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, 2000
---------------------------------
[ ] 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 (I.R.S. Employer Identification No)
incorporation or organization)
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. Discontinued
operations. The Company disposed of all its' operations and had no revenue for
the year.
As of December 22, 2000, there were 27,596,946 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 $855,505 at the closing quotation for the Issuer's common stock of
$0.031 December 22, 2000.
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 4
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
PART II
5. Market for Common Equity and Related Stockholder Matters 6
6. Management's Discussion and Analysis or Plan of Operation 6
7. Financial Statements 8
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 8
10. Executive Compensation 8
11. Security Ownership of Certain Beneficial Owners and Management 9
12. Certain Relationships and Related Transactions 11
13. Exhibits and Reports on Form 8-K 12
Signatures 13
<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
Pen is at present a fully reporting public shell company, which is looking
for a merger or acquisition of new technology.
Historically, the Company developed and produced on a turnkey basis,
contract manufacturing solutions for original equipment manufacturers in
the computer, telecommunications, electronic instrument, medical and
testing equipment industries.
Summary of Current Year Events and Subsequent Events
Since the end of FY 1999, Pen has gone through substantial changes and
problems caused by a default notice from our bank, due to one of our major
customers going into receivership and leaving Pen with over $1.5 million
in accounts receivable and inventory. In February 2000, Pen sold its'
PowersStream division to Lund Engineering of Orem, Utah for cash and
notes. Lund took over the assets and debts of PowerStream, which paid off
PowerStream's obligations to Finova which also owns the notes through its'
foreclosure actions.
During the last six (6) months of FY 2000, Pen focused on completing a
merger and reducing its' debt through a stock for debt program with its'
vendors. Seventy-six (76) percent of the vendors agreed to the program,
thus reducing Pens' outstanding vendor debt from $3.2 million to $689,541.
Pen issued 761,747 shares of unregistered common stock.
For all of FY 99 Pen operated two divisions: 1) the InCirT division,
located in Irvine, California, providing assembly and testing services for
electronic circuit boards; and 2) the PowerStream division, located in
Orem, Utah, designing and manufacturing custom power supplies, battery
chargers and UPS systems. 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 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.
Finova extended the deadline to February 28, 2000 but no other lending
arrangements or definitive agreements to sell the Company or any of its
divisions were made. In March 2000, Finova caused a foreclosure of all of
Pens' assets as a result of the default notice not being satisfied. This
left Pen as only a fully reporting public shell company without assets,
nor operating divisions.
3
<PAGE>
(B) BUSINESS OF ISSUER
(1) Principal Products and Services
With the disposition of the net assets of our historical divisions, the Company
currently has no products or services. The Company is currently seeking a
strategic merger with another operating company that could bring new opportunity
assets into Pen.
(2) Business Strategy
In order to re-start our business, we will have to acquire a business or merge
with another company that we believe is complementary. To successfully implement
this strategy, we must identify suitable acquisition candidates, acquire these
candidates on acceptable terms, integrate their operations and technology
successfully and maintain the goodwill of the acquired business and our
shareholders. We may fail in our efforts to implement one or more of these
tasks. Moreover, in pursuing acquisition opportunities, we may compete for
acquisition targets with other companies with similar growth strategies. Some of
these competitors may be larger and have greater financial and other resources
than we do. Our future will be materially and adversely affected if we are
unable to manage future or acquisition-based growth effectively.
(3) Employees
Our success is dependent, in part, upon our ability to attract and retain
qualified management and technical personnel. Competition for these personnel is
intense, and we will be adversely affected if we are unable to attract key
employees.
ITEM 2. DESCRIPTION OF PROPERTY FACILITIES
In February 1999, the Company's corporate offices moved into a building leased
by its' InCirT division. After the Company was foreclosed on by its' bank, we
were able to negotiate a month-to-month rental agreement with InCirT's landlord
for approximately 2000 square feet in an industrial building in Irvine,
California.
4
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
1. 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 Savvy obtained a judgment against the Company for $165,750.
2. On February 15, 2000, Amistar Corporation filed 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.
3. On March 21, 2000, Interworks Computer Products, Inc., filed suit to
recover $35,771 in past due uncontested vendor obligations.
4. On July 22, 2000, Force Electronics filed suit to recover $68,816 in
past due uncontested vendor obligations, and obtained a judgment on
September 15, 2000.
5. Control Design Supply/Nedco filed suit to recover $6,788 in past due
uncontested vendor obligations.
6. On March 20, 2000, DHL Airways Inc. obtained a judgment in the amount
of $3,868 for past due uncontested vendor obligation.
On November 15, 1999, Alan L. Weaver, former CEO of Pen Interconnect,
Inc., obtained a judgment against the Company in the amount of $135,300
for breach of a settlement agreement relative to Mr. Weavers' employment
agreement with the Company. The Company has reserved $135,300 as a
contingent liability as of September 30, 2000 for this agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters voted on by the shareholders in the fourth quarter.
5
<PAGE>
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 de-listed from the National Association of Securities Dealers
Automated Quotation system as of March 30, 1999. They are traded under the
symbol "PENC:OB" 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 three years.
High Low
Fiscal Year 2000-Quarter Ended
September 30, 2000 $0.30 $0.17
June 30, 2000 0.36 0.18
March 31, 2000 0.55 0.20
December 31, 1999 0.53 0.25
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 December 22, 2000 the closing quotation for the common stock on the OTC
Bulletin Board was $0.031 per share. As of December 22, 2000, there were
27,596,946 shares of common stock issued and outstanding, held by approximately
1,350 shareholders, including several holders who are nominees for an
undetermined number of beneficial owners.
On December 22, 2000, the closing quotation for the warrants was $0.016 per
warrant. The Company extended the public warrants for one more year to November
17, 2001 as they were to expire on November 17, 2000. As of September 30, 2000,
there were issued and outstanding public and private warrants to purchase
6,420,453 shares of the Company's common stock.
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.
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, 2000 and 1999. This discussion and analysis should be read
in conjunction with the Company's financial statements and related footnotes.
Results of Operations
Net sales: There were no sales from continuing operations for the years ended
September 30, 2000 and 1999. All operating divisions were disposed of during
1999 and 2000, and all operating activity was reclassified as discontinued
operations. Since March 2, 2000, the Company decided to maintain its' situation
as a reporting public company, and to reduce its' debt in order to make the
Company attractive to private companies that would want to use Pen to go public.
This approach would be a major step to possibly help to maintain some
shareholder value in the Company's stock price.
The Company did enter into a Letter of Intent to reverse merge with a small
private .com company, perFORMplace.com, in the entertainment services business.
A definitive agreement was signed in late August 2000 with the intent to obtain
shareholder ratification at the next shareholders' meeting. However, on November
8, 2000, before the meeting could be held, perFORMplace.com terminated the
merger. This caused a serious drop in the Company's stock price and the need to
go back out to seek a new merger partner or acquisition.
Since the disposition of the net assets and operations of our historical
operations, the Company has reduced its' staff to two employees and one
part-time financial consultant.
Cost of Sales
Not applicable.
6
<PAGE>
Operating Expenses
Since the foreclosure on the assets and the sale of its' operating divisions,
the operating costs of the Company have been kept to a minimum, with minimal
employees (2), limited travel and expenses. As a result, general and
administrative expenses decreased from $2,699,526 to $1,733,596, a net change of
36%.
Depreciation decreased $107,172 from 1999 to 2000. Most of the Company's fixed
assets were disposed of during 2000.
Interest expense decreased $232,327 during 2000, primarily due to the
foreclosure of the assets of its' InCirT division, and the resulting affect
against the Company's line of credit.
The Company recorded a $320,500 loss from impairment due to the write-off of
advances made to a potential merger candidate. Impairment losses during 1999 of
$724,959, resulted from the closure of two of its' divisions. The primary source
of funds was through the occasional exercise of warrants and options so as to
pay the necessary legal and accounting bills as related to the several lawsuits
and the SEC reporting requirements as well as the limited payroll.
Other Income/Expenses
The Company recorded a $135,300 loss from a lawsuit brought by a former
executive of the Company during 2000.
Losses from discontinued operations decreased to $497,827 in 2000 from
$5,695,148 in 1999. The Company disposed of two divisions during 1999 and the
remaining two divisions early in 2000.
Losses on the disposal of these operating divisions decreased from $1,575,497 in
1999 to $776,384 in 2000 as the Company disposed of its' two remaining divisions
during 2000.
Extraordinary Income
The Company recorded a gain from extinguishments of debt of $2,018,547 during
2000 resulting from the conversion of vendor payables to equity.
Net Loss and Loss Per Share
Net loss and loss per share. Net losses decreased to $1,891,199 or $0.10 per
common share in fiscal year 2000 from $12,014,791 or $1.82 per common share in
fiscal year 1999; a decrease of $10,123,592 or $1.72 per share. This decreased
loss per common share resulted primarily from the discontinuance of operations
of the Company due to the foreclosure by the bank.
Liquidity and Capital Resources
The Company had negative working capital at September 30, 2000 of $1,777,914
compared to a negative working capital of $1,811,105 at September 30, 1999 for a
decrease in working capital
of $166,809. The decrease was due to the foreclosure on the Company's assets,
the sale of its' divisions, thus leaving only minimal costs of a few employees
and limited furniture.
During fiscal 2000 Pen continued to experience cash flow problems. For most of
fiscal 1999, the market price of Pen's stock was sufficient to raise additional
funds to support the negative cash flow from operations. Pen's stock price has
continued to decline since Pen's securities were de-listed from the NASDAQ
National Market in March of 1999.
In March 2000, because of Pens' inability to clear the default notice, our bank,
Finova Capital caused a pre-packaged foreclosure of all of Pens' assets,
including the take-over of our largest division, InCirT, which was subsequently
sold to ADTI, a subsidiary of Comtel Holdings, Inc. Since that time, Pen has
maintained its' fully reporting public status in an attempt to merge with a new
asset/company that was looking to go public via a reverse merger.
Additional capital infusions are necessary to help the Company continue its'
operations at this time and the investors which purchased the preferred stock in
FY99 have been willing to continue some limited funding to assist the Company in
its' search for a merger partner or acquisition of new assets. However, there is
no guarantee that this will continue for any sustained period. If Pen cannot
raise additional capital, Pen may have to seek bankruptcy protection.
In February 2000, Pen sold its' PowerStream division to Lund Engineering or
Orem, Utah for cash and notes. Lund took over the assets and debt of PowerStream
which paid off its' obligations to Finova, which also owns the note through its'
foreclosure actions.
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 Mr. Pendleton's agreement to waive any
claim to post employment, deferred compensation or retirement benefits. The
transfer of the MotoSat division to Mr. Pendleton resulted in a loss to the
Company of approximately $68,000.
7
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data are included beginning at page A
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACOUNTANTS 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 ACT
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 three
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 62 Chairman of the Board, Chief
Executive Officer
And Principal Accounting
Officer
Milton Haber 76 Director
Brian Bonar 52 Director
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.
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.
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. It is
our understanding that these reports have been filed on a timely basis.
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 Fiscal Year Salary Bonus
Stephen J. Fryer 2000 $148,802 $ 4,116
President & CEO 1999 139,000 17,304
1998 96,000 12,000
Jim Pendleton (1) 1999 139,666 0
Chairman/CEO 1998 129,000 0
Mehrdad Mobasseri (1) 1999 96,000 89,282
President-InCirT 1998 83,999
Alan Weaver (1) 1999 100,000 30,881
Vice President 1998 120,000 32,432
o 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.
(1) - All resigned in 1999/2000.
8
<PAGE>
Option/SAR Grants in Fiscal Year 2000
<TABLE>
<CAPTION>
Number of Securities Percent of Total
Underlying Options Options Granted to Exercise
Granted Employees in Fiscal Price per Expiration
Name Year 2000 Share Date
------------------------------- --------------------- --------------------- ------------ --------------
<S> <C> <C> <C> <C>
Stephen J. Fryer 300,000 92% $0.30 March 2003
300,000 92% $0.22 June 2003
</TABLE>
Aggregated Option/SAR Exercises in Fiscal
Year 2000 and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Securities In-the-Money
Underlying Options at Fiscal
Unexercised Options Year End
Shares Acquired
on Exercise Exercisable / Exercisable /
Unexercised Unexercised
Name Value Realized
--------------------------- ---------------- --------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Stephen J. Fryer -0- None 1,092,500/1,092,500 $0.00
</TABLE>
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 September 30, 2000, (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.
9
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature Amount Issuable on Percentage of
Name and Address of Beneficial of Beneficial Owner Exercise of Outstanding Common
Owner Options/Warrants stock
-------------------------------------- ------------------- ------------------ ------------------
Directors and Executive Officers
<S> <C> <C> <C>
Stephen J. Fryer 1,092,500 1,092,500 3.83
Milton Haber 162,222 162,222 .56
Brian Bonar 150,000 150,000 .52
AMRO International, S.A (1) 3,905,727 3,905,727 13.7
Grossmunster Platz 26
Zurich, Switzerland
Austost Anstalt Schaan (1) 1,952,863 1,952,863 6.85
Landstrasse 163
Vaduz, Liechenstein
Balmore Funds, S.A. (1) 1,952,863 1,952,863 6.85
Trident Chambers
Road Town, Tortola
British Virgin Islands
RBB Bank AG (1) 3,168,200 3,168,200 11.1
Burgring 16
Graz, Austria
All Officers and Directors as a Group 1,404,722 1,404,700 4.93
(3 persons)
</TABLE>
(1) 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.
10
<PAGE>
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 taken over by Finova under
terms of its' foreclosure on all assets. 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.
Stephen J. Fryer accepted a Directors' position on Itec's Board in March
2000.
Former officers and board members, James Pendleton and Wayne Wright
reached a modified settlement with the Company, per their management and
deferred income statements, by each accepting 250,000 warrants, priced at
$0.65 per share, and 376,000 shares of common stock in place of monetary
payments.
ITEM 13 - Index of 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, 2000.
(b) Exhibit No. Description
1. 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 amended, as filed February 10, 1999. See Exhibit to report on Form
8-K filed on February 17, 1999.
4.2 Certificate of Amendment creating Series B Convertible Preferred Stock
as amended.
10.4 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.
10.7 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.
10.11.1 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 SA and AMRO
International, SA dated as of February 12, 1999. See Exhibits to Report
on Form 8-K filed February 17, 1999.
11
<PAGE>
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 Profession, dated as of October 1,
1999.
10.15 Change in Pen's Auditors from Grant Thornton LLP to Berg & Associates
as of March 7, 2000, and FINOVA's foreclosure action on Pen's assets to
recover its' loans to the Company. See Exhibits to Report on Form 8-K
filed on March 14, 2000, SEC File No. 1-14072.
10.16 Amended Registration Rights Agreement for registration of Common stock,
Form S-B2 filed February 16, 2000. Registration Statement # 333-79631.
10.17 1999 Consulting Services Agreement and Compensation Plan for outside
consultants (Incorporated by reference to Form S-8, filed September 3,
1999.
10.18 2000 Consulting Services Agreement and compensation plan for outside
consultants. (Incorporated by reference to Form S-8 filed May 17, 200.
27. Financial data schedule.
12
<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 16, 2001 PEN INTERCONNECT, INC.
By:_/s/ Stephen J. Fryer
Stephen J. Fryer
Chairman, CEO and
Chief Accounting Officer
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 16, 2001 By:/s/ Stephen J. Fryer
Stephen J. Fryer
Chairman, CEO and
Chief Accounting Officer
Date: January 16, 2001 By:/s/ Brian Bonar
Brian Bonar
Director
Date: January 16, 2001 By:/s/ Milton Haber
Milton Haber
Director
13
<PAGE>
PEN INTERCONNECT, INC.
AUDITED FINANCIAL STATEMENTS
For the Years Ended
September 30, 2000 and 1999
<PAGE>
PEN INTERCONNECT, INC.
Audited Financial Statements
For the Years ended September 30, 2000 and 1999
Page
Report of Pohl, McNabola, Berg & Co. LLP, Independent Auditors
On the September 30, 2000 Financial Statements 1
Report of Grant Thornton LLP, Independent Auditors
On the September 30, 1999 Financial Statements 2
Balance Sheets 3 - 4
Statements of Operations and Retained Earnings 5 - 6
Statements of Stockholders' Deficit 7
Statements of Cash Flows 8 - 11
Notes to Financial Statements 12 - 44
<PAGE>
Report of Independent Auditors on the September 30, 2000 Financial Statements
Board of Directors
Pen Interconnect, Inc.
Irvine, California
We have audited the accompanying balance sheet of Pen Interconnect, Inc., a Utah
Corporation, as of September 30, 2000, and the related statement of operations,
stockholders' equity (deficit), and cash flows for the year then ended. These
financial statements are the responsibility of the management of Pen
Interconnect, Inc. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Pen
Interconnect, Inc. as of September 30, 2000, and the results of its operations
and its cash flows for the year 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 2 to the
financial statements, the Company has suffered recurring losses from operations,
the Company has a stockholders' deficit of $1,977,914 as of September 30, 2000,
and its current liabilities exceeded its current assets by $1,977,914. These
factors, among others, as discussed in Note 2 to the financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/Pohl, McNabola, Berg & Company LLP
San Francisco, California
December 28, 2000
1
<PAGE>
Report of Independent Auditors on the September 30, 1999 Financial Statements
Board of Directors and Stockholders
Pen Interconnect, Inc.
We have audited the accompanying balance sheet of Pen Interconnect, Inc., (a
Utah Corporation), as of September 30, 1999, and the related statements of
operations, stockholders' deficit, and cash flows (prior to the restatement for
discontinued operations described in Note 11) for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pen Interconnect, Inc. as of
September 30, 1999, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
The accompanying 1999 financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 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 (prior to the restatement for discontinued operations described in
Note 11). These factors, among others, as discussed in Note 2 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 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
Salt Lake City, Utah
December 23, 1999
2
<PAGE>
Pen Interconnect, Inc.
Balance Sheets
September 30, 2000 and 1999
ASSETS
<TABLE>
<CAPTION>
2000 1999
--------------------- --------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 9,319 $ 176,299
Current maturities of notes receivable - 725,112
Prepaid expenses - 103,376
Assets from discontinued operations 9,605 8,523,631
--------------------- --------------------
Total Current Assets 18,924 9,528,418
--------------------- --------------------
Property and equipment:
Computer equipment 1,028 1,028
Accumulated depreciation (154) (51)
--------------------- --------------------
Total property and equipment 874 977
--------------------- --------------------
Total assets $ 19,798 $ 9,529,395
===================== ====================
</TABLE>
(continued)
See accompanying notes to financial statements
- 3 -
<PAGE>
Pen Interconnect, Inc.
Balance Sheets (continued)
September 30, 2000 and 1999
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
2000 1999
---------------------- ---------------------
Current Liabilities:
<S> <C> <C>
Line of credit $ - $ 4,436,562
Accounts payable 200,752 311,300
Accrued liabilities 724,647 360,832
Convertible debentures 150,000 -
Notes payable 56,648 308,189
Liabilities from discontinued operations 864,791 5,922,640
---------------------- ---------------------
Total current liabilities 1,996,838 11,339,523
Stockholders deficit:
16% Convertible preferred stock, $0.01 par value,
authorized 5,000,000 shares
Series A, issued and outstanding, 130 shares in 2000 and 1800
shares in 1999 1 18
Series B, issued and outstanding, 926 shares in 2000 and 1000
shares in 1999 9 10
Common stock, $0.01 par value, authorized 50,000,000
shares issued and outstanding 27,596,946 shares in
2000 and 9,638,114 shares in 1999 275,969 96,381
Additional paid in capital 19,282,402 17,447,876
Accumulated deficit (21,535,421) (19,354,413)
---------------------- ---------------------
Total stockholders' deficit (1,977,040) (1,810,128)
---------------------- ---------------------
Total liabilities and stockholders' deficit $ 19,798 $ 9,529,395
====================== =====================
</TABLE>
See accompanying notes to financial statements
- 4 -
<PAGE>
Pen Interconnect, Inc.
Statements of Operations
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------------------- -----------------------
Revenues:
<S> <C> <C>
Net revenues $ - $ -
Costs of revenues - -
----------------------- -----------------------
- -
----------------------- -----------------------
Sales and marketing - 20,628
General and administrative expenses 1,733,596 2,699,526
Depreciation 103 107,275
----------------------- -----------------------
Loss from operations 1,733,699 2,827,429
Other expenses
Interest expense 358,195 590,522
Loss on impairment 320,500 724,959
Loss on lawsuit 135,300 -
Liquidation damage waiver 86,941 -
----------------------- -----------------------
Loss from continuing operations before income taxes 2,634,635 4,142,910
Income taxes 900 601,236
----------------------- -----------------------
Loss from continuing operations 2,635,535 4,744,146
Loss from discontinued operations, net of tax of $0
PowerStream 269,356 1,735,148
InCirT 228,471 3,580,342
Cable - 299,720
MotoSat - 79,938
----------------------- -----------------------
497,827 5,695,148
Loss (gain) from disposal of discontinued operations, net of
tax of $0
PowerStream (186,643) -
InCirT 963,027 -
Cable - 1,507,059
MotoSat - 68,438
----------------------- -----------------------
776,384 1,575,497
----------------------- -----------------------
Total loss from discontinued operations 1,274,211 7,270,645
----------------------- --------------------
</TABLE>
(continued)
See accompanying notes to financial statements
- 5 -
<PAGE>
Pen Interconnect, Inc.
Statements of Operations (continued)
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------------------ ----------------------
<S> <C> <C>
Loss before extraordinary item 3,909,746 12,014,791
Gain on extinguishment of debt (2,018,547) -
------------------------ ----------------------
Net loss $ 1,891,199 $ 12,014,791
======================== ======================
Net (income) loss per share (Note 1, 17):
Loss before discontinued items and extraordinary item
Basic $ 0.14 $ 0.67
Diluted 0.14 0.67
Loss from discontinued items
Basic 0.07 1.02
Diluted 0.07 1.02
Loss before extraordinary item
Basic 0.21 1.68
Diluted 0.21 1.68
Gain on extinguishment of debt
Basic (0.11) -
Diluted (0.11) -
Net loss per share
Basic $ 0.10 $ 1.82
======================== ======================
Diluted $ 0.10 $ 1.82
======================== ======================
Weighted average shares used in per share calculation
Basic 18,556,461 7,133,344
======================== ======================
Diluted 18,556,461 7,133,344
======================== ======================
</TABLE>
See accompanying notes to financial statements
- 6 -
<PAGE>
Pen Interconnect, Inc.
Statements of Stockholders' Deficit
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
Shares Amount Shares Amount Paid-in Accumulated Total
Capital Deficit
------------------------------------- ------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance 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)
------------------------------------- ------------ -----------------------------------------------
Balance September 30, 1999 9,638,114 96,381 2,800 28 17,447,876 (19,354,413) (1,810,128)
------------------------------------- ------------ -----------------------------------------------
Conversion of Preferred Stock -
Series B 411,112 4,111 (74) (1) (4,111) - (1)
Conversion of Preferred Stock -
Series A 9,057,654 90,577 (1,670) (17) (90,577) - (17)
Common stock issued in lieu of
preferred stock dividend
payable 349,323 3,493 - - 61,088 - 64,581
Compensation expense recognized
on repricing of options and
warrants - - - - 339,822 - 339,822
Conversion of warrants -
Preferred
Stock Series A into common
stock 315,000 3,150 - - 83,792 - 86,942
Exercise of stock options 1,150,000 11,500 - - 254,941 - 266,441
Exercise of warrants 2,766,668 27,667 - - 273,451 - 301,118
Common stock issued for services 1,760,193 17,602 - - 416,372 - 433,974
Conversion of trade payables
and debt
into common stock 1,061,747 10,617 - - 250,655 - 261,272
Sale of common stock 1,087,135 10,871 - - 206,843 - 217,714
Dividends on Preferred Stock - - - - - (289,809) (289,809)
Stock options granted as
compensation - - - - 42,250 - 42,250
Net loss - - - - - (1,891,199) (1,891,199)
------------------------------------- ------------ -----------------------------------------------
Balance September 30, 2000 27,596,946 $ 275,969 1,056 $ 10 $ 19,282,402 $ (21,535,421) $ (1,977,040)
===================================== ============ ===============================================
</TABLE>
See accompanying notes to financial statements
- 7 -
<PAGE>
Pen Interconnect, Inc.
Statements of Cash Flows
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------------------- -------------------
Increase (decrease) in cash and cash equivalents
Cash flow from operating activities:
<S> <C> <C>
Net loss $ (1,891,199) $ (12,014,791)
Adjustments to reconcile net loss to net cash generated
by
(used in) operating activities
Depreciation and amortization 90,514 503,397
Allowance for bad debts - 1,782,001
Allowance for note receivable 320,500 -
Allowance for obsolete inventory - (248,689)
Deferred income taxes - 601,236
Amortization of favorable conversion feature on
subordinated debenture charged to interest expense - 98,571
Common stock issued for services 433,974 756,487
Extinguishment of debt (2,018,547) -
Conversion of warrants 86,941 -
Debt conversion to common stock 261,272 -
Common stock issued for dividends payable 64,581 -
Common stock issued in payment of interest - 7,669
Stock options issued for services at below the fair
market
value of the stock on the date of the grant and
repricing of options 382,071 769,125
Discontinued operations
Loss on disposal of property and equipment - 11,425
Asset impairment charges - 2,598,894
Loss (gain) on sale of divisions (186,643) 1,575,497
Loss on foreclosure of division 963,027 -
Changes in assets and liabilities
Trade accounts receivable 790,429 (1,960,961)
Inventories 1,300,987 63,218
Prepaid expenses and other current assets 9,171 5,665
Other assets - 65,150
Accounts payable 1,861,945 1,170,432
Accrued liabilities (141,401) 191,133
----------------------- -------------------
Net cash flow generated by (used in) operating
activities 2,327,622 (4,024,541)
----------------------- -------------------
</TABLE>
(continued)
See accompanying notes to financial statements
- 8 -
<PAGE>
Pen Interconnect, Inc.
Statements of Cash Flows (continued)
For the Years Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
--------------------- ------------------
Cash flow from investing activities:
<S> <C> <C>
Purchase of property, equipment and leaseholds - (208,712)
Advances to perFORMplace 320,500 -
Issuance of notes receivable (374,567) (575,112)
Collection on notes receivable - 6,287
Proceeds from sale of divisions 75,689 1,075,000
--------------------- ------------------
Net cash generated by investing activities 21,622 297,463
--------------------- ------------------
Cash flow from financing activities:
Issuance of preferred stock (18) 2,800,000
Proceeds from issuance of common stock 217,714 -
Proceeds from convertible debenture 150,000 -
Net change in line of credit (1,840,467) 615,249
Principal payments on long-term debt obligations (1,611,010) (883,201)
Proceeds from bridge loans - 900,000
Principal payments on bridge loans - (900,000)
Principal payments on capital leases - (57,246)
Exercise of warrants 301,117 392,798
Exercise of stock options 266,440 378,000
--------------------- ------------------
--------------------- ------------------
Net cash generated by (used in) financing activities (2,516,224) 3,245,600
--------------------- ------------------
Net decrease in cash and cash equivalents (166,980) (481,478)
--------------------- ------------------
Cash and cash equivalents at beginning of year 176,299 657,777
--------------------- ------------------
Cash and cash equivalents at end of year $ 9,319 $ 176,299
===================== ==================
Supplementary disclosures of cash flow information
Cash paid during the year for
Interest $ 360,296 $ 593,374
Income taxes $ 900 $ -
</TABLE>
(continued)
See accompanying notes to financial statements
- 9 -
<PAGE>
Pen Interconnect, Inc.
Statements of Cash Flows (continued)
For the Years Ended September 30, 2000 and 1999
Non-Cash Investing and Financing Activities
Favorable Conversion Feature of Subordinated Debentures
The Company recognized charges related to the favorable conversion feature of
the subordinated debentures issued during 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 of
$98,571 in 1999. There were no remaining debentures at September 30, 2000.
Sale of Division
On January 21, 2000, the Company sold substantially all of the assets and
certain liabilities of its PowerStream Division (Note 3, 7) noted as
follows:
Cash -
Accounts receivable, net $ 142,017
Inventories 74,262
Prepaid expenses -
Note Receivable 9,017
Property, equipment and leaseholds, net 69,229
Accounts Payable (166,661)
Unearned revenue (216,000)
Note payable (14,820)
Capital leases (7,998)
-----------------------
Net liabilities transferred
(110,954)
Less consideration received
Note receivable -
Cash 75,689
-----------------------
Gain on sale of division $ (186,643)
=======================
Foreclosure of Division
On March 3, 2000, the Company's InCirT Division was foreclosed and
substantially all of the assets and liabilities were turned over to a
secured lender (Note 3, 7). The value of the assets and liabilities
transferred were as follows:
Accounts receivable, net $ 2,038,322
Inventories 2,875,412
Notes receivable 299,662
Property, equipment and leaseholds, net 959,758
Accounts payable (2,614,032)
Other debt obligations (2,596,095)
-----------------------
Loss on foreclosure of division $ 963,027
=======================
(continued)
See accompanying notes to financial statements
- 10 -
<PAGE>
Pen Interconnect, Inc.
Statements of Cash Flows (continued)
For the Years Ended September 30, 2000 and 1999
Non-Cash Investing and Financing Activities (continued)
Sale of Divisions
On January 31, 1999, the Company sold substantially all of the assets
and certain liabilities of its Cable Division. Assets and liabilities
were as follows:
Accounts receivable, net $ 310,467
Inventories 917,760
Prepaid expenses 17,509
Other assets 32,390
Property, equipment, net 1,496,459
Capital leases (42,526)
-----------------------
Assets sold, net 2,732,059
Less consideration received
Note receivable 150,000
Cash 1,075,000
-----------------------
Loss on sale of division $ (1,507,059)
=======================
On September 30, 1999, the Company sold substantially all of the assets
and liabilities of its MotoSat Division. Assets and liabilities sold
were as follows:
Accounts receivable, net $ 180,896
Inventories 206,689
Notes receivable 33,377
Property, 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)
=======================
Conversion of debt and trade payables
During fiscal year 2000, debt and trade payables in the amount of $261,272 were
converted into 1,061,747 shares of common stock. During fiscal year 1999,
convertible debentures in the amount of $1,500,000 were converted into 2,092,671
shares of common stock.
The following is a listing of the non-cash charges to common stock during fiscal
year 2000:
Conversion of preferred stock into common stock $ (18)
Common stock issued in lieu of dividends payable 64,581
Conversion of warrants-preferred stock into common stock 86,942
Common stock issued for services 433,974
See accompanying notes to financial statements
- 11 -
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
1. Organization and Summary of Significant Accounting Policies
Organization
Pen Interconnect, Inc. (the Company) was incorporated on September 30,
1985, in the State of Utah. Through March 3, 2000, the date of
foreclosure of its last remaining operating division, the Company was 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 consisted of printed circuit
boards. The Company's customers included 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 included
OEMs of telecommunications, instrumentation and testing equipment.
The Company sold three of its operating divisions during the last two
years, noted as follows:
Division Name Date Sold
-------------------------- -------------------------
Cable Division January 31, 1999
MotoSat September 30, 1999
PowerStream January 21, 2000
On March 3, 2000 the Company and its secured asset based lender, Finova
Capital, entered into a voluntary foreclosure in which all the assets
in the Company's last remaining division, InCirT, was transferred to
Finova to satisfy the revolving credit and term loans held by the bank.
12
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
1. Organization and Summary of Significant Accounting Policies (continued)
Organization (continued)
During the second quarter of FY2000 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. On
November 11, 2000, perFORMplace.com informed the Company that it had
decided not to pursue the merger. The Company is currently pursuing
other strategic alternatives.
Basis of Presentation
The financial statements include the corporate operations of Pen
Interconnect as continuing operations. Operations of Cable, MotoSat,
PowerStream and InCirT have been disclosed as discontinued operations
in the financial statements for the years ended September 30, 2000 and
1999.
Cash, Cash Equivalents and Short-Term Investments
The Company considers cash on hand, cash in banks, certificates of
deposits and time deposits with original maturities of three months or
less when purchased as cash equivalents. Short-term investments are
investments with original maturity greater than ninety days and less
than one year.
Inventories
Inventories consisted primarily of components and boards, and were
valued at the lower of cost or market (first-in, first-out basis).
Costs included materials, labor, and overhead.
13
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
1. Organization and Summary of Significant Accounting Policies (continued)
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
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 were being amortized on a straight-line
method over 15 years. The carrying value of goodwill was reviewed
periodically based on the undiscounted cash flows of the entities
acquired over the remaining amortization period. The Company reduced
the carrying value of goodwill by $1,873,935 in 1999 (Note 9).
14
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
1. Organization and Summary of Significant Accounting Policies (continued)
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.
Stock-Based Compensation
The Company accounts for its stock-based compensation plan based on
Accounting Principles Board ("APB") Opinion No. 25. In October 1995,
the Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has determined
that it will not change to the fair value method and will continue to
use APB Opinion No. 25 for measurement and recognition of any expense
related to employee stock based transactions.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and display of changes in equity from non-owner
sources in the financial statements. The Company does not have any
components of comprehensive income in 2000 or 1999.
Valuation of Long-lived Assets
The Company periodically evaluates the carrying value of long-lived
assets to be held and used, including intangible assets, when events
and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated discounted
cash flow from such asset is separately identifiable and is less than
its carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the fair market value of
15
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
1. Organization and Summary of Significant Accounting Policies (continued)
Valuation of Long-lived Assets (continued)
the long-lived asset. Fair market value is determined primarily using
the anticipated cash flows discounted at a rate commensurate with the
risk involved. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair market values are
reduced for the cost to dispose.
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.
Revenue Recognition
Sales are generally recorded when products are shipped or when services
are rendered.
Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Significant estimates include allowance for doubtful accounts and notes
receivable, inventory obsolescence, estimated lives for fixed assets,
impairment of goodwill and intangibles, the liabilities posed by
lawsuits and collection of contingent assets. Actual results could
differ from these estimates.
16
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
1. Organization and Summary of Significant Accounting Policies (continued)
Advertising
The Company did not incur any significant amount of advertising
expenses.
Earnings (Loss) Per Share
Basic earnings per common share are computed using the weighted average
number of common shares outstanding during the period. Dividends to
preferred shareholders are deducted to arrive at earnings (loss)
available to common shareholders.
Diluted earnings per common share incorporate the incremental shares
issuable upon the assumed exercise of stock options and warrants.
All of the Company's stock options and warrants were excluded from the
calculation of diluted earnings per share because they were
antidilutive.
Segment and Geographic Information
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 requires enterprises to
report information about operating segments in annual financial
statements and selected information about reportable segments in
interim financial reports issued to shareholders, on the basis that is
used internally for evaluating segment performance and deciding how to
allocate resources to segments. It also established standards for
related disclosures about products and services, geographic areas and
major customers. Segment disclosures have been provided for
discontinued operations (Note 11).
Research and Development
Researh and development costs are expensed as incurred.
17
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
1. Organization and Summary of Significant Accounting Policies (continued)
Recent Pronouncements
In June 1998, the Financial Accounting Standard Board (FASB) issued
Statement No. 133, "Accounting for the Derivative Instruments and
Hedging Activities". The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. This
statement is effective for fiscal years beginning after June 15, 2000,
and has been adopted by the Company for the year ending September 30,
2000. The adoption of this Statement does not have an effect on the
Company's revenues and earnings, as the Company currently does not have
any derivative instruments.
In March 2000, the FASB released Interpretation No.44, " Accounting for
Certain Transactions Involving Stock Compensation." This Interpretation
addresses certain practice issues related to APB Opinion No.25. The
provisions of this Interpretation are effective July 1, 2000, and,
except for specific transactions noted in paragraphs 94-96 of this
Interpretation, shall be applied prospectively to new awards, exchanges
of awards in business combinations, modifications to an outstanding
award, and exchanges in grantee status that occur on or after that
date.
Certain events and practices covered in Interpretation No. 44 have
different application dates, and events that occur after an application
date but prior to July 1, 2000, shall be recognized only on a
prospective basis. Accordingly, no adjustment shall be made upon
initial application of the Interpretation to financial statements for
periods prior to July 1, 2000. Thus, any compensation cost measured
upon initial application of this Interpretation that is attributed to
periods prior to July 1, 2000 shall not be recognized. The Company has
adopted the provisions of this Interpretation starting July 1, 2000.
The Company recognized compensation expense of $42,250 during fiscal
year 2000 as a result of adopting this Interpretation.
18
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
1. Organization and Summary of Significant Accounting Policies (continued)
Reclassifications
Certain reclassifications have been made to the 1999 financial
statements to conform to the 2000 presentation.
2. Financial Results and Liquidity
The Company has incurred net losses of $1,891,199 in 2000. In addition,
the Company has a stockholders' deficit of $1,977,040 in 2000, and a
working capital deficit of $1,977,914 as of September 30, 2000. These
factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern.
During 1999, the Company sold its unprofitable Cable and MotoSat
Divisions, and during 2000, the Company sold its PowerStream Division
and entered into a voluntary foreclosure of its InCirT Division. The
Company's current operations continue to generate operating losses and
continue to use rather than provide cash flow. The Company has issued
preferred stock, debentures and increased other borrowings to provide
working capital to help meet current obligations. The Company still
currently does not generate enough cash to fund operations and service
its debt requirements.
The Company plans to seek a strategic merger with another operating
company, and its efforts are focused primarily on sale or merger
opportunities.
While the Company continues to seek additional equity capital, there
can be no assurance that the Company will be successful in
accomplishing its objectives. Without an infusion of additional
capital, there is substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include
any adjustments that might be necessary should the Company be unable to
continue as a going concern.
19
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
3. Disposition of Operating Divisions
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 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 or compensate the Company for the additional
$558,747 of net assets.
The note receivable of $150,000 and the royalties due to the Company
from the sale of the Cable Division were assigned by the Board to the
Company's founder and former Board Chairman in order to compensate him
for the termination of his management contract and deferred
compensation agreement when he agreed to step aside from the management
of the Company. This agreement was reached in December 1999 as part of
an overall settlement agreement of claims.
MotoSat Division
Effective September 30, 1999, the Company sold substantially all of the
assets and liabilities of its MotoSat 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 MotoSat
Division.
20
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
3. Disposition of Operating Divisions (continued)
PowerStream Division
Effective January 21, 2000, the Company sold substantially all of the
assets and liabilities of its PowerStream Division to Lund Instrument
Engineering, Inc. The net liabilities of ($110,954) were sold for cash
of $75,689 plus royalties ranging from 8% to 16% of the gross profits
generated by the sale of certain products for a period of three years
subsequent to the sale subject to certain adjustments. The Company
recognized a gain of $186,643 upon the disposition of the PowerStream
Division. Cash proceeds were used to pay down a note due to a secured
lender.
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 2000, 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
division, for which Finova had a perfected security interest. The
Company recognized a loss of $963,027 upon the foreclosure of the
InCirT Division.
4. Concentrations
Financial instruments that potentially subject the Company to
concentration of credit risk include cash deposits in excess of FDIC
limits and short-term investments. The Company restricts investment of
cash balances to financial institutions with high credit standing.
21
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
5. Notes Receivable
There were no notes receivable as of September 30, 2000. Notes
receivable as of September 30, 1999, consist of the following and are
all included in Assets from Discontinued Operations:
<TABLE>
<CAPTION>
1999
-------------------
--- ---------------
<S> <C> <C>
8% note receivable due on June 30, 2000 with monthly
interest-only payments; unsecured $ 552,612
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
--- ---------------
--- ---------------
725,112
Less current maturities (575,112)
--- ---------------
---------------
$ 150,000
=== ===============
</TABLE>
6. Inventory
Inventory for the period ended September 30, 1999, which is included
in Assets from Discontinued Operations, consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw material $ 3,253,574
Work-in-process 1,507,108
Finished goods 59,315
-- ------------------
-- ------------------
4,819,997
Less allowance for obsolete
inventory (569,336)
-- ------------------
-- ------------------
$ 4,250,661
== ==================
</TABLE>
There is no inventory as of September 30, 2000.
22
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
7. Foreclosure
The Company entered into a financing agreement with a bank for
$6,300,000. The agreement consisted of a $5,000,000 revolving credit
line and two term loans for $800,000 and $500,000. Under the loan
agreements for these loans, the Company was required to meet certain
financial ratios and specific minimum levels of earnings and net worth.
The loan agreements also restricted employee advances, capital
expenditures, compensation, and additional indebtedness; and restricted
the payment of dividends. The Company had borrowed $4,436,562 under the
line of credit at September 30, 1999. At times, including at September
30, 1999, the Company had 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 had not received a waiver from
the lender and all obligations under this credit facility were payable
on demand of the lender and were classified as current liabilities in
the balance sheet. Subsequent to September 30, 1999, the lender
declared the loan agreement in default.
The Company continued operating under a default notice with its lender
and began seeking buyers for its two remaining divisions PowerStream
and InCirT. 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 InCirT Division of the Company, for which its Lender had a
perfected security interest. The Company's September 30, 2000 balance
sheet reflects the transfer of all collateral assets to its Lender, and
the Company has recognized an offset of the bank's line of credit
balance and term loans owed by the Company. The Company recorded a loss
on transfer of assets of $963,027.
The bank line of credit has a remaining balance due of approximately
$1,400,000 that is not recorded in the financial statements, and
remaining estimated assets to collect of approximately $2,400,000,
which are also not recorded in the financial statements. The Company is
currently negotiating an agreement with the lender, which it expects
will result in complete satisfaction of all the loans with the lender
in exchange for the assets the lender currently has in its possession.
The draft agreement also includes the repricing of certain warrants
that the Company has issued to the lender and the issuance of a certain
number of additional warrants to the lender.
23
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
8. Note Payable and Convertible Debenture
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
2000 1999
------------------- -------------------
Non-interest-bearing note, payable in 12 monthly
installments of $74,509, collateralized by inventory
<S> <C> <C>
$ - $ 844,104
Non-interest-bearing note, payable in 12 monthly
installments of $51,280, 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
- 214,579
7.50% note, due on demand 56,648 13,617
Non-interest-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 - 79,992
Non-interest-bearing note to a parts vendor - 11,720
11.25% note to a financial institution, past due - 3,100
7% convertible debenture, interest only, due August 2001
150,000 -
--- --------------- --- ---------------
206,648 1,682,478
Less current maturities (206,648) (1,682,478)
--- --------------- --- ---------------
Total Long Term Debt $ - $ -
=== =============== === ===============
</TABLE>
24
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
8. Note Payable and Convertible Debenture (continued)
In August 2000, the Company entered into a convertible debenture
agreement for $600,000 in exchange for 4,000,000 shares of the
Company's common stock. This agreement consists of three installments:
$150,000 upon the signing of the agreement; $150,000 upon the submittal
of the registration documents; and $300,000 upon the completion of the
registration of the debenture. The first installment was received prior
to September 30, 2000. The convertible debenture has an interest rate
of 7% per annum. The Company is currently preparing the necessary
documents to register the debenture. The debenture is convertible into
common stock at the lesser of $0.15 per share or 70% of the market
price on the conversion date.
9. Long-Lived Assets
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. During 2000, the Company
reserved the advances it made to perFORMplace.com, which amounted to
$320,500. These adjustments are made in order to better reflect
management's current expectations for the realization of these assets.
The following is a summary of the assets charged-off to impairment for
the years ended September 30:
2000 1999
----------------- --- ---------------
Goodwill $ - $ 1,873,935
Notes receivable 320,500 724,959
--- ------------- --- ---------------
$ 320,500 $ 2,598,894
=== ============= === ===============
25
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
10. Operating Leases
The Company rents office and warehouse space on a monthly basis. There
are no long-term lease commitments.
11. Discontinued Operations
With the sale of its Cable and MotoSat Divisions during 1999 and the
sale of the PowerStream Division and the foreclosure of its InCirT
Division in 2000 (See Footnotes 3 and 7), all of the operating
divisions of the Company have been classified as discontinued
operations.
Following is a summary of the operating activity and the discontinued
assets and liabilities of these operations:
<TABLE>
<CAPTION>
2000 1999
-------------------- ----------------------
Revenues:
<S> <C> <C>
InCirT Division $ 6,674,900 $ 15,516,431
Cable Division - 1,052,538
Other divisions 50,489 1,082,869
---- --------------- ---- -----------------
$ 6,725,389 $ 17,651,838
==== =============== ==== =================
Gross Profit:
InCirT Division $ 1,160,301 $ 936,420
Cable Division - 7,888
Other divisions 17,818 39,240
---- --------------- ---- -----------------
$ 1,178,119 $ 983,548
==== =============== ==== =================
Identifiable Assets:
InCirT Division $ 9,605 $ 8,137,540
Cable Division - -
Other divisions - 386,091
---- --------------- ---- -----------------
$ 9,605 $ 8,523,631
==== =============== ==== =================
</TABLE>
26
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
11. Discontinued Operations (continued)
<TABLE>
<CAPTION>
2000 1999
-------------------- ---------------------
Identifiable Liabilities:
<S> <C> <C>
InCirT Division $ (864,791) $ (5,398,446)
Cable Division - -
Other divisions - (524,194)
--- ---------------- --- -----------------
$ (864,791) $ (5,922,640)
=== ================ === =================
</TABLE>
The assets and liabilities from discontinued operations are noted as
follows:
<TABLE>
<CAPTION>
2000 1999
---------------- ------------------
Assets from Discontinued Operations
<S> <C> <C>
Cash $ - $ 914
Accounts Receivable - 2,717,583
Inventory - 4,191,346
Other Assets - 59,315
Prepaid Expenses 9,605 18,587
Property, Plant & Equipment, Net - 1,535,886
---- ----------- --- --------------
Total Assets from Discontinued Operations $ 9,605 $ 8,523,631
==== =========== === ==============
Liabilities from Discontinued Operations
Accounts Payable $ 864,791 $ 3,650,111
Employee Payable - 55,198
Lease Liability - 8,754
Accrued Liabilities - 205,232
Notes Payable - 1,787,345
Unearned Revenue - 216,000
---- ----------- --- --------------
Total Liabilities from Discontinued Operations $ 864,791 $ 5,922,640
==== =========== === ==============
</TABLE>
27
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
12. Related Party Transactions During Fiscal Year 2000
Stephen J. Fryer, Chairman, CEO, President and Chief Accounting Officer
received options for 300,000 shares in March 2000 and another 300,000
shares in June 2000.
Milton Haber and Brian Bonar, both Directors of the Company, received
100,000 warrants each in March 2000 for their continued service as
members of the board of directors.
Brian Bonar has been a Director of the Company since January 2000 and
is also Chairman of the Board at Itec. As of the foreclosure date, Itec
owed the Company $850,000 for services performed by InCirT.
Stephen J. Fryer accepted a Directors' position on Itec's Board in
March 2000.
Former officers and board members, James Pendleton and Wayne Wright
reached a modified settlement with the Company, per their management
and deferred income contracts, by each accepting 250,000 warrants,
priced at $0.65 per share and 376,000 shares of common stock in place
of monetary payments.
13. Stockholders' Equity
Preferred Stock Dividends in Arrears Deferred
Payments of annual dividends for 2000 and 1999 were deferred by the
Company's Board of Directors on the outstanding preferred stock because
of losses sustained by the Company. As of September 30, 2000, preferred
dividends in arrears amounted to $555,193 on the Preferred Stock Series
A and B.
Conversion of Convertible Preferred Stock - Series A
In 2000, the Company converted 1,670 shares of Preferred Stock Series A
into 9,057,654 shares of common stock, and the Company converted
$64,581 of dividends payable on these shares of Preferred Stock into
349,323 shares of common stock.
28
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
13. Stockholders' Equity (continued)
Conversion of Convertible Preferred Stock - Series B
In 2000, the Company converted 74 shares of Preferred Stock Series B
into 411,112 shares of common stock.
Conversion of Preferred Stock - Series A Warrants
In 2000, the Company converted warrants to purchase shares of Preferred
Stock Series A into 315,000 shares of common stock in a cashless
exercise, and the Company recorded an expense of $86,942 based on the
fair value of the common stock on the date of conversion.
Common Stock Reserved for Future Issuance
At September 30, 2000, the Company has reserved 270,000 shares of its
authorized but unissued common stock for possible future issuances for
ISOs in connection with its Stock Option Plan.
Repricing of Stock Options
In order to continue to attract and retain employees, the Board of
Directors authorized the repricing of options and warrants to purchase
shares of common stock effective March 2000, to the then fair market
value of $0.30 per share. All repriced options maintained the same
expiration terms. Approximately 1,240,000 options and warrants were
repriced under this program. The repricing included members of the
Board of Directors and executive officers.
29
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
13. Stockholders' Equity (continued)
Grant of Equity Interest in Full Settlement of Trade Payable and
Troubled Debt
Due to significant cash flow problems, in April 2000 the Company
commenced on a program to reach agreements with its vendors to grant
shares of its common stock to the vendors in full settlement of the
amounts due the vendors. At the date of issuance of the shares, the
amounts due vendors exceeded the fair market value of the common stock
issued by $2,018,547, which is classified in the statement of
operations as an extraordinary gain due to the extingushment of debt.
As of September 30, 2000, the Company has issued 1,061,747 shares of
its common stock under this program.
14. Preferred Stock and Convertible Debenture
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 March 1999 at the same
price but only 1,000 shares were issued. 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, and have a
liquidation value of $1,000 per share.
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 for 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
(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
30
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
14. Preferred Stock and Convertible Debenture (continued)
Preferred Stock (continued)
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 the
date the Preferred Stock and Warrants were initially issued.
Convertible 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.
31
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
14. Preferred Stock and Convertible Debentures (continued)
Convertible Debentures (continued)
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.
15. Stock Options and Warrants
The Company has a Stock Option Plan (the Plan). The Plan provides for
the granting of both Incentive Stock Options (ISOs) and Non-qualified
Stock Options (NSOs) to purchase shares of common stock. ISOs are
granted at not less than market value on the date of grant, whereas
NSOs may be granted at not less than 85 percent of the market value on
the date of the grant. Options may be granted
32
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
15. Stock Options and Warrants (continued)
under the Plan to all officers, directors, and employees of the
Company. In addition, NSOs may be granted to other parties who perform
services for the Company. The Board of Directors has also granted
management the authority to issue non-statutory stock options and/or
warrants to employees and consultants of the Company.
As of September 30, 2000 and 1999, the Company granted to its employees
and other eligible participants options and warrants exercisable for
the Company's common stock and preferred stock. Options and warrants to
purchase shares of its common stock are usually granted at the prices
equal to the current fair market value of the Company's common stock as
of the date of grant.
Under the Plan, no option may be exercised after the expiration date of
ten years from the date of grant. As of September 30, 2000, there are
two types of convertible securities (NSOs and Warrants) outstanding.
NSOs may be granted to any eligible participant as determined by the
management of the Company.
Stock options and warrants issued as of September 30, 2000 and 1999,
are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------- ------------------------------
Average Average
Exercise Exercise
Shares Price Shares Price
--------------- --- -------- -------------- --- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 11,086,667 $ 2.45 8,070,000 $ 3.88
Granted 2,464,655 0.36 6,131,667 0.56
Exercised (4,231,668) 0.16 (1,783,750) 0.43
Forfeited/Cancelled (810,000) 2.45 (1,331,250) 1.52
--------------- --------------
Outstanding at end of year 8,509,654 $ 3.28 11,086,667 $ 2.45
=============== === ======== ============== === ========
Exercisable at end of year 8,502,154 $ 3.28 10,791,767 $ 2.49
=============== === ======== ============== === ========
</TABLE>
33
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
15. Stock Options and Warrants (continued)
The non-statutory stock options and warrants are for periods of two to
five years. All options and warrants to purchase shares were fully
vested as of September 30, 2000.
Under APB-25, the cost of compensation is measured by the excess of the
fair market value of the stock over the option exercise price on the
measurement date. This is referred to as the intrinsic value method.
Accordingly, the Company recorded compensation expense of $339,822 and
$769,125 for options and warrants granted below the fair market value
of the stock on the date of grant for the years ended September 30,
2000 and 1999.
The following table summarizes information about options and warrants
outstanding at September 30, 2000:
<TABLE>
<CAPTION>
Weighted
Weighted Average Number
Average Remaining Exercisable as of
Number Exercise Price Contractual September 30, 2000
Exercise Prices Outstanding per Share Life (Years)
-------------------- ------------- ----------------- --------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.01 -0.20 2,074,201 $ 0.06 0.65 2,074,201
0.21 -0.30 2,067,500 0.30 4.27 2,060,000
0.31 - 1.00 921,953 0.86 3.69 921,953
1.01 - 2.00 585,000 1.85 4.96 585,000
2.01 - 3.00 11,000 2.71 1.13 11,000
3.01 - 6.50 2,850,000 6.50 0.09 2,850,000
------------- -------------------
8,509,654 8,502,154
============= ===================
</TABLE>
The exercise periods for the options range from immediate to four years
from the date of the grant and have various vesting requirements.
The Company has adopted only the disclosure provisions of SFAS No. 123.
It applies APB Opinion No. 25 and related interpretations in accounting
for its stock options and warrants granted to employees or to members
of the Company's Board of Directors. The Company applies provisions of
SFAS No. 123 for options and warrants granted to third parties.
Accordingly, compensation cost has been recognized for its stock
options and warrants granted to outside third parties.
34
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
15. Stock Options and Warrants (continued)
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under this plan consistent
with the methodology prescribed by SFAS No. 123, the Company's net loss
and loss per share would be increased to the pro forma amounts
indicated below for the years ended September 30:
<TABLE>
<CAPTION>
2000 1999
-------------------- -------------------
Net Loss:
<S> <C> <C>
As reported $ (1,891,199) $ (12,014,792)
Pro forma $ (1,966,130) $ (13,175,657)
Basic and diluted loss per common share:
As reported:
Basic $ (0.10) $ (1.82)
Diluted $ (0.10) $ (1.82)
Pro forma:
Basic $ (0.11) $ (1.99)
Diluted $ (0.11) $ (1.99)
</TABLE>
The fair value of these options was estimated at the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 2000: dividend yield of 0%; expected
volatility of 200%; risk-free interest rate of 5.6%, and expected life
of 2 to 5 years; 1999: dividend yield of 0%; expected volatility of
132%; risk-free interest rate of 5.5%, and expected life equal to the
actual life for the period. The weighted-average fair value of options
and warrants granted was $0.27 and $0.33 for 2000 and 1999,
respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
35
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
16. Earnings (Loss) Per Share
Fully diluted loss per share, both net loss and shares outstanding have
been adjusted for warrants and options outstanding.
Per share data is based on the weighted average number of the Company's
common shares and common share equivalents. The number of common shares
and common share equivalents used in the loss per share calculation are
as follows:
<TABLE>
<CAPTION>
2000 1999
------------------ ------------------
<S> <C> <C>
Common stock
Average number of shares
Outstanding 18,556,461 7,133,344
Dilutive securities:
Preferred stock, Series A and B
average number of shares
outstanding - -
Convertible debenture - -
Common stock equivalents
due to assumed exercise
of options and warrants - -
--- -------------- -- ---------------
Total shares - diluted 18,556,461 7,133,344
=== ============== == ===============
</TABLE>
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. For 1999, net loss applicable to common stock includes a
non-cash imputed dividend to the preferred stockholders related to the
beneficial conversion feature on the Series A and Series B preferred
stock. 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 net loss
per common share.
36
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
16. Earnings (Loss) Per Share (continued)
<TABLE>
<CAPTION>
2000 1999
------------------- -------------------------
<S> <C> <C>
Net loss $ (1,891,199) $ (12,014,791)
Dividends on preferred stock (289,809) (265,384)
Imputed dividends from beneficial
conversion feature - (722,832)
-- ---------------- -- ----------------------
Loss applicable to common stock $ (2,181,008) $ (13,003,007)
== ================ == ======================
</TABLE>
For the years ended September 30, 2000 and 1999, all of the options and
warrants that were outstanding were omitted from the computation of
diluted EPS since including them would have been anti-dilutive.
17. Income Taxes
Income tax expense (benefit) from continuing operations consists of the
following:
2000 1999
-------------- ------------------
Current
Federal $ - $ -
State 900 -
-- ----------- --- --------------
900 -
Deferred
Federal - 518,265
State - 82,971
-- ----------- --- --------------
- 601,236
-- ----------- --- --------------
$ 900 $ 601,236
== =========== === ==============
37
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
17. Income Taxes (continued)
Reconciliation of income taxes (benefit) computed at the federal
statutory rate of 34 percent is as follows:
<TABLE>
<CAPTION>
2000 1999
------------------ --------------------
<S> <C> <C>
Federal income taxes (benefit) at
statutory rate $ (568,743) $ (3,880,608)
State income taxes (benefit), net of
federal tax benefit (147,873) (537,932)
Permanent differences - 4,842
Increase in valuation allowance 717,516 5,014,934
--- -------------- --- ----------------
Income taxes $ 900 $ 601,236
=== ============== === ================
Deferred tax assets and liabilities consist of the following:
2000 1999
-------------------- --------------------
Deferred tax assets (liabilities)
Depreciation and amortization $ - $ 763,404
Net operating loss 7,954,332 5,619,324
Reserve for inventory
obsolescence - 220,442
Allowance for doubtful accounts - 732,014
Impairment of note receivable 137,302 -
Reserve for vacation - 38,934
--- ---------------- --- ----------------
Deferred tax asset 8,091,634 7,374,118
Valuation allowance (8,091,634) (7,374,118)
--- ---------------- --- ----------------
Net deferred tax asset $ - $ -
=== ================ === ================
</TABLE>
38
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
17. Income Taxes (continued)
The Company sustained net operating losses in each of the periods
presented. For 2000 and 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 $8,091,634 has
been recorded in 2000 ($7,374,118 in 1999) to reduce the net deferred
tax assets to their estimated net realizable value.
As of September 30, 2000, the Company had net operating loss
carryforwards for tax reporting purposes of approximately $16,175,000
expiring in various years through 2020.
39
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
18. Summarized Quarterly Information (Unaudited)
Following is a summary of quarterly results of operations for the years
ended September 30, 2000 and 1999. These amounts have been restated for
discontinued operations:
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------------------------------------
Fiscal 2000 Dec 31 March 31 June 30 Sept 30
-----------
---------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net Sales $ - $ - $ - $ -
Gross Profit (loss) - - - -
Operating loss from
continuing operations (206,160) (780,492) (709,435) (939,448)
Loss from discontinued
operations (324,069) (881,263) (144,053) 851,558
-- ------------- -- -------------- -- ------------- -- --------------
Net loss $ (530,229) $ (1,661,755) $ (853,488) $ (87,890)
== ============= == ============== == ============= == ==============
Loss per share from
continuing operations
- basic and diluted $ (.02) $ (.06) $ (.04) $ (0.0221)
Gain (Loss) per share from
discontinued operations -
basic and diluted
$ (.03) $ (.06) $ - $ 0.0213
Gain per share from
extraordinary item - basic
and diluted $ - $ - $ - $ 0.1088
Fiscal 1999 Dec 31 March 31 June 30 Sept 30
-----------
---------------- ----------------- ---------------- -----------------
Net Sales $ - $ - $ - $ -
Gross Profit (loss) - - - -
Operating loss from
continuing operations (327,333) (1,065,218) (396,880) (1,521,395)
Loss from discontinued
operations (917,902 (1,333,308) (319,355) (6,133,400)
-- ------------- -- -------------- -- ------------- -- --------------
Net loss $ (1,245,235) $ (2,398,526) $ (716,235) $ (7,654,795)
== ============= == ============== == ============= == ==============
Loss per share from
continuing operations
- basic and diluted $ (.06) $ (.22) $ (.10) $ (.19)
Loss per share from
discontinued operations
- basic and diluted $ (.16) $ (.24) $ (.09) $ (.76)
</TABLE>
40
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
18. Summarized Quarterly Information (Unaudited) (continued)
The fiscal 2000 amounts include certain significant fourth quarter
adjustments including asset impairment charges of $320,500, and an
increase to the estimate of expense related to claims and litigation of
$135,300.
The fiscal 1999 amounts 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.
19. Commitments and Contingencies
Employment Agreement
The Company has entered into an agreement with the CEO of the Company,
which provides for an annual salary, noted as follows:
Year ending September 30,
2001 $ $151,839
2002 151,839
Thereafter -
---- --------------
$ $303,678
The employment agreement provides for an automobile allowance.
41
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
19. Commitments and Contingencies (continued)
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.
During the year ended September 30, 2000 the following lawsuits were
filed against the Company:
1) 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 Savvy obtained a judgment against the Company for $165,750;
2) On February 15, 2000, Amistar Corporation filed suit against the
Company to recover $95,733 in uncontested past due vendor obligations.
On April 18, 2000, Amistar executed "Acceptance of Proposal to Accept
Exchange of Debt for Capital Stock of Pen Interconnect, Inc." However,
this dismissal is yet to be filed with the court;
3) On March 21, 2000 Interworks Computer Products, Inc., filed suit to
recover $35,771 in past due uncontested vendor obligations;
4) In July 2000 Force Electronics filed suit to recover $68,816 in past
due uncontested vendor obligations. On September 15, 2000, a Writ of
Attachment was granted by the Court in the amount of $68,816;
5) Control Design Supply/Nedco filed suit to recover $6,788 in past due
uncontested vendor obligations;
6) On March 20, 2000 DHL Airways, Inc. obtained a judgment in the amount
of $3,868 for past due uncontested vendor obligations.
On November 15, 2000 Alan L. Weaver, former CEO of Pen Interconnect,
Inc., obtained a judgment against the Company in the amount of $135,300
for breach of a settlement agreement relative to Mr. Weaver's
employment agreement with the Company. The Company has reserved
$135,300 as a contingent liability as of September 30, 2000 for this
agreement.
42
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
20. Subsequent Events
In April 2000, the Company signed a Letter of Intent with
perFORMplace.com for a reverse merger, which would give perFORMplace
82.5% of the stock in the Company in exchange for all of the shares of
perFORMplace. PerFORMplace would take over the operation of the Company
and bring their assets and business operations, which are in the
entertainment services arena, into the Company. perFORMplace terminated
this agreement on November 8, 2000. As of that date, the Company had
advanced $383,000 to perFORMplace, who has subsequently signed a
promissory note back to the Company for repayment of such funds with
interest over the next two years.
The Company signed a definitive agreement on December 18, 2000 with
Itec. The Company will acquire for stock two subsidiaries of Itec,
EduAdvantage and Deal Seekers. The transaction requires that the
Company issue approximately 84,000,000 common shares for the
acquisition. This merger is subject to shareholder ratification and
will require an increase in the number of authorized shares.
Warrants and Non-Statutory Stock Options
During the period October 1, 2000, to December 28, 2000, the Company
issued warrants and non-statutory stock options to its employees and
third parties allowing them to purchase up to 6,324,201 shares of
common stock. The exercise price of the warrants and stock options
issued range from $0.025 to $0.05 per share.
Repricing of Stock Options
In order to continue to attract and retain employees, the Board of
Directors authorized the repricing of certain options and warrants to
purchase shares of common stock effective November 2000 to the then
fair market value of $0.04 or $0.05 per share. All repriced options
maintained the same expiration terms. Approximately 1,132,000 options
and warrants were repriced under this program. The repricing included
members of the Board of Directors and executive officers.
43
<PAGE>
Pen Interconnect, Inc.
Notes to Financial Statements
September 30, 2000 and 1999
20. Subsequent Events (continued)
Additional Financing
An agreement was reached to provide a $5,000,000 equity credit line to
the Company. This credit line is contingent upon the registration of a
minimum of 10,000,000 shares of Company stock that can be used as a put
against future financings. The registration of these shares is
contingent on the filing of the 10-K for 2000.
44
