting of 1,800 shares, par value $0.01 per share, for
$1,000 per share. Series B was issued in April 1999 at the same price but
only 1,000 shares were issued. As mentioned in Note C, part of the funds
raised from the issuance of this stock were used to repay the bridge
loans made earlier in the fiscal year. After repayment of the bridge
loans and paying $238,500 in fees and expenses, the net cash raised by
the Company for operations was $1,665,500. Both series of Preferred Stock
carry a 16 percent dividend rate, which is paid quarterly.
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 Pen Common Stock equal to $1,000
divided by the average of the two lowest closing bid prices for Pen
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 (the "Conversion Price"). During the
first six months the Board of Directors approved a reduction of the
maximum Conversion Price for the Series A Preferred Stock and Series B
Preferred Stock to $.53 from $1.17 and $.79 per share respectively. The
reduction was granted to obtain a waiver in relation to the sale of a
major asset - InCirT Technologies Division. The shares of Series B
Preferred Stock are convertible into Common Stock at the same Conversion
Price as the Series A Preferred Stock. Warrants to acquire 335,453 shares
of Common Stock at conversion prices ranging from $0.86 to $1.434 per
share were also issued to the purchasers of the Series A and Series B
Preferred Stock. The warrants expire three years from date the Preferred
Stock and warrants were initially issued.
During the quarter Series A preferred shareholders converted 1491
preferred shares into 7,848,661 common shares.
Note G - Earnings (loss) per share
Basic earnings (loss) per common share is computed by dividing net
earnings (loss) available to common shareholders by the weighted average
number of common shares outstanding during each period. Diluted earnings
per common share 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.
Outstanding options and warrants are not included in the calculation in
the loss periods because to do so would be anti-dilutive.
For the three and six months ended March 31, 2000, net loss attributable
to common shareholders includes a non-cash imputed dividend to the
preferred shareholders related to the beneficial conversion feature on
the 1999 Series A and Series B Preferred Stock and related warrants. (See
Note F). 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 non-cash charge against the loss per
common share.
12
<PAGE>
Note G - Earnings (loss) per share - CONTINUED
Basic and diluted earnings (loss) per common share are calculated as
follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31, March 31, March 31, March 31,
2000 1999 2000 1999
----------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Net earnings (loss) $(1,662,654) $(2,398,526) $(2,192,884) $(3,643,762)
Preferred dividends (25,288) (30,773) (137,288) (30,773)
Imputed dividend from beneficial 0 (449,438) 0 (449,438)
conversion feature
----------------- --------------- ------------- --------------
Net earnings (loss) $(1,687,942) $(2,878,737) $(2,330,172) $(4,123,973)
attributable to common
stockholders
================= =============== ============= ==============
Basic EPS
- -------------------------------------------
Common shares outstanding entire period 9,913,114 6,069,160 9,663,114 5,018,437
Weighted average common shares issued 3,671,429 252,393 1,963,488 913,736
----------------- --------------- ------------- --------------
Weighted average common shares
outstanding during period 13,584,534 6,321,553 11,626,602 5,932,173
================= =============== ============= ==============
Earnings (loss) per common share $ (.12) $ (0.46) $(.20) $ (0.70)
Diluted EPS
- -------------------------------------------
Weighted average common shares
outstanding during period - basic 13,584,534 6,321,553 11,626,602 5,932,173
Dilutive effect of stock options and
warrants 0 0 0 0
----------------- --------------- ------------- --------------
Weighted average common shares
outstanding during period - diluted 13,584,534 6,321,553 11,626,602 5,932,173
================= =============== ============= ==============
Earnings (loss) per common share -
assuming dilution $ $ (0.46) $ $ (0.70)
(.12) (.20)
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS. This 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 the following 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, other factors and the fact that the Company's only two
remaining divisions have been sold or liquidated 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.
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 three and
six months ended March 31, 2000 and 1999. This discussion should be read in
conjunction with the audited financial statements of the Company and notes
thereto included in the Annual Report of the Company on Form 10-KSB for the year
ended September 30, 1999.
General
Through March 2, 2000 Pen Interconnect, Inc. was a provider of contract
manufacturing services for original equipment manufacturers. It built electronic
systems and subsystems for customers in a range of industries including
computers, consumer electronics, industrial and medical instrumentation,
avionics, communications, and semiconductor applications. In addition, the
Company provided custom design and manufacturing of battery chargers, power
supplies and uninterrupted power supply systems. Pen Interconnect's services
included product design and prototyping, systems assembly, software duplication,
packaging and warehousing.
Through March 2, 2000 Pen Interconnect, Inc. provided the total manufacturing
solution including circuit design, board design from schematic, mechanical and
product design, prototype assembly, volume board assembly, system services and
end-user distribution. The Company was incorporated under the laws of the State
of Utah on September 30, 1985. Pen Interconnect, Inc. had support manufacturing
facilities in California and Utah.
During the quarter the Company announced a change in its strategic direction in
disposing of its contract manufacturing operations and seeking new technologies,
with specific interest in Internet business to business activities. On March 29,
2000 the Company announced the signing of a letter of intent to acquire
perFORMplace.com, a privately held Internet provider of electronic
business-to-business services to the entertainment industry.
14
<PAGE>
Sale of Powerstream Division
On January 21st, 2000 the Company sold its Powerstream Division to Lund
Instrument Engineering of Orem, UT., which purchased certain assets and assumed
certain liabilities of PowerStream Division. Lund remitted $74,324 to the
Company as a partial payment for the acquisition. The Company is to receive for
three years royalties of a) sixteen (16%) percent of the gross profits generated
from sales generated from a contract with L3 Communications, less any customer
advances and b) eight (8%) percent of gross profits on all other sales contracts
in place at closing. The Company recognized a gain of $186,643 on the sale, not
including any possible future royalty payments.
Voluntary Foreclosure and Sale of Certain Assets
On March 3, 2000 the Company and its secured asset based lender, Finova Capital,
entered into a voluntary foreclosure in which all collateral secured under
Finova's perfected security interest was transferred to Finova to satisfy the
revolving credit and term loans held by the bank. As of March 31, 2000 the
outstanding line of credit and term loans amounted to $3,934,432. Finova has
sold some of the assets to ADTI, a subsidiary of Comtel Holdings for promissory
notes, which will be paid down according to usage of inventory and periodic
payments for equipment. The Company's loan will be reduced by the payments made
by ADTI as well as collections of other accounts receivable and sales of other
inventory to third parties. The Company's March 31, 2000 balance sheet reflects
the transfer of all collateral assets to Finova to which the Company has
recognized an offset of the bank's line of credit balance and term loans owed by
the Company. In accordance with FASB 15, the Company estimated a loss on
transfer of assets of $(900,008); the loss reflects the difference between book
value and estimated fair market value.
Results of Operations
Net sales. With the sale of Powerstream Division and the voluntary foreclosure
and sale of assets of InCirT Division during the quarter, which represent the
only operating units of the Company, and the fact that each is accounted for in
the financial statements as discontinued operations and that each division's
operations did not occupy a full quarter of activity, a comparative analysis
against prior same quarter and prior same six months periods is inappropriate.
Cost of sales. With the sale of Powerstream Division and the voluntary
foreclosure and sale of assets of InCirT Division during the quarter, which
represent the only operating units of the Company, and the fact that each is
accounted for in the financial statements as discontinued operations and that
each division's operations did not occupy a full quarter of activity, a
comparative analysis against prior same quarter and prior same six months
periods is inappropriate.
Operating expenses. With the sale of Powerstream Division and the voluntary
foreclosure and sale of assets of InCirT Division during the quarter, which
represent the only operating units of the Company, and the fact that each is
accounted for in the financial statements as discontinued operations and that
each division's operations did not occupy a full quarter of activity, a
comparative analysis against prior same quarter and prior same six months
periods is inappropriate.
15
<PAGE>
Other income and expenses. Other expenses decreased by $141,735 or 40% for the
three months ended March 31, 2000 as compared to the same period in the prior
year. These expenses also decreased $244,136 or 39% for the first six months of
fiscal 2000 as compared to the same period in the prior year. The reductions
were the result of lower line of credit borrowings and lower securities offering
costs and conversions.
Net earnings (loss) and earnings (loss) per share. Net loss for the second
fiscal quarter ended March 31, 2000 totaled ($1,687,942) or ($0.12) per basic
share, compared with a loss of ($2,878,737) or ($0.46) per basic share for the
second quarter of fiscal year 1999. The change in the loss per basic share of
($0.34) is mostly comprised of a reduction of operating losses of $.12 per share
and approximately $0.19 per share decrease as a result of a 115% increase in the
number of shares outstanding. The loss for the first six months of fiscal year
2000 of ($2,330,172) or ($0.20) per basic share was ($0.50) per share less than
that of the first six months of the prior fiscal year. The change in loss per
basic share for this period was mostly comprised of a reduction in operating
losses of $0.16 per share and approximately $0.30 per share decrease as a result
of a 96% increase in the number of shares outstanding.
Liquidity and Capital Resources
During the first three months of FY 2000 the Company sustained losses of
$530,227. Management has taken steps to correct this trend by selling the
PowerStream division during the second quarter of FY 2000, which incurred an
operating loss of approximately $215,000 during the first quarter.
The Company has previously announced its intention to seek a buyer for the
InCirT Division, which incurred an operating loss of approximately $119,000
during the first quarter of FY2000. As of the end of February 2000 the Company
had decided that the sale of InCirT Division at book value or better was not
likely before Finova Capital foreclosed on the Company's assets. The Company and
Finova negotiated the sale of certain InCirT Division's assets to ADTI, a
subsidiary of Comtel Holdings under a prearranged, voluntary foreclosure and
resale transaction on March 2, 2000.
As a result of the Company's lender restricting loan advances during the quarter
and foreclosure on March 2, 2000, the Company raised additional capital during
the quarter from the exercise of warrants ($120,625) and options ($182,867). In
light of the financial condition of the Company and the Company's bank
unwillingness to continue funding operations, the exercise of the warrants and
options required the funds be escrowed and that the use of funds be limited to
keeping the Company's administrative operations in tact while the Company found
an qualified acquisition for its new business strategy. The Company has signed a
non-binding letter of intent to acquire perFORMplace.com, an Internet based
entertainment industry application service provider. Remaining escrowed funds
will be utilized for ongoing administrative expenses and professional fees in
conjunction with the acquisition and required public filings.
16
<PAGE>
Liquidity and Capital Resources - Continued
The Company's management estimates that approximately $2 million may have to be
raised to support post acquisition activity of perFORMplace.com until the
acquisition reaches a positive cash flow estimated to be during FY 2001by
perFORMplace.com's management. This does not include any payments to trade
creditors of the former operations of the Company. The Company has an offer to
such creditors to replace approximately $3 million in trade debt with 1 million
restricted common shares. As of this date of filing this Form 10QSB, complete
responses to the offer have not been received.
Inflation and Seasonality
The Company does not believe that its discontinued operations were significantly
impacted by inflation or seasonality. It does not believe that the operating
performance of its announced acquisition in process of perFORMplace.com will be
significantly impacted by inflation or seasonality.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time the Company has been a party to various legal proceedings
arising in the ordinary course of business. As of the date of this filing, the
Company and it's CEO, Steve Fryer, are being sued by a former officer of the
Company for fraud and misrepresentation. Per the Company's legal counsel, there
are no grounds for the lawsuit and there is no expectation that any judgment
will be made against the Company.
During the first two quarters of FY2000 lawsuits were filed against the Company:
1) In January 2000, McBride Electric Inc. obtained a judgment against
the Company for $2,963 . As of this writing McBride has accepted
the Company's stock for debt offer, contingent upon the Company's
receiving an acceptable acceptance rate on all other vendors.
2) On October 28, 1999 Color Savvy Systems, Ltd. filed suit to
recover $165,750 in past due uncontested vendor obligations. On
February 16, 2000 Color Savy obtained a judgment against the
Company for $165,783.
3) On February 9, 2000 Totex Manufacturing Inc. file suit against the
Company to recover $169,404 in uncontested past due vendor
obligations. As of this writing Totex has accepted the Company's
stock for debt offer, contingent upon the Company's receiving an
acceptable acceptance rate on all other vendors.
4) On February 15, 2000 Amistar Corporation suit against the Company
to recover $95,733 in uncontested past due vendor obligations. As
of this writing Amistar has accepted the Company's stock for debt
offer, contingent upon the Company's receiving an acceptable
acceptance rate on all other vendors.
5) On March 1, 2000 Xstatic, LLC. filed suit against the Company to
recover $21,549.90 uncontested past due vendor obligations. As of
this writing Xstatic has accepted the Company's stock for debt
offer, contingent upon the Company's receiving an acceptable
acceptance rate on all other vendors.
17
<PAGE>
6) On March 21, 2000 Interworks Computer Products, Inc. filed suit to
recover $35,771 in past due uncontested vendor obligations.
7) On April 7, 2000 Wyle Electronic filed suit to recover $90,437.87
in past due uncontested vendor obligations.
Item 2. Changes in the Securities and Use of Proceeds. During the first six
months the Board of Directors approved a reduction of the maximum Conversion
Price for the Series A Preferred Stock and Series B Preferred Stock to $.53 from
$1.17 and $.79 per share respectively. The reduction was granted to obtain a
waiver in relation to the sale of a major asset - InCirT Technologies Division.
During the quarter Series A preferred shareholders converted 1491 preferred
shares into 7,848,661 common shares.
As a result of the Company's lender restricting loan advances during the quarter
and foreclosure on March 2, 2000, the Company raised additional capital during
the quarter from the exercise of warrants ($120,625) and options ($182,867). In
light of the financial condition of the Company and the Company's bank
unwillingness to continue funding operations, the exercise of the warrants and
options required the funds be escrowed and that the use of funds be limited to
keeping the Company's administrative operations intact while the Company found
an qualified acquisition for its new business strategy. The Company has signed a
non-binding letter of intent to acquire perFORMplace.com, an Internet based
entertainment industry application service provider. Remaining escrowed funds
will be utilized for ongoing administrative expenses and professional fees in
conjunction with the acquisition and required public filings.
During the second quarter of FY2000, certain options were re-priced by the
Company. Options representing 1,876,668 common shares were exercised at a
weighted average exercise price of $.097 per share, which generated $182,866 in
proceeds. The Company recognized $294,171 in compensation expense as a result of
the options being exercised below market price.
During the second quarter of FY 2000, the Board of Directors re-priced certain
warrants as an inducement to exercise the warrants. Warrants representing
965,000 common shares were exercised at an average weighted exercise price of
$.125 per share.
Item 3. Defaults Upon Senior Securities. On March 3, 2000 the Company and its
secured asset based lender, Finova Capital, entered into a voluntary foreclosure
in which all collateral secured under Finova's perfected security interest was
transferred to Finova to satisfy the revolving credit and term loans held by the
bank. As of March 31, 2000 the outstanding line of credit and term loans
amounted to $3,934,432.
Item 4. Submission of Matters to a Vote of Security Holders. None during the
quarter.
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
18
<PAGE>
A. Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K None.
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEN INTERCONNECT, INC.
By: /s/ Stephen J Fryer
May 15, 2000 Stephen J. Fryer
Chairman, CEO and
Principal Accounting Officer
20
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Pen Interconnect, Inc. March 31, 2000 financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001000266
<NAME> Pen Interconnect, Inc.
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1.00
<CASH> 2,031
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 221,522
<PP&E> 470,058
<DEPRECIATION> 34,969
<TOTAL-ASSETS> 665,611
<CURRENT-LIABILITIES> 4,038,807
<BONDS> 0
0
14
<COMMON> 209,173
<OTHER-SE> (3,582,383
<TOTAL-LIABILITY-AND-EQUITY> 665,611
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 612,514
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,191,984)
<INCOME-TAX> 900
<INCOME-CONTINUING> (612,514)
<DISCONTINUED> (1,205,332)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,192,884)
<EPS-BASIC> (.20)
<EPS-DILUTED> (.20)
</TABLE>
