Second Amended
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS UNDER THE 1934 ACT
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
Espo's Inc.
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(Name of Small Business Issuer in its charter)
New York 11-3042779
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10501 FM 720 East, Frisco, Texas 75035
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(Address of principal executive offices) (ZIP Code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None None
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Securities to be registered under Section 12(g) of the Act:
Common Stock ($0.0001 Par Value)
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(Title of class)
<PAGE>
PART I
Alternative 2
Item 6. Description of Business
(a) Narrative Description of Business.
(1) Business done and intended to be done
Espo's Inc. ("the Company") is a New York corporation chartered on
November 29, 1990. The Company formerly manufactured and sold clothing
and accessories and sold and rented sporting goods and gave lessons for
the sporting goods which it sold or rented. In December of 1999 the
Company divested itself of all its assets and traded shares of its
common stock to shareholders of Performance Interconnect Corp. in
exchange for their stock in Performance Interconnect Corp.
Performance Interconnect Corp. was incorporated October 10, 1996, in
the State of Texas. It was formed to acquire the assets of I-CON
Industries, Inc. , and actually acquired title to those assets on March
31, 1998. I-CON had been formed in 1979 as a limited partnership,
licensed by the Kollmorgen Corporation to design and manufacture
MULTIWIRE technology and was later incorporated under new ownership.
In March, 1999, PC Dynamics of Texas, Inc., a wholly owned subsidiary
of Performance Interconnect Corp., acquired all the assets of PC
Dynamics Corporation, a Frisco, Texas, manufacturer of metalback RF
circuit boards.
As a result of all the foregoing, the Company owns 99.67% of the common
stock of Performance Interconnect Corp., and Performance Interconnect
Corp. owns all of the common stock of PC Dynamics of Texas, Inc. The
Company's business is conducted under the names of Performance
Interconnect Corp. and PC Dynamics of Texas, Inc.
(i) Principal Products, Principal Markets, Method of Distribution
The Company manufactures and markets circuit boards. Circuit
boards are the basic semiconductor interconnection system used in
almost all electronics equipment. The circuit boards manufactured
and marketed by the Company are at the high end of the market,
both as to technology and as to price. The Company has four kinds
of products:
(1) High reliability (military) RF (radio frequency)
circuit boards.
(2) Commercial RF circuit boards.
(3) Discrete wiring technology (DWT) circuit boards.
(4) Fiber optics circuit boards
<PAGE>
All of these are typically manufactured on specific orders from
the customer and shipped directly from the factory to the customer
by a common carrier, such as UPS or Federal Express. Usually the
method of shipment is specified by the customer. Sales are
effected through six U.S. manufacturer's representatives, with a
total staff of about 16 persons, two in-house sales persons and
one manufacturer's representative in Europe.
High Reliability RF (Radio Frequency) Circuit Boards
RF circuit boards are multilayer circuit boards manufactured with
low dielectric constant laminates and precise mechanical
requirements for the circuits. These special materials require
special processes not ordinarily available from high-volume
multilayer competitors. The Company's high-reliability circuit
boards have primarily military applications. They are manufactured
and marketed under the Performance Interconnect name.
Commercial RF Circuit Boards
The commercial RF circuit boards manufactured by the Company are
used primarily in cellular and PCS telecommunications, military
radar and communications and various high volume commercial
applications, such as garage door openers and radar detectors.
The telecommunications applications of these circuit boards are
important in developed nations like the United States, but they
are especially valuable in underdeveloped nations which do not
have the telephone infrastructure in place. Many of these
countries are going directly to wireless.
The commercial RF circuit boards are manufactured and marketed
under the PC Dynamics name.
Discrete Wiring Technology (DWT) Circuit Boards
Most circuit boards in use today are what are know as multilayer
circuit boards. Their circuits are printed and etched onto the
board. DWT circuits, by contrast, actually use insulated wires to
provide the signal interconnects. DWT is a more expensive
process, but it has several distinct advantages over printed
boards. These advantages are improved signal integrity, more
consistent uniformity board-to-board, lower weight, lower
temperature, superior impedance control and superior route
ability. DWT circuit boards are used primarily in high-
performance computers and telecom switching equipment where the
choice is driven more by performance characteristics than by
price. The Company expects this market to expand in proportion to
the expected increase in computer speeds.
DWT circuit boards' target markets include supercomputers, test
equipment, telecommunications, satellite communications, military
avionics, counter measures, missiles, smart bombs, defense systems
and communications.
<PAGE>
Worldwide DWT revenue is estimated at $40 million. Domestic sales
account for 35% of this figure. There are six suppliers
worldwide, two domestically. The two domestic suppliers are
Advanced Interconnect Technology (AIT), with estimated DWT
revenues totaling $10 million, and the Company, with $3.7 million.
Fiber Optics Circuit Boards
3M has a DARPA contract to develop a fiber optics backplane
technology. (A "DARPA" contract is a type of agreement with the
federal government providing for government funding in the
development of certain technologies.) 3M approached the Company
about two and one-half years ago to develop putting the fiber onto
3M's adhesive. 3M and the Company have almost, but not quite,
completed an agreement to determine the system by which the
product is to be marketed. It is not yet certain whether the
Company will manufacture and sell to the end user or will
manufacture and sell to 3M.
Unlike the Company's other circuit boards which transmit electric
signals, this product transmits light-waves.
(iii) The Company's accounting does not provide any firm
figures on Company-sponsored or customer-sponsored research and
development activities.
(iv) The Company has 91 full-time employees, 80 permanent and
eleven temporary.
(v) Federal, state and local provisions regulating discharge of
materials into the environment do not have a material affect on
the capital expenditures, earnings and competitive position of the
Company. The Company's manufacturing operations do generate acids
and other wastes. These wastes are collected and stored on a
short-term basis in an approved manner within the plant and are
then removed monthly under a contract with an approved carrier at
a total expense of approximately $10,000 per month. The disposal
of these wastes is subject to regulation and monitoring by the
Texas Natural Resources commission and by the Environmental
Protection Agency. There are no material estimated capital
expenditures for environmental control facilities for the
remainder of the current fiscal year or in the foreseeable future.
(2) Distinctive or Special Characteristics of the Company's Operation
or Industry Which May Have a Material Impact upon the Company's Future
Financial Performance.
The industry in which the Company is engaged (circuit boards) and the
industries which use the Company's products (high performance computers
and communications) have seen the rise and fall of numerous companies
and products in recent years. They are in a constant state of flux,
radically innovative. Any success which the Company may have had in
the past is probably less predictive in these industries than it is in
most.
<PAGE>
The Company intends to operate as a "niche" supplier and will not
typically compete with larger volume companies. There are, however,
many companies in the electronics field which have greater financial
resources, operational experience and technical facilities than the
Company. In the future these larger companies are not expected to
compete directly with the Company. If the "niche" grows larger and
more lucrative, the likelihood of competition will increase.
(3) Management's Discussion and Analysis
Forward Looking Statements
This filing may contain "Forward Looking Statements", which are
the Company's expectations, plans and projections, which may or
may not materialize and which are subject to various risks and
uncertainties, including statements concerning expected income and
expenses, and the adequacy of the Company's sources of cash to
finance its current and future operations. When used in this
filing, the words "plans", "believes", "expects", "projects",
"targets", "anticipates" and similar expressions are intended to
identify forward-looking statements. Factors which could cause
actual results to materially differ from the Company's
expectations include the following: general economic conditions
and growth in the high tech industry; competitive factors and
pricing pressures; change in product mix; and the timely
development and acceptance of new products. These forward-looking
statements speak only as of the date of this filing. The Company
expressly disclaims any obligation or undertaking to release
publicly any updates or change in its expectations or any change
in events, conditions or circumstances on which any such statement
may be based except as may be otherwise required by the securities
laws.
Overview
Effective December 23, 1998, Espo's Inc. entered into a stock-for-
stock reverse merger with Performance Interconnect Corp. As a
part of the plan of reorganization, all of the assets, liabilities
and business of Espo's Inc. prior to the date of the
reorganization were transferred to another company. Accordingly,
the prior operations of Espo's Inc. are treated as discontinued
operations for its year ended November 30, 1999.
Performance Interconnect Corp. ("PIC") is a contract manufacturer
of quality, high performance circuit boards located in Frisco,
Texas, just north of Dallas. PIC's products are used on
computers, communication equipment, the aerospace industry,
defense electronics and other applications requiring high
performance electrical capability.
<PAGE>
The following discussion provides information to assist in the
understanding of the Company's financial condition and results of
operations for the years ended June 30, 1998, and 1999, and five
months ended November 30, 1999. It should be read in conjunction
with the Consolidated Financial Statements and Notes thereto
appearing in this Form 10-SB for the five months ended November
30, 1999, and the years ended June 30, 1999, and June 30, 1998.
Unaudited supplemental data is also provided for the six months
ended May 31, 2000.
Results of Operations
Revenues Sales for the five months ended November 30, 1999, were
$3,867,356, compared to $4,929,025 for the year ended June 30,
1999, and $1,122,379 for the year ended June 30, 1998. Sales for
the six months ended May 31, 2000, were $4,306,421, as compared to
$2,524,944 in the 1999 period. The sales figures reflect the
acquisition of PIC's active business in March of 1998 and the
addition of the PC Dynamics business by PIC in March of 1999.
Average monthly sales were $374,126 during the three months of
active business reported in the June 30, 1998, year, $409,086
during the June 30, 1999, year, and $773,471 during the five
months ended November 30, 1999, and $717,737 during the six months
ended May 31, 2000. The monthly revenue increases during the year
ended June 30, 1999, and the five months ended November 30, 1999,
and the six months ended May 31, 2000, were the result of the
acquisition of the PC Dynamics business.
Revenue levels experienced during the five months ended November
30, 1999, were not high enough to cover the fixed manufacturing
and operating expenses of the Company. The Company has embarked
upon a strategy of obtaining increased sales from Radio Frequency
(RF) customers, while changing the product mix of PC Dynamics'
sales to better reflect the Company's manufacturing strengths. As
a result, the Company expects to achieve substantial future growth
in sales, and to achieve profitability in 2001.
Gross Profit Gross profit of $175,103 was reported for the year
ended June 30, 1998, with $344,678 shown for the year ended June
30, 1999, and a negative of $649,011 for the five months ended
November 30, 1999. For the six months ended May 31, 2000, gross
profit of $31,382 was shown, with $14,291 for the comparable
period in 1999.
<PAGE>
The gross profit for the year ended June 30, 1998, was not
sufficient to make the Company profitable because the volume of
sales was not high enough to absorb the fixed manufacturing
overhead and operating expenses. Revenues were enhanced by the
addition of PC Dynamics, but not by enough to overcome fixed cost
increases caused by the new business. In addition, problems
encountered in integrating the businesses, including excessive
scrap related to PC Dynamics orders booked prior to the asset
purchase, caused manufacturing cost overruns which resulted in
substantial deterioration in gross profit for the year ended June
30, 1999, and the five months ended November 30, 1999. Gross
profit margins improved at May 31, 2000, and further improvement
is expected based upon anticipated sales increases which will
better absorb fixed manufacturing costs.
Operating Expenses Operating expenses totaled $256,424,
$1,685,260 and $517,144 in the years ended June 30, 1998, and
1999, and the five months ended November 30, 1999. At May 31,
2000, the amount was $1,097,539 as opposed to $959,768 for 1999.
Other Income and Expenses During the years ended November 30,
1998, and 1999, and the five months ended November 30, 1999, net
other expenses of $221,531, $370,916 and $252,423 were reported.
For the six months ended May 31, 2000, net other expenses of
$301,503 were incurred, with $213,284 shown in the comparable
period for 1999. Net interest expense of $211,159, $319,131,
$252,423 and $381,466 was incurred in the years ended June 30,
1998, and 1999, the five months ended November 30, 1999, and the
six months ended May 31, 2000. The net interest expense has
increased with the Company's increased borrowing over those
periods.
Liquidity and Capital Resources For the years ended June 30,
1998, and 1999, and the five months ended November 30, 1999, the
Company reported net losses of $302,952, $1,711,498 and
$1,418,578. The unaudited loss for the six months ended May 31,
2000, was $1,367,660, compared to $1,158,761 for the comparable
period in 1999. Operations provided cash of $254,047 and then
used cash of $871,479, $874,300 and $849,726 in each period.
Total uses of cash, including property acquisitions, were
$2,496,065, $1,789,015, $924,166 and $278,090 for each period.
Those cash needs were provided primarily through borrowing and
issuance of preferred stock.
The Company anticipates that it will become profitable during the
first or second quarter of its year ended November 30, 2001, with
cash flow shortfalls prior to that time being funded by additional
borrowing and private placement of preferred stock.
<PAGE>
Item 7. Description of Property
The Company's executive offices and manufacturing facilities are located
together in a single building at 10501 FM 720 East, in Frisco, Texas,
approximately forty minutes northeast of DFW Airport. Performance
Interconnect Corp. leased the building for a 3-year term which began on
March 25, 1999. It contains 45,000 square feet. At the this time the
Company occupies approximately 85% of the building and estimates that the
building is being used at approximately 65% of its capacity. The Company is
now running one full, and one partial, manufacturing shift. Utilization
can be increased as necessary by making the second shift a full shift and by
running a third shift.
Before the December 1999 transation in which the Company acquired
Performance Interconnect Corp. the Company's principal executive offices
were in East Hampton, New York.
Item 8. Directors, Executive Officers and Significant Employees
The term of office of each of the directors and directors is one year,
beginning on the date of the annual meeting of shareholders, which is held
within five months after the end of the fiscal year on November 30.
D. Ronald Allen, President, Chairman of the Board and Director , age 49.
Mr. Allen is a financial consultant and C.P.A. located in Dallas, Texas.
From 1971 to 1984, he worked as a tax accountant becoming a partner with
KPMG Main-Hurdman prior to its merger with Peat Marwick. Since 1984, Mr.
Allen has been an independent consultant and manager of several real estate
and venture capital investments in both private and public companies.
Edward P. Stefanko, Vice President and Director, age 45. Mr. Stefanko has
served as President and Director of Performance Interconnect since its
organization in 1996. From 1995 to 1996 Mr. Stefanko was National Sales
Manager for Cuplex, Incorporated, Garland, Texas., supervising two
employees. Cuplex is a contract manufacturing operation which at that time
had sales of approximately $40 million per year. From 1993 to 1995 he was
Vice President Sales of I-CON Industries, Inc., Euless, Texas, where he
managed all of I-CON's sales activities, supervising two employees. The
assets of I-CON Industries were later acquired by the Company. I-CON's
sales during that period approximated $8 million per year.
Brooks Harman, Secretary and Director, age 52. Mr. Harman has been an
officer and Director of Performance Interconnect since it was first
organized in 1996, originally serving as Vice President and, since February
of 1999 as Chief Operating Officer. He has spent the past fifteen years as
a consultant and guiding companies and individuals through financial
restructuring. In addition to consulting, Mr. Harman has also been involved
in real estate sales and investments.
Doug Lippincott, National Sales Manager, age 40. Mr. Lippincott joined
Performance Interconnect in July of 1999. Before that time he was Regional
Sales Manager for Volex in 1998 and 1999, promoting and selling cable
assemblies and supervising a sales force of four others. Prior to his
service with Volex, Mr. Lippincott had been National Sales Manger for I-CON
Industries in 1997, supervising three other employees.
<PAGE>
Robert P. Noland, Plant Manager, age 51. Mr. Noland has served as Plant
Manager since October, 1997. He is responsible for operations plans to
support development of the RF capability as well as the DWT system ,
operational plans and control of manufacturing, purchasing, engineering,
maintenance and facilities. From November, 1994, to October 1997, Mr.
Noland was with P.C. Boards, Inc., Chanute, Kansas There he served first as
Operations Manager and later as Quality/Engineering Manager. As
Quality/Engineering Manager he implemented and directed all quality
activities, provided direction for acquiring ISO 9000 certification and lead
the team which updated the preproduction engineering capabilities. As
Operations Manager Mr. Noland had day-to-day responsibility for pre-
production engineering, process engineering, maintenance, quality and
manufacturing. From May, 1983, to November, 1995, Mr. Noland served as
Manufacturing Manager/Production Manager for P.C. Dynamics, Inc., Frisco,
Texas. In that position he directed planning activities and exercise
operational cost control in the areas of production, production control,
purchasing and shipping/receiving.
Dan Tucker, Controller, age 48. Mr. Tucker has served as Controller since
1997. From 1995 to 1997 Mr. Tucker was Controller for Holman Boiler Works,
Inc., Dallas, Texas. Holman is a $25 million operation providing service,
manufacturing and distribution for steam boiler, burners and related
components. From 1993 to 1994 he served as Executive Vice President and
chief Financial Officer for WBH Industries, Inc., Arlington, Texas. WBH is
a $12 million international distributor of builders' hardware, doors and
frames to major construction projects.
Ronald L. Jordan, Quality Manager, age 61. Mr. Jordan has served as Quality
Manager since November, 1998. From January 1982, to November, 1998, he was
Quality Manager for Cuplex, Inc.
Steve Hallmark, Account Executive, age 47. Mr. Hallmark has over twenty
years of experience in manufacturing, the last eleven with PC Dynamics. With
PC Dynamics he has held positions as Engineering Manager, Quality Manager,
and Sales Manager. Mr. Jordan's responsibility is sales, and he is
concentrating his efforts on the military RF circuit board market.
Item 9. Remuneration of Directors and Officers.
The following chart shows the aggregate annual remuneration of the three
highest paid persons who are officers as a group during the Company's last
fiscal year:
Capacities in which Aggregate
Identity of group remuneration was received Remuneration
Three highest paid persons As employees (salary) $353,030.08 (1)
who are officers as a group
during the Company's last
fiscal year
(1) This figure includes payment into a trust for the family of
one officer and consulting fees described in Item 11 of this Part.
<PAGE>
Item 10. Security Ownership of Management and Certain Security Holders.
<TABLE>
(a) Voting securities and principal holders thereof.
Title of Percent of
Class Name and address of owner Amount owned Class
----- ------------------------- -------------- ----------
<S> <C> <C> <C>
common Each of the three highest paid persons 4,628,989 (1) 78.90%
stock who are officers and directors of the
Company
common All officers and directors as a group 4,628,989 (1) 78.90%
stock
common Each shareholder who owns more than
stock 10% of any class of the Company's
securities (there are no shares subject
to outstanding options):
Associates Funding Group 1,249,244 (1) 21.29%
Winterstone Management, Inc. 905,244 (1) 15.43%
Stefanko Children's 932,041 (1) 15.89%
Irrevocable Trust
B.C. & Q. Corp. 849,485 (1) 14.48%
Summit Innovations 692,975 (1) 11.81%
</TABLE>
(1) All of this stock is held through a trust or a corporation
controlled by an officer or director but not directly by
that officer or director.
(b) D. Ronald Allen holds the power to vote the securities of
Associates Funding Group, Winterstone Management, Inc., and B.C. & Q.
Corp. Ed Stefanko holds the power to vote the securities of the
Stefanko Children's Irrevocable Trust. Brooks Harman holds the power
to vote the securities of Summit Innovations.
<PAGE>
<TABLE>
(c) Non-voting securities and principal holders thereof:
Name and address Percent
Title of Class of owner Amount owned of Class
--------------- -------- ------------ --------
<S> <C> <C> <C>
Series A Cumulative Preferred CMLP Group Ltd. 1,770 shs. 59%
Stock; $10 par value; redemp- 17300 North Dallas Parkway
tion value of $1,000 per share; Suite 2040
dividends of 8% the first year, Dallas, Texas 75248
10% the second year, 12% the
third year, 14% the fourth Winterstone Management Inc. 1,230 shs. 41%
year and 16% thereafter 17300 North Dallas Parkway
Suite 2040
Dallas, Texas 75248
Series B Convertible Nations Corp. 900 shs. 100%
Preferred Stock; dividends
at rate of 6% of redemption
value per year; convertible
into the Company's common
stock at the rate of $3.00
per share for five years.
</TABLE>
(d) Options, warrants and rights: None of the individuals referred to
subsection (a) above has any option, warrant or right to purchase
securities from the Company or any of its subsidiaries.
(e) The Company has no parent company.
Item 11. Interest of Management and Others in Certain Transactions
(b) D. Ronald Allen, who is President, Chairman of the Board and a
Director of the Company, has received fees from Performance
Interconnect Corp. in the amount of $225 per hour for his consulting
services prior to his employment by the Company as of January 1, 2000.
These fees amounted to $100,585 in the fiscal year ended June 30, 1998,
and $150,581 in the fiscal year ended June 30, 1999.
Item 12. Securities Being Registered
(a) The security which is being registered is Common Stock ($0.01 Par
Value).
(1) Brief outline of
(i) Dividend rights: Each share of Common Stock ($0.01 Par
Value) shares equally in dividends from sources legally
available therefor when, as and if declared by directors.
(ii) Voting rights: All shares of Common Stock ($0.01 Par
Value) are entitled to one vote per share. There are no
voting securities other than the Common Stock ($0.01 Par
Value).
(iii) Liquidation rights. Upon dissolution of the Company,
whether voluntary of involuntary, all shares of Common Stock
($0.01 Par Value) are entitled to share equally in the assets
of the Company available for distribution to stockholders.
(iv) Preemptive rights: None
(v) Conversion rights: None
(vi) Redemption provisions: None.
(vii) Sinking fund provisions: None.
(viii) Liability to further calls or to assessment by the
Company: None
<PAGE>
PART II
Item 1. Market for Common Equity and Related Stockholder Matters
(a) Market Information
(1) The principal market where the Company's common equity is
traded is the National Daily Quotation Sheets.
(2) The amount of common equity -
(i) that is subject to outstanding options or warrants to
purchase or securities convertible into, common equity:
300,000 shares pursuant to a letter agreement dated November
29, 1999, to issue convertible preferred stock, described
above
(ii) that could be sold pursuant to Rule 144 under the
Securities Act: 5,516,947 shares.
(b) Holders. There is only one class of common equity, which is
Common Stock ($0.01 Par Value). There are 56 holders of record
of the Common Stock ($0.01 Par Value).
(c) Dividends.
(1) No cash dividends have ever been declared on the common
equity of the Company or of its subsidiary Performance
Interconnect Corp.
(2) There are two limitations on the Company's ability to pay
dividends on the common stock at this time: First, there are no
funds legally available for that purpose. Secondly, the Company's
Series A and Series B Preferred Stock is entitled to be paid
dividends in preference to any other class of capital stock. This
right to dividends is cumulative, commencing on the date the
Series A and Series B Preferred Stock was first issued.
Item 2. Legal Proceedings
Neither the Company nor its property is the subject of any pending legal
proceeding.
Item 3. Change in Accountants
Not applicable.
<PAGE>
Item 4. Recent Sales of Unregistered Securities
<TABLE>
Securities sold within the past three years without registering the
securities under the Securities Act:
(a)
Amount Class of persons
Date Title (shares) to whom sold Consideration
---- ----- -------- ----------------- -------------
<S> <C> <C> <C> <C>
1-2-00 Common Stock 5,481,947 holders of 99.67% of 99.67% of the common
($0.01 Par the common stock of stock of Performance
Value) Performance Inter- Interconnect Corp.
connect Corp.
12-27-99 Series A 3,000 Holders of all the All the preferred
preferred stock of stock of Performance
Performace Interconnect Corp.
Interconnect Corp.
11-29-99 Series B 900 Nations Corp. 300,000 shares of
Preferred Stock common stock of
uniView Technologies
</TABLE>
(b) There have been no underwriters. The tabulation at (a)
immediately above describes the persons or class of persons to whom the
Company sold the securities.
(c) There have been no underwriting discounts or commissions. No
securities have been sold for cash; the tabulation at (a) immediately
above describes the amount of consideration received for securities
sold other than for cash.
(d) The rule of the Commission under which the Company claimed
exemption from registration for the transactions described at (a) above
is Rule 506. The Company relied upon the following facts: Every one of
the persons who acquired stock in that transaction was an accredited
investor.
Item 5. Indemnification of Directors and Officers
The Company has no provision for indemnification of officers or directors at
this time; although the directors anticipate considering some such provision
in the relatively near future.
<PAGE>
PART F/S
ESPO'S INC.
FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 1999 AND 1998
<PAGE>
TABLE OF CONTENTS
Page No.
AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Balance Sheets 2
Statements of Opeerations 3
Statements of Changes in Stockholder's Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6
<PAGE>
STEWART H. BENJAMIN
CERTIFIED PUBLIC ACCOUNTANT, P.C.
27 SHELTER HILL ROAD
PLAINVIEW, NY 11803
TELEPHONE: (516) 933-9781
FACSIMILE: (516) 827-1203
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
J. Espo's Inc.
East Hampton, New York
I have audited the accompanying combined balance sheets of Espo's Inc. (a
New York corporation) and J. Espo's Inc. as of November 30, 1999 and 1998,
and the related combined statements of income, stockholders' equity, and
cash flows for the years then ended. These combined financial statements
are the responsibility of the Company's management. My responsibility is to
express an opinion on these combined financial statements based on my
audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audits to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
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. I believe that my
audits provide a reasonable basis for my opinion.
In my opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Espo's Inc. and
J. Espo's Inc. as of November 30, 1999 and 1998, and the results of its
operations and cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/Stewart H. Benjamin
Certified Public Accountant, P.C.
Plainview, New York
July 12, 2000
<PAGE>
<TABLE>
ESPO'S INC.
BALANCE SHEETS
November 30, November 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash $ -- $ 7,675
Accounts receivable -- 17,259
Inventory (Note 1) -- 150,077
Prepaid insurance -- 2,183
--------- ---------
Total current assets -- 177,194
--------- ---------
Property and equipment, net (Notes 1 & 3) -- 67,337
--------- ---------
Other assets
Deferred income taxes (Notes 1 & 4) -- 2,529
--------- ---------
Total assets $ -- $ 247,060
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ -- $ 25,293
Note payable (Note 5) -- 50,000
Due to officer/stockholder (Note 9) -- 5,915
Current portion of long-term debt -- 4,089
Accrued expenses -- 2,072
Payroll taxes payable -- 7,921
Sales tax payable -- 7,803
Income taxes payable -- 6,685
--------- ---------
Total current liabilities -- 109,778
--------- ---------
Long-term liabilities
Long-term debt, net of current
portion (Note 6) -- 18,624
Stockholders' equity (Note 2)
Common stock, $.01 par value, authorized
- 25,000,000 shares, issued and
outstanding - 2,356,250 shares at
November 30, 1999 and 2,000,250
shares at November 30, 1998 23,563 20,003
Additional paid-in capital 115,896 44,456
Retained earnings (deficit) (139,459) 54,199
--------- ---------
Total stockholders' equity -- 118,658
--------- ---------
Total liabilities and stockholders' equity $ -- $ 247,060
========= =========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
ESPO'S INC.
STATEMENTS OF OPERATIONS
Year Year
Ended Ended
November 30, November 30,
1999 1998
--------- ---------
<S> <C> <C>
Income from continuing operations $ -- $ --
Discontinued operations (Note 1)
Income from operations of discontinued company
(less applicable income taxes of $2,621 in
1999 and $5,548 in 1998) 9,206 12,651
Loss from sale and transfer of assets (202,864) --
--------- ---------
Net income (loss) $ (193,658) $ 12,651
========= =========
Net income (loss) per common share $ (.08) $ .02
========= =========
Weighted average common shares outstanding 2,308,458 655,518
========= =========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
ESPO'S INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period November 30, 1997 to November 30, 1999
Common Stock Additional Retained
------------------- Paid-In Earnings
Shares Amount Capital (Deficit)
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Balances, at November 30, 1997 150 $ 1,000 $ 63,459 $ 14,423
Issuance of common stock 2,000,100 19,003 (19,003) -
Correction of 1997 error - - - 27,125
Net income - - - 12,651
--------- -------- -------- ---------
Balances, at November 30, 1998 2,000,250 20,003 44,456 54,199
Issuance of common stock 356,000 3,560 71,440 -
Net loss for the year - - - (193,658)
--------- -------- -------- ---------
Balances, at November 30, 1999 2,356,250 $ 23,563 $ 115,896 $ (139,459)
========= ======== ======== ==========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
ESPO'S INC.
STATEMENT OF CASH FLOWS
<CAPTION>
Year Year
Ended Ended
November 30, November 30,
1999 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Continuing operations
Net income $ 9,206 $ 12,651
Adjustments to reconcile income to net
cash used in continuing operations
Depreciation 19,679 17,593
Deferred income taxes 2,529 (2,529)
Changes in assets and liabilities
Increase in accounts receivable 17,259 (17,259)
Increase in inventory 150,077 (59,127)
(Increase) Decrease in prepaid expenses 2,183 (2,183)
Increase in accounts payable (25,293) 18,895
Decrease in accrued expenses (2,072) 2,072
Increase (Decrease) in payroll
taxes payable (7,921) 7,921
Increase in sales tax payable (7,803) 7,803
Increase in income taxes payable (6,685) 6,685
---------- ----------
CASH USED IN CONTINUING OPERATIONS 151,159 (7,478)
Discontinued operations
Loss from sale and transfer of assets (202,864) --
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (51,705) (7,478)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (11,728) (35,256)
Transfer of property and equipment 59,386 --
---------- ----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 47,658 (35,256)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit 183,500 15,000
Repayment of line of credit (179,000) --
Transfer of line of credit (54,500) --
Proceeds from long-term borrowing -- 23,995
Payments on long-term borrowing (4,089) (1,282)
Transfer of long-term borrowing (18,624) --
Loans from officer/stockholder 17,910 5,915
Transfer of loans from officer/stockholder (23,825) --
Proceeds from issuance of common stock 75,000 --
---------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (3,628) 43,628
---------- ----------
NET INCREASE (DECREASE) IN CASH (7,675) 894
CASH - BEGINNING OF YEAR 7,675 6,781
---------- ----------
CASH - END OF YEAR $ -- $ 7,675
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 11,538 $ 6,115
Income taxes $ 7,323 $ 1,392
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
ESPO'S INC.
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies
Description of Business
The financial statements presented are those of Espo's, Inc. (the
"Company"). The Company was incorporated under the laws of the State of New
York on November 29, 1990. The Company's business activities involve retail
and wholesale sales of beach and surfing related apparel, sporting goods and
accessories. Retail sales are a seasonal portion of the Company's
operations.
Discontinued Operations
Pursuant to an Agreement and Plan of Reorganization between the Company and
Performance Interconnect Corp. ("PIC"), a Texas corporation, whereby the two
companies entered into a stock-for-stock reverse merger transaction
effective December 23, 1999, the Company has transferred and assigned all of
its assets and liabilities and its on-going business operations to J. Espo's
Inc., a New York corporation for $1 and some consideration. The transaction
with J. Espo's Inc. was effective on November 30, 1999. The Company issued
and exchanged 5,500,000 shares of Rule 144 restricted shares for a minimum
of 99% of PIC's issued and outstanding common stock totaling 2,437,000
shares in a transaction qualifying as a tax-free, stock-for-stock exchange
pursuant to Section 368 (a)(1)(B) of the Internal Revenue Code. Pursuant to
the agreement, the current officers and directors of the Company will resign
their positions and PIC designees will be appointed as the new management
and Board of Directors. Subsequent to the balance sheet date, the Company
canceled 1,971,250 of its restricted shares held by the Company's officers
and directors. The balance of the Company's 385,000 shares issued and
outstanding, of which 350,000 shares shall be free trading, will be retained
by its shareholders.
Revenues applicable to the discontinued operations of Espo's Inc. were
$549,322 and $716,829 for the years ended November 30, 1999 and 1998,
respectively.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reporting amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from those estimates.
Inventory
Inventory is stated at the lower of cost or market, with cost determined on
a first-in, first-out basis and market based on the lower of replacement
cost or realizable value.
<PAGE>
Property and equipment and depreciation
Property and equipment are stated at cost. Depreciation for both financial
reporting and income tax purposes is computed using combinations of the
straight line and accelerated methods over the estimated lives of the
respective assets. Maintenance and repairs are charged to expense when
incurred. When property and equipment are retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the
respective accounts and any gain or loss is credited or charged to income.
Income Taxes
The Company uses Statement of Financial Accounting Standards No. 109
"Accounting For Income Taxes" (SFAS No. 109) - in reporting deferred income
taxes. SFAS No. 109 requires a company to recognize deferred tax
liabilities and assets for the expected future income tax consequences of
events that have been recognized in the company's financial statements.
Under this method, deferred tax assets and liabilities are determined based
on temporary differences between the financial carrying amounts and the tax
bases of assets and liabilities using the enacted tax rates in effect in the
years in which the temporary differences are expected to reverse. The
differences relate solely to depreciable assets (use of different
depreciation methods and lives for financial statement and income tax
purposes).
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed by dividing the net income
(loss) by the weighted average shares outstanding during the year.
Note 2 - Common Stock Transactions
During the year ended November 30, 1999, the Company issued 300,000 shares
of free trading common stock to individual shareholders at $.25 per share,
50,000 shares of free trading common stock to the Company's financial
consultant for services rendered, and 6,000 shares of restricted common
stock to officers and directors of the Company for services and costs
advanced. Subsequent to the balance sheet date, the Company canceled
1,971,250 of its restricted shares held by the Company's officers and
directors. The balance of the Company's 385,000 shares issued and
outstanding, of which 350,000 shares shall be free trading, will be retained
by its shareholders.
<PAGE>
Note 3 - Property and Equipment
Property and equipment consisted of the following at November 30, 1998:
Machinery and equipment $ 7,922
Furniture and fixtures 8,840
Automobile 30,795
Leasehold improvements 49,255
------
96,812
Less accumulated depreciation 29,475
------
$67,337
======
During the year ended November 30, 1999, the Company purchased machinery and
equipment totaling $1,742 and furniture and fixtures totaling $9,986. The
Company's property and equipment was transferred to J. Espo's Inc. on
November 30, 1999 at its book value of $59,386.
Depreciation expense of $19,679 and $17,593 was charged to operations for
the years ended November 30, 1999 and 1998.
Note 4 - Income Taxes
Income tax expense is based on reported results of operations; deferred
federal income taxes reflect the impact of temporary differences. Income
taxes consisted of the following at November 30, 1999 and 1998:
1999 1998
----- -----
Current taxes
Federal $1,775 $4,072
State 1,221 2,930
----- -----
2,996 7,002
----- -----
Deferred tax expense (benefit)
Federal 256 (1,601)
State 148 (928)
----- -----
404 (2,529)
----- -----
Effect of prior year (over)
under-accrued taxes (779) 1,075
----- -----
$2,621 $5,548
===== =====
<PAGE>
Note 5 - Note Payable
The Company has a bank line of credit with Bridgehampton National Bank that
provides short-term borrowings up to $100,000. Interest on advances is
payable monthly at two percent over the prime rate. The note payable to the
bank is collateralized by cash deposits, inventories and equipment, and is
guaranteed by an officer/stockholder of the Company. Pursuant to the Plan
of Reorganization, the Company's line of credit and lien against its assets
will be released by the bank, and the outstanding balance of $54,500 at
November 30, 1999 was transferred to the surviving company, J. Espo's Inc.
Note 6 - Long-term Debt
Long-term debt consists of an automobile loan payable to Suffolk County
National Bank in monthly installments of $500 inclusive of interest at a
rate of 9.15%. The loan matures on July 29, 2003 and is guaranteed by an
officer/stockholder of the Company. Interest expense related to the
automobile loan of $1,910 and $717 was charged to operations for the years
ended November 30, 1999 and 1998. Pursuant to the Plan of Reorganization,
the Company's loan will be released by the bank, and the outstanding balance
of $18,624 at November 30, 1999 was transferred to the surviving company, J.
Espo's Inc.
Note 7 - Lease Commitment
The Company leases its primary retail space under a non-cancelable operating
lease that expires in May 2000. Pursuant to the Plan of Reorganization, the
Company's obligations for the remainder of the lease were transferred to J.
Espo's Inc. on November 30, 1999.
Rent expense of $23,963 and $39,955 was charged to operations for the years
ended November 30, 1999 and 1998.
Note 8 - Litigation
The Company is a defendant in a lawsuit commenced by a former supplier on
July 1, 1996. The Company executed a counterclaim for damages caused by an
alleged defective tender of delivery. The Company expects to obtain a
favorable judgment in the case. However, the ultimate outcome of this
litigation is unknown at the present time. Accordingly, no provision for
any liability that may result has been made in the accompanying financial
statements. In the opinion of management, the existing litigation is not
considered to be material in relation to the Company's financial position
immediately prior to the transfer of its assets to J. Espo's Inc.
The president of the Company and J. Espo's Inc. will assume the role of
defendants subsequent to the Plan of Reorganization.
Note 9 - Related Party Transactions
The Company leases its Easthampton, New York store from a corporation that
is 50%-owned by the Company's stockholder. The lease requires monthly
payments of $1,600, and the Company is responsible for all insurance and
utilities.
The Company was indebted to an officer/stockholder for expenses advanced on
behalf of the Company, in the amount of $23,825 immediately prior to
November 30, 1999. Such balance was transferred to J. Espo's Inc. on
November 30, 1999 pursuant to the Plan of Reorganization. There were no
specific repayment terms on the amount due to an officer/stockholder.
<PAGE>
Espo's, Inc.
Consolidated Financial Statements
For the Five Months Ended
November 30, 1999
and
For the Years Ended
June 30, 1999 and 1998
<PAGE>
Espo's, Inc.
Table of Contents
============================================================================
Page
Independent Auditors' Report 1
Consolidated Financial Statements:
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders'
Equity (Deficit) 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6 - 21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Espo's, Inc.
Frisco, Texas
We have audited the accompanying consolidated balance sheets of Espo's, Inc.
as of November 30, 1999 and June 30, 1999, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
the five months ended November 30, 1999 and the years ended June 30, 1999
and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Espo's, Inc. as of November 30, 1999 and June 30, 1999, and the
results of its operations and cash flows for the five months ended November
30, 1999 and the years ended June 30, 1999 and 1998, in conformity with
generally accepted accounting principles.
/s/ Travis, Wolff & Company, L.L.P.
January 14, 2000
Dallas, Texas
<PAGE>
<TABLE>
ESPO'S INC.
Consolidated Balance Sheets
============================================================================
May 31,
2000 November 30, June 30,
ASSETS (Unaudited) 1999 1999
--------- --------- ---------
<S> <C> <C> <C>
Current assets:
Cash $ 4,380 $ 0 $ 7,753
Securities available for sale 130,000 450,000 0
Trade accounts receivable, net 1,080,332 1,095,519 950,432
Other receivables 14,048 114,193 22,768
Inventory 1,010,535 896,442 1,258,376
Prepaid expenses 45,072 35,393 48,257
--------- --------- ---------
Total current assets 2,284,367 2,591,547 2,287,586
--------- --------- ---------
Property and equipment, net
of depreciation 3,229,490 3,213,324 3,387,364
--------- --------- ---------
Other assets:
Goodwill, net of amortization 501,244 507,657 528,000
Loan origination fees, net
of amortization 53,027 63,107 71,507
Deposits 14,156 8,270 7,345
--------- --------- ---------
568,427 579,034 606,852
--------- --------- ---------
Total Assets $6,082,284 $6,383,905 $6,281,802
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 411,597 $ 375,558 $ 330,868
Current maturities of long-term debt 486,275 1,229,464 947,623
Lines of credit and note payable 685,411 915,461 768,280
Current portion of royalty payable 300,000 300,000 300,000
Accounts payable 1,272,872 1,243,663 1,164,704
Advances payable to related parties 15,000 15,000 15,000
Accrued expenses 527,866 623,232 681,982
--------- --------- ---------
Total current liabilities 3,699,021 4,702,378 4,208,457
--------- --------- ---------
Noncurrent liabilities:
Long-term debt 1,335,775 1,881,279 1,566,519
Royalty payable 75,000 75,000 200,000
--------- --------- ---------
Total noncurrent liabilities 1,410,775 1,956,279 1,766,519
--------- --------- ---------
<PAGE>
ESPO'S INC.
Consolidated Balance Sheets (continued)
============================================================================
May 31,
2000 November 30, June 30,
(Unaudited) 1999 1999
--------- --------- ---------
<S> <C> <C> <C>
Stockholders' equity (deficit):
Preferred stock; par value $0.01;
$1,000 per share redemption value;
1,000,000 shares authorized:
Series A - 8% cumulative dividends
increasing to 10%, 12% and 14%,
in successive years and 16%
thereafter; 3,000 shares
authorized,issued and outstanding 30 30 30
Series B - convertible 6%; 900
shares authorized, issued and
outstanding 9 9 9
Series C - 12% cumulative
dividends; 10,000 shares
authorized, 5,300 shares issued
and outstanding 53 0 0
Additional paid-in capital,
preferred stock 5,661,345 3,125,696 2,288,696
Common stock; par value $0.01,
25,000,000 shares authorized 59,456 58,669 54,819
Additional paid-in capital,
common stock 220,917 (9,294) (5,444)
Accumulated deficit (4,969,322) (3,449,862) (2,031,284)
--------- --------- ---------
Total stockholders'
equity (deficit) 972,488 (274,752) 306,826
--------- --------- ---------
Total Liabilities and
Stockholders' Equity $6,082,284 $6,383,905 $6,281,802
========= ========= =========
</TABLE>
<PAGE>
<TABLE>
ESPO'S INC.
Consolidated Statements of Operations
============================================================================================================
Six Six
Months Ended Months Ended Five
May 31, 2000 May 31, 1999 Months Ended Year Ended Year Ended
(Unaudited) (Unaudited) November 30, 1999 June 30, 1999 June 30, 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales $4,306,421 $2,524,944 $3,867,356 $4,929,029 $1,122,379
Cost of sales 4,275,039 2,510,653 4,516,367 4,584,351 947,276
--------- --------- --------- --------- ---------
Gross profit (loss) 31,382 14,291 (649,011) 344,678 175,103
--------- --------- --------- --------- ---------
Expenses:
General and administrative 1,078,270 678,299 472,173 1,388,039 254,399
Depreciation and
amortization (Note 4) 18,818 14,076 44,971 29,828 2,025
Moving expense 0 0 0 221,774 0
Loss on disposal of equipment 451 0 0 45,619 0
--------- --------- --------- --------- ---------
1,097,539 692,375 517,144 1,685,260 256,424
--------- --------- --------- --------- ---------
Loss from operations (1,066,157) (678,084) (1,166,155) (1,340,582) (81,321)
Other income (expense):
Interest expense (381,466) (162,499) (252,423) (319,131) (450,736)
Interest income 0 0 0 0 239,577
Miscellaneous income (expense) 79,963 (318,178) 0 (51,785) (10,472)
--------- --------- --------- --------- ---------
(301,503) (480,677) (252,423) (370,916) (221,631)
--------- --------- --------- --------- ---------
Loss before provision for
income taxes (1,367,660) (1,158,761) (1,418,578) (1,711,498) (302,952)
Provision for income taxes 0 0 0 0 0
--------- --------- --------- --------- ---------
Net loss ($1,367,660) ($1,158,761) ($1,418,578) ($1,711,498) ($302,952)
Loss available to common stock ($1,519,460) ($1,431,561) ($1,542,578) ($2,009,098) ($352,552)
Loss per share - basic ($0.26) ($0.26) ($0.28) ($0.37) ($0.06)
Loss per share - diluted ($0.26) ($0.26) ($0.28) ($0.37) ($0.06)
</TABLE>
<PAGE>
<TABLE>
ESPO'S INC.
Consolidated Statements of Stockholders' Equity (Deficit)
============================================================================================================================
Preferred Stock Common Stock
------------------------------ -------------------------------------------------------------
Additional Additional Accumulated
Shares Amount Paid-in Capital Shares Amount Paid-in Capital Deficit Total
----- -- --------- --------- ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
July, 1, 1997,
Recapitalization as a
result of merger (Note 1) 3,900 $39 $3,125,696 5,481,947 $54,819 ($9,294) ($16,834) $3,154,426
Net loss - 0 0 - 0 0 (302,952) (302,952)
----- -- --------- --------- ------ ------- --------- ---------
Balance at June 30, 1998 3,900 39 3,125,696 5,481,947 54,819 (9,294) (319,786) 2,851,474
Net loss 0 0 0 0 0 0 (1,711,498) (1,711,498)
----- -- --------- --------- ------ ------- --------- ---------
Balance at June 30, 1999 3,900 39 3,125,696 5,481,947 54,819 (9,294) (2,031,284) 1,139,976
Net loss 0 0 0 0 0 0 (1,418,578) (1,418,578)
Acquired equity (Note 1) 0 0 0 385,000 3,850 0 0 3,850
----- -- --------- --------- ------ ------- --------- ---------
Balance at November 30, 1999 3,900 39 3,125,696 5,866,947 58,669 (9,294) (3,449,862) (274,752)
Net loss 0 0 0 0 0 0 (1,367,660) (1,367,660)
Common stock sold 0 0 0 78,666 787 230,211 0 230,998
Preferred stock, Series C,
issued in exchange for debt 5,300 53 2,535,649 0 0 0 0 2,535,702
Dividends declared and paid
on preferred stock 0 0 0 0 0 0 (151,800) (151,800)
----- -- --------- --------- ------ ------- --------- ---------
Balance at May 31, 2000
(Unaudited) 9,200 $92 $5,661,345 5,945,613 $59,456 $220,917 ($4,969,322) $ 972,488
----- -- --------- --------- ------ ------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
ESPO'S INC.
Consolidated Statements of Cash Flows
====================================================================================================================
Six Six
Months Ended Months Ended Five
May 31, 2000 May 31, 1999 Months Ended Year Ended Year Ended
(Unaudited) (Unaudited) November 30, 1999 June 30, 1999 June 30, 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss ($1,367,660) ($1,158,761) ($1,418,578) ($1,711,498) ($302,952)
========= ========= ========= ========= =======
Adjustments to reconcile net
loss to net cash provided
by (used in) operating
activities:
Depreciation and amortization 277,967 190,283 237,647 403,424 84,566
Loss on disposal of assets 450 45,619 0 45,619 0
Inventory allowance 0 (60,956) 2,686 (60,956) 30,000
Changes in operating assets
and liabilities:
Decrease in marketable security 320,000 0 0 0 0
(Increase) decrease in
trade accounts receivable 15,187 143,408 (100,397) (197,029) (129,510)
(Increase) decrease in other
receivables 100,145 (21,268) 10,260 (21,268) (1,500)
(Increase) decrease in inventory (114,093) 130,160 361,934 (154,000) (297,941)
(Increase) decrease in
prepaid expenses (9,679) (4,959) 12,864 (35,063) (13,194)
Increase in other assets (5,886) (78,852) (925) (82,616) 0
Increase in accounts payable 29,209 522,730 78,959 557,132 607,572
Increase (decrease) in
accrued expenses (95,366) 210,783 (58,750) 384,776 277,006
--------- --------- --------- --------- ---------
Total adjustments 517,934 1,076,948 544,278 840,019 556,999
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities (849,726) (81,813) (874,300) (871,479) 254,047
Cash flows from investing activities:
Acquisition of property and equipment (278,090) (883,215) (49,866) (917,536) (173,912)
Investment in notes and advances
receivable 0 0 0 0 (2,576,200)
--------- --------- --------- --------- ---------
Net cash used in investing activities (278,090) (883,215) (49,866) (917,536) (2,750,112)
<PAGE>
ESPO'S INC.
Consolidated Statements of Cash Flows (continued)
====================================================================================================================
Six Six
Months Ended Months Ended Five
May 31, 2000 May 31, 1999 Months Ended Year Ended Year Ended
(Unaudited) (Unaudited) November 30, 1999 June 30, 1999 June 30, 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Advances from related party 0 15,000 0 15,000 496,200
Dividends paid (151,800) (150,657) 0 (159,362) (32,190)
Net proceeds from short-term borrowing 36,039 357,400 (193,025) (100,000) 0
Payments on royalty payable 0 (50,000) (125,000) 0 0
Proceeds from long-term debt 0 904,936 1,095,901 1,623,714 2,080,000
Payments on long-term debt (1,288,693) 0 (201,669) (257,025) 0
Net proceeds (payments) from line
of credit and notes payable (230,050) (204,823) 340,206 575,255 0
Proceeds from sale of stock 2,766,700 46,875 0 46,875 0
--------- --------- --------- --------- ---------
Net cash provided by
financing activities 1,132,196 918,731 916,413 1,744,457 2,544,010
Increase (decrease) in cash 4,380 (46,297) (7,753) (44,558) 47,945
Cash, beginning of period 0 52,311 7,753 52,311 4,366
--------- --------- --------- --------- ---------
Cash, end of period $ 4,380 $ 6,014 $ 0 $ 7,753 $ 52,311
--------- --------- --------- --------- ---------
For supplemental disclosures of cash flow information, see Note 8.
</TABLE>
<PAGE>
Espo's Inc.
Notes to consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
History and organization
The consolidated financial statements of Espo's, Inc. ("Espo's") are the
continuation of the financial statements of PERFORMANCE INTERCONNECT CORP.
("PI") and its wholly owned subsidiaries, Varga Investments, Inc. and PC
DYNAMICS OF TEXAS INC. (collectively referred to as the "Company"). Espo's
was incorporated in New York and at the time of the reverse acquisition
merger discussed below was considered a shell corporation. PI was
incorporated in Texas in 1996 and began operations in July 1997. Through its
subsidiaries, the Company has acquired certain assets and liabilities of two
high tech manufacturing operations in North Texas. The acquisitions were
accounted for as purchases. The Company is involved in the design and
manufacture of multi-wire and rf/microwave circuit boards for sale and
distribution throughout the United States.
Subsequent recapitalization
On November 18, 1999, the major stockholder and chairman of the Company
signed a letter of intent with the president of Espo's, Inc., an unrelated,
publicly traded entity, whereby the Company would be recapitalized through a
reverse acquisition merger with Espo's, Inc. (a public shell). Under the
agreement, the Company agreed to cause its stockholders to exchange at least
99% of Company common stock for up to 5,500,000 shares of restricted common
stock in Espo's, Inc. The transaction was completed and consummated on
December 21, 1999 (November 30, 1999 for accounting purposes) and
retroactively applied to the financial statements presented herein. Espo's
capital structure after the recapitalization consisted of 5,481,947 shares
of common stock distributed to the stockholders of the Company and 385,000
shares in public float or owned by the previous principals of Espo's, Inc.
Subsequent to closing the recapitalization, Espo's, Inc. elected new
directors, officers and amended the articles of incorporation to permit
preferred stock. The preferred stock of the Company was exchanged for the
newly authorized preferred stock of Espo's. See Note 13.
Principles of consolidation
All significant inter-company accounts and transactions have been eliminated
in consolidation. PI and its wholly owned subsidiaries have adopted
November 30, the fiscal year end of Espo's, Inc., as their year-end.
Inventory
The Company's inventory is valued at the lower of cost, determined on a
first-in, first-out basis, or market.
<PAGE>
Property and equipment
The majority of the Company's property and equipment was acquired through
the purchase transactions described above and in Note 8. These assets are
shown at their acquisition value (approximate fair market value) less
accumulated depreciation. Subsequent acquisitions of property and equipment
are stated at cost, less accumulated depreciation. Depreciation is
calculated using the straight-line method over the estimated useful lives of
the underlying assets ranging from 3 to 10 years. The cost of normal
maintenance and repairs is charged to operating expenses as incurred.
Material expenditures which increase the life of an asset are capitalized
and depreciated over the estimated remaining useful life of the asset. The
cost of items sold, or otherwise disposed of, and the related accumulated
depreciation or amortization, are removed from the accounts and any gains or
losses are reflected in current operations.
In addition, the Company periodically reviews all long-lived assets,
including intangibles, in order to ascertain that the carrying value of the
asset is recoverable. For the consolidated balance sheets presented herein,
it is the Company's estimate that the net future cash flows from the use or
disposal of all long-lived assets are greater than their carrying value and,
therefore, impairment is not considered to have occurred.
Securities available for sale
These securities are equity stocks in a publicly traded company that are
anticipated to be held for investment or used as collateral for future
borrowings and as such are classified as available for sale. These
securities are carried at their fair market value which, at November 30,
1999, equals their historic cost. Any subsequent unrealized gain or loss
will be reflected as an element of equity on the consolidated balance
sheets. See Notes 8 and 13.
Other assets
Included in other assets are loan origination fees and goodwill. Loan
origination fees are being amortized using the interest method over the
expected life of the loan.
Goodwill is the excess cost over fair value of net assets acquired. It
originated from the Company's 1999 acquisition as discussed in Note 8 and is
being amortized over 40 years using the straight-line method.
Deferred income taxes
Deferred taxes are calculated on temporary differences resulting from
different financial and income tax reporting methods used to recognize
income and expenses. These differences result primarily from the methods
used to calculate depreciation, amortization, accrued vacation and the
allowance for doubtful accounts. See Note 7.
Concentration of risk
The Company may, on occasion, have cash balances in bank accounts in excess
of the federally insured limits. The Company has not experienced any losses
from these accounts and management does not believe it has any significant
risk related to these accounts.
<PAGE>
At November 30, 1999, there was approximately $816,000 of trade receivables
due from four customers. This accounted for approximately 67% of trade
receivables, including receivables factored with recourse. For the five
months ended November 30, 1999, sales to these four major customers
accounted for approximately 26%, 19%, 12% and 8% of revenues with a
cumulative total of approximately $2,534,000.
At June 30, 1999, amounts due from five major customers, totaling
approximately $760,000 accounted for approximately 78% of trade receivables,
including receivables factored with recourse. For the year ended June 30,
1999, sales to three of these major customers accounted for approximately
41%, 16% and 11% of revenues with a cumulative total of approximately
$3,400,000.
In addition, the Company occasionally uses a factor for a select group of
receivables. Due to the nature of the receivables factored, the Company
accounts for these transactions as short-term borrowings. See Note 3.
Earnings (loss) per share
Basic earnings per share is calculated by dividing the income (loss)
available to common stock (the numerator) by the weighted average number of
shares of common stock outstanding during the period (the denominator). At
November 30, 1999, the weighted average number of shares outstanding was
5,484,463 and at June 30, 1999 and 1998, the weighted average number of
shares outstanding was 5,481,947. For the interim periods presented, May
31, 2000 and 1999, the weighted average number of shares outstanding was
5,881,474 and 5,481,947, respectively.
Diluted earnings per share adds to the denominator those securities that if
converted would cause a dilutive effect to the calculation. To compute the
weighted average number of shares outstanding for the calculation of the
diluted earnings per share, the number of shares vested in the employee
stock option plan must be included in the denominator on a weighted average
basis. At November 30, 1999, June 30, 1999 and 1998, the weighted average
number of shares outstanding were 5,511,093, 5,490,848 and 5,481,947,
respectively. For the interim periods presented, May 31, 2000 and 1999, the
weighted average number of shares outstanding were 5,908,104 and 5,490,848,
respectively.
Use of estimates
The preparation of financial statements requires management to make
estimates and assumptions that effect the financial statements at, and
during the reporting periods. Actual results could differ from these
estimates.
Cash equivalents
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
<PAGE>
Note 2 - Inventory
<TABLE>
Inventories consist primarily of the following:
May 31, November 30, June 30,
--------- --------- ---------
2000 1999 1999
(Unaudited)
--------- --------- ---------
<S> <C> <C> <C>
Finished goods $ - $ - $ -
Work in progress 659,392 573,562 926,352
Raw materials 351,143 322,880 332,024
--------- --------- ---------
Total inventory $1,010,535 $ 896,442 $1,258,376
========= ========= =========
</TABLE>
The Company utilizes batch processing for orders from clients that are part
of an existing purchase and delivery contract. The Company only produces an
amount sufficient to complete the order and provide for quality control
inspections. Once a batch is complete, it is immediately shipped to the
customer, thus eliminating the need to warehouse finished goods.
Note 3 - Trade Accounts Receivable
The Company maintains an agreement to factor select accounts receivable with
a financing group and accounts for the factored receivables as secured
short-term borrowings. The Company receives 85% of the face amount of
qualifying invoices and the remaining 15% is held by the factor as a reserve
until the invoice is collected, whereby the reserve is then refunded to the
Company less applicable fees. All invoices are factored with recourse to the
Company. In addition, the Company believes the historic value of the
accounts receivable presented below approximates their fair value.
<TABLE>
Accounts receivable consists of the following:
May 31, November 30, June 30,
--------- --------- ---------
2000 1999 1999
(Unaudited)
--------- --------- ---------
<S> <C> <C> <C>
Accounts receivable - trade $1,086,332 $1,118,450 $ 973,363
Allowance for bad debts (6,000) (22,931) (22,931)
--------- --------- ---------
Trade accounts receivable, net $1,080,332 $1,095,519 $ 950,432
========= ========= =========
</TABLE>
<PAGE>
Note 4 - Property and Equipment
<TABLE>
Property and equipment consist of the following:
November 30, June 30,
---------- ----------
1999 1999
---------- ----------
<S> <C> <C>
Furniture and fixtures $ 55,707 $ 53,707
Computers 67,633 52,104
Vehicles 47,520 47,520
Production equipment 3,633,486 3,604,963
Leasehold improvements 88,017 84,203
3,892,363 3,842,497
---------- ----------
Less accumulated depreciation
and amortization 679,039 455,133
---------- ----------
$ 3,213,324 $ 3,387,364
========== ==========
</TABLE>
Depreciation expense for the five months ended November 30, 1999 totaled
$223,904 of which $192,676 was included in cost of sales for depreciation on
production equipment. Amortization expense of intangible assets totaled
approximately $13,700 for the five months ended November 30, 1999.
Depreciation expense for the year ended June 30, 1999 totaled $399,660 of
which $373,595 was included in cost of sales for depreciation on production
equipment. Amortization expense of intangible assets totaled approximately
$3,800. Depreciation expense for the period ended June 30, 1998, totaled
$84,566 of which $82,541 was included in costs of sales for depreciation on
production equipment.
<PAGE>
Note 5 - Lines of Credit and Note Payable
Lines of credit
On March 25, 1999, a subsidiary of the Company entered in to an agreement
for a line of credit with a financial institution. The agreement allows
borrowings of up to the greater of $1,500,000 or a set percentage of
receivables and inventory. Interest is payable monthly with the principal
due at maturity. The agreement matures March 24, 2001, and shall be
automatically renewed for successive periods of one year unless otherwise
terminated as provided. Interest accrues at the Citibank, N.A. prime rate
(8.25% at November 30, 1999), plus 3%. The agreement is collateralized by a
first lien on specific assets of the Company and is guaranteed by a
stockholder and entities related through common ownership. The line of
credit also subjects the subsidiary to certain financial and negative
covenants. At November 30, 1999, the subsidiary was subject to financial
covenants that required the subsidiary to maintain a current ratio of 1.0 or
better and a net worth of at least $450,000. The subsidiary was in
violation of both covenants at November 30, 1999 and, therefore, requested
and received a waiver of those terms for the period ending November 30,
1999. The subsidiary continues to be in violation of the above covenants.
For the period ending June 30, 1999, the subsidiary was in violation of the
covenants noted above and; therefore, requested and received a similar
covenant waiver. At November 30, 1999 and June 30, 1999, the outstanding
balance on this line of credit was $661,635 and $575,255, respectively, and
is classified as a current liability due to the lenders waiver not extending
beyond the current reporting period. See Note 14.
In addition, the Company has a line of credit with its major stockholder
whereby the stockholder has agreed to provide funding in the event
outstanding checks are presented to the bank and the Company has inadequate
funds in its account. These advances are to be repaid upon the Company
receiving adequate cash or if significant funds are raised through an equity
offering. The funds accrue interest at approximately 18% and at November
30, 1999, the outstanding balance was $253,826.
Note payable
In connection with the assets purchased during the year ended June 30, 1999,
as described in Note 8, the Company incurred a note payable to the seller.
The note accrued interest at the prime rate plus 1% and was payable in
monthly payments of $50,000 plus interest. The note was collateralized by a
subordinate lien on specific assets and guaranteed by the Company and a
stockholder of the Company. The balance of the note at June 30, 1999 was
$193,025 and has subsequently been paid in full.
<PAGE>
Note 6 - Long-term Debt
<TABLE>
Long-term debt consists of the following:
November 30, June 30,
1999 1999
--------- ---------
<S> <C> <C>
Note payable to a shareholder due August 2002.
Interest accrues at 24% and is due at maturity.
The loan is collateralized by a partial second
lien on certain assets of the Company. $ 50,000 $ 50,000
Notes payable to an individual due May and
June 2001. Interest accrues at 24% and is
payable monthly. The loan is collateralized
by a subordinated lien on the Company's assets. 275,000 275,000
Notes payable to stockholders, refinanced with
debt to third parties. See Note 9. 0 665,984
Note payable to the seller originating from
purchase of assets, maturing March 2000.
Interest accrues at the prime rate
(8.25 % at November 30, 1999), plus 1%.
In July 1999, the note was restructured
whereby the payments to be made were
$26,610 per month plus accrued interest.
The note is collateralized by a subordinated
lien on specific corporate assets. The note
is guaranteed by the Company and a
stockholder of the Company. 640,429 773,479
Note payable to a bank maturing March 2004.
The note is payable in monthly installments
of $586, including interest accrued at 9.74%.
The note is collateralized by a Company vehicle. 25,560 26,679
Notes payable to a financial institution
maturing July 2000. Interest accrues at the
prime rate (8.25% at November 30, 1999),
plus 4% and is payable in monthly payments
of $7,750 plus accrued interest. The notes
are collateralized by a first lien on specific
assets of the Company. The notes also
require specific financial and negative
covenants, with which the Company was
in compliance at November 30, 1999. 337,500 375,000
Note payable to a financial institution
maturing March 2001. Interest accrues
at the prime rate (8.25% at November 30,
1999), plus 3% and is payable in monthly
payments of $6,000 plus accrued interest.
The note is collateralized by a first lien on
specific assets of a subsidiary of PI. The
note also requires specific financial and
negative covenants. See below. 318,000 348,000
Notes payable to a third party maturing
January 1, 2001. Interest is accrued at 18%
and is payable monthly. The notes are
collateralized by a security agreement for
various corporate assets. 1,214,254 -
Note payable to a third party maturing
September 30, 2000. Interest is accrued
at 17% and is payable monthly. The note
is collateralized by a security agreement
for various corporate assets. 250,000 -
--------- ---------
$3,110,743 $2,514,142
Less amounts classified as current 1,229,464 947,623
--------- ---------
Total long-term debt $1,881,279 $1,566,519
========= =========
</TABLE>
<PAGE>
As noted above, a subsidiary of PI is subject to certain financial and
negative covenants in relation to long-term debt the subsidiary has with a
financial institution. These are the same covenants, related violations and
waiver as discussed in Note 5. Since the waiver does not extend beyond the
current period, the outstanding balance has been classified as a current
liability.
The minimum annual principal payments on long-term debt are as follows for
the years ending November 30:
2000 $ 983,464
2001 2,059,899
2002 57,659
2003 6,469
2004 3,252
Thereafter -
-----------
$ 3,110,743
===========
Note 7 - Income Taxes
Due to losses generated during the periods ending November 30, 1999, June
30, 1999, and June 30, 1998, the Company has available a net operating loss
carryforward of approximately $3,800,000. In view of this loss and the
uncertainty of the Company's near-term profitability, management has
estimated the Company's current tax liability to be zero. The current
estimated net operating losses will expire in the years 2013 through 2015.
<TABLE>
The estimated net deferred taxes consist of the following:
November 30, June 30,
----------- -----------
1999 1999
------------ -----------
<S> <C> <C>
Deferred tax asset $ 1,290,000 $ 755,000
Deferred tax asset
valuation allowance (1,290,000) (755,000)
Deferred tax liability - -
----------- -----------
$ - $ -
=========== ===========
</TABLE>
<PAGE>
Note 8 - Cash Flow Information
Non-cash transactions
During the five months ended November 30, 1999, the Company continued to
receive cash advances from entities related through common ownership. As
funds were advanced during the period, the amounts were added to existing
notes payable. On October 15, 1999, two notes due to related entities were
replaced with three new notes payable to third parties. In addition, the
Company received 300,000 shares of stock in uniView Technologies Corporation
with an estimated fair market value of $900,000 (see Notes 1 and 13). The
Company subsequently sold 150,000 of these shares valued at $450,000 to a
entity related through common ownership for forgiveness of existing debt,
accrued interest and a future advance (other receivable) that was funded in
December 1999. The replacement of the notes and the acquisition and sale of
the stock were considered non-cash transactions.
During the year ended June 30, 1999, the Company purchased certain assets of
a high-tech manufacturing entity for $1,066,554 of debt plus royalties. The
royalties were subsequently renegotiated as a series of payments totaling
$500,000, payable at $25,000 each month over a 20 month period and are based
on production and sales activity. In addition, the Company purchased a
vehicle with approximately $28,000 of bank debt.
During the year ended June 30, 1998, the Company received approximately
$2,575,000 of loans and advances from parties related through common
ownership. These funds were then advanced to an unrelated manufacturing
company which had been advanced approximately $100,000 prior to July 1,
1997. These funds, plus accrued interest of approximately $120,000, were
converted into preferred stock of the manufacturing company in November
1997. The preferred stocks liquidating preference were the assets of the
manufacturing company. The Company subsequently exercised its liquidating
preference by exchanging the preferred stock and any accrued dividends
for fixed assets. The assets were recorded at the historic cost of the
liquidated preferred stock and have an estimated fair market value
of $3,780,000 as determined by a third party appraisal. The Company's
liabilities related to these loans were subsequently converted into
preferred stock as discussed below.
On August 28, 1998, the board of directors amended the articles of
incorporation authorizing 2,000,000 shares of preferred stock, including
3,000 shares of Series A Preferred Stock ("Preferred Stock") with a par
value of $10. Pursuant to a letter of intent from four debt holders,
approximately $2,330,000 of long-term debt and $125,000 of accrued interest
were converted into 2,452 shares of Preferred Stock effective April 30,
1998. Subsequent to the reverse acquisition merger discussed in Note 1,
these shares of preferred stock were exchanged for the current Series A
preferred stock. See Note 13.
Supplemental information
Interest paid for the five months ended November 30, 1999 and the years
ended June 30, 1999 and 1998 totaled approximately $177,000, $261,000 and
$252,000, respectively. The Company was not required to and did not pay any
federal income taxes.
<PAGE>
Note 9 - Related Party Transactions
As noted in Note 7, there are amounts included in long-term debt that are
due to related parties. Accrued interest relating to these liabilities
totaled approximately $41,000, $108,000 and $43,000 for the five months
ended November 30, 1999 and the years ended June 30, 1999 and 1998,
respectively. At November 30, 1999 and June 30, 1999, accounts payable
includes approximately $165,000 and $200,000, respectively, due Winterstone
Financial Services for consulting services. Winterstone is related to the
Company through common ownership.
Included in current liabilities at November 30, 1999 and June 30, 1999 are
advances payable to related parties. These advances are short-term advances
of operating capital that accrue interest at 24% and are payable on demand.
Note 10 - Stock Compensation
On February 28, 1998, the Board of Directors and management of the Company
approved a stock-based compensation plan (the "Plan") for all individuals
employed as of March 31, 1998. The original number of shares to be issued
was approximately 1,145,000; however, through reverse stock splits, this has
been decreased to approximately 114,500 shares. The Company accounts for
the fair value of its grants under the Plan in accordance with FASB 123,
Accounting for Stock-Based Compensation.
The related compensation costs that have been charged against income are
$5,367 for the five months ended November 30, 1999, $7,156 for the year
ended June 30, 1999 and $2,385 for the period ended June 30, 1998.
The shares are valued at approximately $0.25 per share and is management's
best estimate considering the Company's financial position, the life of the
options, management's estimate of the expected price of the underlying stock
once trading begins, the expected volatility of the stock, expected
dividends and current risk-free interest rates. As the Company develops a
trading price and volatility history, management intends to make use of
pricing models to facilitate future valuations.
Under the Plan, eligible employees are to receive a predetermined amount of
shares, primarily based on their salary and tenure with the Company. The
employees vest at 25%, 25% and 50% for the periods ending March 1, 1999,
2000 and 2001, respectively. In the event the Company is purchased or
involved in a merger, all shares become 100% vested. The employees do not
have to contribute any capital to obtain the shares and, if terminated prior
to vesting, forfeit their rights to unvested shares.
<TABLE>
November 30, June 30,
------------ -------------------
1999 1999 1998
------------ ------- -------
<S> <C> <C> <C>
Shares outstanding at the
beginning of the period 106,519 114,498 -
Shares outstanding at the end
of the period 106,519 106,519 114,498
Shares exercisable at the end of
the period 26,630 26,630 -
Shares granted during the period - - 114,498
Shares exercised during the period - - -
Shares forfeited during the period - 7,979 -
</TABLE>
<PAGE>
Note 11 - Commitments
The Company rents office space, equipment and warehouse facilities under
non-cancelable operating leases. Total rent expense was $121,940 for the
five months ended November 30, 1999; $440,120 for the year ended June 30,
1999 and $84,728 for the year ended June 30, 1998. Future minimum lease
payments are as follows for the years ending November 30:
2000 $ 259,980
2001 214,221
2002 78,221
2003 1,493
2004 1,493
Thereafter -
-----------
$ 555,408
===========
The Company has certain royalty agreements with a third party for sales of
multi-wire boards. Total royalty expense was approximately $41,000 for the
five months ended November 30, 1999, $101,000 for the year ended June 30,
1999 and $31,000 for the year ended June 30, 1998. The royalty agreement is
for a ten-year period ending December 31, 2003 and is automatically extended
for subsequent five-year periods. Either side may terminate at the end of
the ten-year or five-year periods.
Note 12 - Warrants
In conjunction with a financing agreement executed in October 1997, the
Company issued warrants for the purchase of 10% of the authorized number of
shares of common stock for $2,000,000. The warrants are exercisable through
October 22, 2002. Due to the estimated value of the underlying stock when
the warrants were issued, the restricted nature of the warrants and the
exercise price, the warrants have been estimated to have no significant
value.
Note 13 - Preferred Stock
As discussed in Note 1, the Company completed a recapitalization through a
reverse acquisition merger with Espo's, Inc. Subsequent to the transaction,
the board of directors authorized preferred stock by amendment to the
Company's Articles of Incorporation. The preferred stock consists of
1,000,000 authorized shares with a par value of $0.01 and a redemption value
of $1,000 per share. The redemption value is used solely for the
calculation and payment of dividends as there is no mandatory redemption
feature associated with this stock. Preferred stock consists of:
Series A, 3,000 shares issued and outstanding with cumulative dividends
paying 8% in year one, 10% in year two, 12% in year three, 14% in year
four, and 16% yearly thereafter. Dividends are calculated on the
redemption value of $1,000 per share. Series A was issued in exchange
for all of the existing preferred stock of PI, the Series A stock
redemption fund and the payables associated with the sinking fund and
dividends declared but unpaid. The consummation of this transaction
increased additional paid-in capital by approximately $2,225,000 and
approximately $2,288,000 at November 30, 1999 and June 30, 1999,
respectively, as the transaction has been retroactively applied to those
periods.
<PAGE>
Series B, 900 shares of issued and outstanding 6% convertible stock with
dividends payable quarterly in cash. The stock may be converted into 900
shares of common stock through 2004 at a conversion rate of $3.00 per
share. The stock was issued in exchange for $900,000 of preferred
subscribed and unissued stock which had been originally funded by the
contribution of 300,000 shares in another publicly traded company valued
at approximately $3.00 per share. The consummation of this transaction
increased additional paid-in capital by $899,901 for all the periods
presented as the transaction has been retroactively applied to these
periods.
Note 14 - Continued Operations
At June 30, 1998, the Company's financial statements and key financial
indicators presented a financial picture of an entity that had not been able
to take advantage of certain economies of scale as expenses and liabilities
outpaced earnings.
On March 15, 1999, the Company facilitated the acquisition of certain assets
of PC DYNAMICS CORPORATION ("PCD") by the Company's wholly owned subsidiary,
PC DYNAMICS OF TEXAS, INC., and subsequently moved all manufacturing and
corporate operations of the Company to the leased facility previously
occupied by PCD. This move was viewed as an effort to apply corporate
overhead to a larger manufacturing base.
At June 30, 1999, the Company had completed the move and had ramped up
operations and, shortly thereafter, initiated a limited second production
shift. The Company was still requiring outside cash infusion, but mainly as
a result of moving costs and costs associated with the acquisition.
From June 30, 1999 through November 30, 1999, stockholders had advanced and
loaned the Company approximately $800,000 to meet its cash requirements.
During this period, the Company enacted a plan to upgrade quality control
procedures in order to reduce waste and spoilage. These procedures were
designed to improve manufacturing efficiency in an effort to help achieve
operational profitability. The directors are continuing to seek additional
equity funding and are optimistic that the reverse acquisition merger
discussed in Note 1 will provide the needed capital platform to raise
additional equity and continue operations.
The accompanying financial statements were prepared as if the Company would
continue as a going concern and, therefore, contemplates the realization of
assets and the liquidation of liabilities in the normal course of business.
If the Company is unable to continue to generate increased sales, increased
profitability, or obtain additional equity participation to cover negative
cash flows, a director and several related party stockholders have agreed to
fund the capital requirements of the Company through November 30, 2000.
Note 15 - Unaudited Interim Financial Statements
The financial statements as of May 31, 2000 and 1999, and for the six months
then ended are unaudited; however, in the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) which are
necessary in order to make the interim financial statements not misleading,
have been made. The results of the interim period are not necessarily
indicative of the results to be obtained for a full fiscal year.
<PAGE>
PART III
Index of Exhibits
Ex. 2.1 Agreement and Plan of Reorganization by and between Performance
Interconnect Corp, its undersigned shareholders and Espo's Inc *
Ex. 3.1 Certificate of Incorporation filed in the Office of the Secretary
of State of the State of New York, November 29, 1990. *
Ex. 3.2 Certificate of Amendment of Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York,
July 17, 1998 *
Ex. 3.3 Certificate of Amendment of Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York,
October 27, 1998. *
Ex. 3.4 Certificate of Amendment of Certificate of Incorporation filed in
the Office of the Secretary of State of the State of New York,
March 20, 2000. *
Ex. 3.5 Bylaws. *
Ex. 4.1 Form of letter describing employee stock option plan. *
Ex. 4.2 Letter agreement dated November 29, 1999, providing for issuance
of preferred stock of Espo's to Nations Corp. in exchange for
common stock of uniView Technologies Corp. This preferred stock
has not yet actually been issued. *
Ex. 4.3 Letter agreement dated December 27, 1999, providing for issuance
of preferred stock of Espo's to CMLP Group Ltd. and Winterstone
Management Inc., in exchange for Series A preferred stock of
Performance Interconnect Corp. This preferred stock has not yet
actually been issued. *
Ex. 4.4 Letter Agreement dated October 9, 1998, providing for issuance of
preferred stock of Performance Interconnect Corporation in
exchange for its promissory notes. *
Ex. 4.5 Warrant dated as of October 22, 1997, authorizing the purchase of
4,000,000 shares of common stock of Performance Interconnect Corp.
at $0.50 per share. *
Ex. 4.6 Letter dated February 24, 2000, addressed to Travis Wolff,
describing commitment to fund capital requirements of Performance
Interconnect Corp. through November 30, 2000. *
Ex. 4.7 Promissory Note dated June 7, 1999, in the principal sum of
$75,000.00, by Performance Interconnect Corp. in favor of Gay
Rowe. *
Ex. 4.8 Promissory Note dated May 1, 1999, in the principal sum of
$200,000.00, by Performance Interconnect Corp. in favor of Gay
Rowe. *
Ex. 4.9 Promissory Note dated August 31, 1997, in the principal sum of
$50,000.00, by Varga Investments, Inc., in favor of Ed Stefanko.
(Varga Investments was a limited partnership formed to acquire
I-Con Industries.) *
Ex. 4.10 Security Agreement dated August 31, 1997, by and between Ed
Stefanko, Secured Party, and Varga Investments, Inc., Debtor.
(Varga Investments was a limited partnership formed to acquire
I-Con Industries.) *
Ex. 4.11 Letter agreement dated October 15, 1999, by Winterstone
Management, Inc., and Performance Interconnect Corp, *
Ex. 4.12 Promissory Note dated October 15, 1999, in the principal sum of
$619,477.88, by Performance Interconnect Corp. in favor of Nations
Investment Corp., Ltd. *
<PAGE>
Ex. 4.13 Promissory Note dated October 15, 1999, in the principal sum of
$594,777.69, by Performance Interconnect Corp. in favor of Nations
Investment Corp. *
Ex. 4.14 Security Agreement dated June 30, 1999, by Winterstone Management
Inc and Performance Interconnect Corp. *
Ex. 4.15 Note dated September 30, 1999, in the principal sum of
$250,000.00, by Winterstone Management, Inc., in favor of Zion
Capital, Inc. *
Ex. 4.16 Secured Promissory Note dated August 12, 1998, in the principal
sum of $131,570.00, by Performance Interconnect Corp. in favor of
FINOVA Capital Corporation. *
Ex. 4.17 Secured Promissory Note dated August 12, 1998, in the principal
sum of $318,430.00, by Performance Interconnect Corp. in favor of
FINOVA Capital Corporation. *
Ex. 4.18 Loan and Security Agreement dated as of August 12, 1998, by
Performance Interconnect Corp. in favor of FINOVA Capital
Corporation. *
Ex. 4.19 Loan and Security Agreement dated March 25, 1999, by and between
PC Dynamics of Texas, Inc., and FINOVA Capital Corporation. *
Ex. 4.20 Loan Schedule dated March 25, 1999, by PC Dynamics of Texas, Inc.,
and FINOVA Capital Corporation. *
Ex. 4.21 Subordination and Standstill Agreement dated March 25, 1999, among
FINOVA Capital Corporation, M-Wave, Inc., and PC Dynamics of
Texas, Inc. *
Ex. 4.22 Environmental Certificate and Indemnity Agreement dated as of
March 25, 1999, by PC Dynamics of Texas, Inc., in favor of FINOVA
Capital Corporation. *
Ex. 4.23 Continuing Personal Guaranty dated March 25, 1999, by D. Ronald
Allen, guaranteeing obligations of PC Dynamics of Texas, Inc.,
Borrower, to FINOVA Capital Corporation, Lender. *
Ex. 4.24 Continuing Corporate Guaranty dated March 25, 1999, by Associates
Funding Group, Inc., guaranteeing obligations of PC Dynamics of
Texas, Inc., Borrower, to FINOVA Capital Corporation, Lender. *
Ex. 4.25 Continuing Limited Corporate Guaranty dated March 25, 1999, by JH
&BC, Inc., guaranteeing obligations of PC Dynamics of Texas, Inc.,
Borrower, to FINOVA Capital Corporation, Lender. *
Ex. 4.26 Continuing Corporate Guaranty dated March 25, 1999, by Performance
Interconnect Corporation, guaranteeing obligations of PC Dynamics
of Texas, Inc., Borrower, to FINOVA Capital Corporation, Lender. *
Ex. 4.27 Continuing Corporate Guaranty dated March 25, 1999, by Winterstone
Management, Inc., guaranteeing obligations of PC Dynamics of
Texas, Inc., Borrower, to FINOVA Capital Corporation, Lender. *
Ex. 4.28 Secured Promissory Note dated March 25, 1999, by PC Dynamics of
Texas, Inc., in favor of FINOVA Capital Corporation. *
Ex. 4.29 Amended and Restated Purchase & Sale Agreement dated March 31,
1998, by I-Con Industries, Inc., and Performance Interconnect
Corp., Sellers, in favor of USA Funding, Inc., Purchaser. This is
a sale of accounts receivable. *
Ex. 10.1 Letter dated June 2, 1999, by Performance Interconnect Inc. to
M-Wave Inc. *
Ex. 10.2 Lease of upgrade Mark V Bearing Spindle Drill, S/N 128, dated
11/12/97, by Excellon Automation Co. in favor of Winterstone
Management, Inc. and I-Con Industries, Inc. *
Ex. 10.3 Equipment Lease Agreement dated 5/15/98 by Excellon Automation
Co., in favor of Performance Interconnect, Inc. *
Ex. 10.4 Guaranty by D. Ronald Allen of amounts set forth in Excellon Lease
Agreement dated May 15, 1998. *
<PAGE>
Ex. 10.5 Agreement dated as of March 15, 1999, between PC Dynamics,
Corporation, and PC Dynamics of Texas, Inc. *
Ex. 10.6 Guaranty dated as of March 15, 1999, by D. Ronald Allen in favor
of PC Dynamics Corporation. *
Ex. 10.7 Guaranty dated as of March 15, 1999, by Performance Interconnect
Corp. in favor of PC Dynamics Corporation. *
Ex. 10.8 Assumption of Liabilities dated March 15, 1999, by PC Dynamics of
Texas, Inc., in favor of PC Dynamics Corporation. *
Ex. 10.9 Royalty Agreement dated March 15, 1999, between PC Dynamics
Corporation and PC Dynamics of Texas, Inc. *
Ex. 10.10 Promissory Note dated March 15, 1999, in the principal sum of
$773,479.00 by PC Dynamics of Texas, Inc., in favor of PC Dynamics
Corporation. *
Ex. 10.11 Lease dated as of March 25, 1999, by PC Dynamics Corporation,
Landlord, and PC Dynamics of Texas, Inc., Tenant. *
Ex. 10.12 Promissory Note dated March 15, 1999, in the principal sum of
$293,025.00 by PC Dynamics of Texas, Inc., in favor of PC Dynamics
Corporation. *
Ex. 10.13 Letter dated May 27, 1999, by Joseph A. Turek on behalf of M-Wave
(parent company of PC Dynamics Corporation) on Poly Circuits
letterhead to Ron Allen (on behalf of Performance Interconnect. *
Ex. 21 Subsidiaries of the Company *
Ex. 27 Financial Data Schedule
* Exhibits incorporated by reference to the Company's Registration
Statement on Form 10-SB (File No. 1-158211) filed on April 12,
2000.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this second amended registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
ESPO'S INC.
Date: January 12, 2001
By:/s/ D. Ronald Allen
D. Ronald Allen, President
