UNITED STATES
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from to______________
Commission file number 1-14072
PEN INTERCONNECT, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0430260
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
1601 Alton Parkway Irvine, Ca. 92606
(Address of Principal Executive Offices) (Zip Code)
(949) 798-5800
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No _____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No _____
------ --------
APPLICABLE ONLY TO CORPORATE ISSUERS
As of June 30, 2000 the issuer had 26,059,051 shares of its common
stock, par value $0.01 per share, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
- ---
FORM 10-QSB
PEN INTERCONNECT, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Financial Information 3
Balance Sheets at June 30, 2000
(unaudited) and September 30, 1999 4-5
Statements of Operations for the three months
ended June 30, 2000 and 1999 (unaudited) and 6
nine month periods ended June 30, 2000 and
1999 (unaudited)
Statements of Cash Flows for the nine months
ended June 30, 2000 and 1999 (unaudited) 7-9
Notes to Condensed Financial Statements (unaudited) 10-14
Item 2 Management's Discussion and Analysis or
Plan of Operation 15-18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 2 Changes in the Securities and Use of Proceeds 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6(a). Exhibits 19
Item 6(b). Reports on Form 8-K 19
Signatures 20
2
PEN INTERCONNECT, INC.
PART I
FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED FINANCIAL STATEMENTS
Pen Interconnect, Inc. (the "Company"), has included the unaudited condensed
balance sheet of the Company as of June 30, 2000 and audited balance sheet as of
September 30, 1999 (the Company's most recent fiscal year), unaudited condensed
statements of operations for the three and nine months ended June 30, 2000 and
1999, and unaudited condensed statements of cash flows for the nine months ended
June 30, 2000 and 1999, together with unaudited condensed notes thereto. In the
opinion of management of the Company, the financial statements reflect all
adjustments, all of which are normal recurring adjustments, considered necessary
to fairly present the financial condition, results of operations and cash flows
of the Company for the interim periods presented. The financial statements
included in this report on Form 10-QSB should be read in conjunction with the
audited financial statements of the Company and the notes thereto included in
the annual report of the Company on Form 10-KSB for the year ended September 30,
1999. The results of operations for the nine months ended June 30, 2000 may not
be indicative of the results that may be expected for the year ending September
30, 2000, in light of the Company's discontinuation of electronic contract
manufacturing operations and its intent to merge with perFORMplace.com.
3
Pen Interconnect, Inc.
BALANCE SHEETS
ASSETS
June 30, September 30,
2000 1999
---------------- ------------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $2,752 $ 177,214
Escrowed investor cash (Note F) 20,697 0
Trade accounts less allowance for
doubtful accounts of $0 at June 30, 2000 and $1,890,576 0 2,708,567
at September 31, 1999
Other receivables 3,506
Current maturities of notes receivable 115,000 575,112
Inventories 0 4,250,661
Prepaid expenses and other current assets 12,857 130,977
---------------- ------------------
Total current assets 154,812 7,842,531
PROPERTY AND EQUIPMENT, AT COST
Production equipment (including capitalized leased 0 1,450,494
equipment of $450,390)
Furniture and fixtures 1,028 167,169
Transportation equipment 0 22,149
Leasehold improvements 0 273,733
---------------- ------------------
1,028 1,913,545
Less accumulated depreciation 129 376,681
---------------- ------------------
899 1,536,864
OTHER ASSETS
Notes receivable, less current maturities 0 150,000
---------------- ------------------
Total other assets 0 150,000
---------------- ------------------
155,712 $9,529,395
================ ==================
The accompanying notes are an integral part of these statements.
4
Pen Interconnect, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, September 30,
2000 1999
---------------- ------------------
(unaudited)
CURRENT LIABILITIES
Line of credit $ $ 4,436,562
0
Current maturities of long-term obligations 55,545 1,682,478
Current maturities of capital leases 0 122,759
Accounts payable 3,218,595 3,961,412
Accrued liabilities 496,655 837,261
---------------- ------------------
Total current liabilities 3,770,795 11,040,472
CAPITAL LEASE OBLIGATIONS, less
current maturities 0 299,051
---------------- ------------------
Total liabilities 3,770,795 11,339,523
STOCKHOLDERS' EQUITY
Convertible preferred stock, $0.01 par value
Authorized 5,000,000 shares, Series A: 160
issued and outstanding at June 30, 2000;
1800 issued and outstanding at September 30, 2 18
1999 8 10
Series B: issued and outstanding 862 shares
Common stock, $0.01 par value,
authorized 50,000,000 shares, issued and
outstanding 26,059,051 shares at June 30,
2000 and 9,638,114 at September 30, 1999 260,591 96,381
Additional paid-in capital 18,764,183 17,447,876
Accumulated deficit (22,639,867) (19,354,413)
---------------- ------------------
Total stockholders' equity (deficit) (3,615,083) (1,810,128)
---------------- ------------------
$155,712 $9,529,395
================ ==================
The accompanying notes are an integral part of these statements.
5
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
---------------------------------- --------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------------- --------------- -------------- --------------
Net sales $ 0 $5,098,525 $ 0 $12,684,444
Cost of sales 0 4,205,910 0 11,221,585
---------------- --------------- -------------- --------------
Gross profit 0 892,615 0 1,462,859
Operating expenses
Sales and marketing 0 22,002 0 139,414
Research and development 0 41,148 0 303,650
General and administrative 735,473 517,517 1,347,935 2,564,985
Depreciation and amortization 26 81,952 78 301,898
---------------- --------------- -------------- --------------
Total Operating Expenses 735,499 662,619 1,348,013 3,309,947
---------------- --------------- -------------- --------------
Operating income (loss) from (735,499) 229,996 (1,348,013) (1,847,088)
continued operations
Discontinued Operations:
-----------------------
Loss from operations of
discontinued Powerstream Division
(288,645)
Gain on sale of Powerstream Div 186,643
Loss from operations of
discontinued InCirT Division (269,356)
Loss on repossession of assets
(Note D) (78,019) (978,027)
Loss on disposal of Cables Div (1,507,059)
---------------- --------------- -------------- --------------
Loss from discontinued operations
(78,019) (1,349,385)
Other income (expense)
Interest expense (39,970) (96,947) (348,072) (485,437)
Loss on impairment of investment
in stock 0 (724,959) 0 (724,959)
Other income (expense), net 0 (124,325) 0 (354,112)
---------------- --------------- -------------- --------------
Total other income (117,989) (348,072) (3,071,567)
(expense) (946,231)
---------------- --------------- -------------- --------------
Earnings (loss) before income taxes (853,488) (716,235) (3,045,470) (4,918,655)
Income tax expense 0 0 900 0
---------------- --------------- -------------- --------------
Net earnings (loss) $(853,488) $(716,235) $(3,046,370) $ (4,918,655)
================ =============== ============== ==============
Earnings (loss) per common share
Basic $(.04) $(0.19) $(0.19) $ (0.75)
Diluted $(.04) $(0.19) $(0.19) $ (0.75)
Weighted average common shares
outstanding
Basic 23,511,340 7,693,650 15,626,845 6,538,820
Diluted 23,511,340 7,693,650 15,626,845 6,538,820
The accompanying notes are an integral part of these statements.
6
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
---------------------------------
June 30, June 30,
2000 1999
--------------- ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $(3,046,370) $ (4,918,655)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 90,489 301,898
Bad debts 0 99,625
Stock issued in exchange for services 573,055 524,377
Interest on debenture conversion 0 104,861
(Gain) loss on disposal of divisions (Note A) (186,643) 1,507,059
Loss on impartment of investment in stock 0 724,959
Loss on transfer of assets (Notes A & D) 978,027 0
Changes in asset and liabilities
Trade accounts receivable 0 (1,065,998)
Accounts receivable offset to customers' accounts payable 2,439,266 0
Other receivables (3,506)
Inventories 0 (1,471,476)
Net assets transferred to lender 3,238,079 0
Prepaid expenses and other assets 118,120 82,239
Accounts payable (457,094) 159,684
Accrued liabilities (340,606) (181,618)
--------------- ---------------
Net cash generated (used) in
operating activities 3,402,817 (4,691,792)
--------------- ---------------
Cash flows from investing activities
Purchase of property and equipment 0 (751,860)
Return of capitalized lease equipment to vendor 419,159 0
Proceeds from the disposal of a division 74,324 1,075,000
Issuance of notes receivable (115,000) (611,169)
--------------- ---------------
Net cash provided by (used in)
investing activities 378,483 (288,029)
--------------- ---------------
(Continued)
7
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
Nine months ended
----------------------------------
June 30, June 30,
2000 1999
---------------- ---------------
Cash flows from financing activities
Net change in line of credit (4,436,562) (160,991)
Net change in repossessed capitalized lease (341,140) 0
Accrued dividends on preferred shares 180,930 0
Principal payments on long-term obligations (167,786) (900,000)
Principal payments on capital lease obligations (71,916) (49,428)
Proceeds from issuance of long-term obligations 0 1,303,547
Proceeds from issuance of capital leases 0 395,648
Discount on exercised common shares options 353,581 0
Discount on warrant conversion to common stock 89,941 0
Proceeds from sale of common stock 402,341 400,999
Proceeds from issuance of short term note payable 55,546 0
Proceeds from issuance of preferred stock 0 2,800,000
--------------- ---------------
Net cash provided (consumed) in financing activities (3,935,065) 3,789,775
---------------- ---------------
Net increase in cash and cash equivalents (153,765) (631,299)
Cash and cash equivalents at beginning of period 177,214 657,777
---------------- ---------------
Cash and cash equivalents at end of period 23,449 $ 26,478
================ ===============
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest expense $348,072 $ 380,576
Income tax expense $ $
900 0
8
Noncash investing and financing activities
During the first nine months of FY 99 $1,401,429 of subordinated debentures were
converted into 1,942,914 shares of common stock. Along with the conversion on
the debentures, $104,861 of unamortized interest on the subordinated debentures
was charged to interest expense.
During the third quarter of FY 99 675,000 shares of common stock were issued to
outside consultants for services performed or to be performed. Of this amount,
$524,377 has been charged to expense and the balance of $232,110 has been
included in prepaid expenses to be written off during the next three months as
the service is provided. At the date of issuance, the market value of the stock
issued was $756,487.
During the second quarter of FY 99, $1,800,000 of Series A Preferred Stock was
issued. Of this amount, $800,000 was used directly to pay off $800,000 of bridge
loans made to the Company during the first quarter of FY 99.
During the second quarter of FY2000 Series A preferred shareholders converted
1419 preferred shares into 7,848,661 common shares at an average conversion
price of $.185 per common share. Under the conversion terms of the convertible
preferred shares, a holder has the right to convert preferred shares into common
shares at eighty-five (85%) percent of the average of the two lowest closing bid
prices during the last twenty-two (22) consecutive trading days prior to
conversion. Additionally, a preferred shareholder exercised warrants attached to
preferred stock and received 313,866 common shares in return for a waiver of
certain covenants relative to registration of the convertible preferred shares.
The waiver was expensed at the value of the conversion of $89,941.
During the third quarter of FY2000 Series A and Series B preferred shareholders
converted 359 preferred shares into 2,178,649 common shares at an average
conversion price of $0.165 per common share. Under the conversion terms of the
convertible preferred shares, a holder has the right to convert preferred shares
into common shares at eighty-five (85%) percent of the average of the two lowest
closing bid prices during the last twenty-two (22) consecutive trading days
prior to conversion.
During the first nine months of FY 2000, the Company has issued 1,455,000 common
shares to consultants who performed various services for the Company in lieu of
cash payments. The Company recognized $372,344 as outside services expense.
Additionally, the Company issued 917,328 common shares in settlement of deferred
compensation liability for former officers and recognized $200,711.36 as
compensation expense.
Investments
The Company had an investment in the publicly traded stock of another company.
The stock was received in satisfaction of notes receivable and has a guaranteed
minimum value of $7.4532 per share. At September 30, 1998, the market value of
the stock was approximately $2.25 per share. During the third quarter of FY 99,
a determination was made the investment in TMCI stock with a net book value of
$724,959 was permanently impaired when the major lender of TMCI foreclosed on
their loan for failure to comply with loan covenants. The balance of this
investment was written off during the quarter ended June 30, 1999.
9
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - ACQUISITIONS/DISPOSITIONS
Laminating Technologies Inc.
On December 23, 1998, the Company signed a definitive agreement to merge
with Laminating Technologies Inc. (LTI). On April 2, 1999 the Company and
LTI mutually terminated this definitive agreement to merge.
Cables To Go Inc.
Effectively January 31, 1999, the Company sold substantially all of the
assets and certain liabilities of its Cable Division to Cables To Go,
Inc. (CTG). Net assets of $2,732,059 were sold for $1,075,000 in cash and
a royalty payment contingent upon the future revenues of the Cable
Division. $150,000 of the royalty payment was guaranteed and has been
recorded by the Company as a note receivable from CTG. CTG agreed to use
and compensate the Company for an additional $558,747 of the net assets
contingent upon certain of its future operating needs. The company
originally recorded a loss of $948,312 upon disposition of the Cable
Division but has adjusted, as of September 30, 1999, the loss to
$1,507,059 based on its present determination that CTG will not use nor
compensate the Company for the additional net assets.
Mobile Technology Inc.
On February 1, 1999 the Company signed a letter of intent with Mobile
Technology Inc. (MTI) to sell all assets and liabilities of the MotoSat
division. MTI's principal owner is James Pendleton, a former Chairman and
CEO of the Company. Effective September 30, 1999, the Company sold
substantially all the assets and liabilities of its MOTO-SAT Division to
James Pendleton. The net assets of $68,438 were sold in exchange for Mr.
Pendleton's agreement to waive any claim to post-employment, deferred
compensation or retirement benefits. The Company recognized a loss of
$68,438 upon disposition of the MOTO-SAT Division.
PowerStream Division
On January 21st, 2000 the Company sold its Powerstream Division to Lund
Instrument Engineering of Orem, UT., which purchased certain assets and
assumed certain liabilities of PowerStream Division. Lund remitted
$74,324 to the Company as a partial payment for the acquisition. The
Company is to receive for three years royalties of a) sixteen (16%)
percent of the gross profits generated from sales generated from a
contract with L3 Communications, less any customer advances and b) eight
(8%) percent of gross profits on all other sales contracts in place at
closing. The Company recognized a gain of $186,643 on the sale, not
including any possible future royalty payments.
Pen Corporate and InCirT Division
The Company had been operating under a default notice with its
asset-based lender, Finova Capital, since September 1999, when the
Company began seeking buyers for its two remaining divisions PowerStream
and InCirT. In February a Letter of Intent to sell the InCirT division to
another contract manufacturer was terminated. The Company solicited a
competitor to purchase most of the assets and to negotiate a supplier
agreement with the Company's largest account as part of a voluntary
foreclosure of all the remaining assets of the Company, for which Finova
had a perfected security interest. The Company's June 30, 2000 balance
sheet reflects the transfer of all collateral assets to Finova to which
the Company has recognized an offset of the bank's line of credit balance
and term loans owed by the Company. As required by FASB Statement 15, the
Company estimated a loss on transfer of assets of $(900,008). This
estimate may change and is dependent upon the liquidation value achieved
in the disposition of the assets transferred to the lender.
NOTE B - INVENTORIES
Inventories consist of the following:
Allinventory has transferred to Finova Capital on March 2, June 30,
September 30, 2000 as part of voluntary foreclosure agreement.
2000 1999
------------- ----------------
Raw materials (net of allowance) $ 0 $ 2,684,238
Work-in-process 0 1,507,108
Finished goods 0 59,315
------------- ----------------
$ 0 $ 4,250,661
============= ================
10
NOTE C - BRIDGE LOANS
During the 1st quarter of FY 1999, the Company secured two bridge loans
both of which were to be repaid with funds to be received from the merger
with LTI. The term of each loan was 90 days and carried an interest rate
of 8 percent. One bridge loan was secured in November for $500,000 and
the other in December for $400,000. Both bridge loans were subsequently
repaid from proceeds received from the issuance of preferred stock. (See
Note F).
Note D - CREDIT FACILITY
On March 3, 2000 the Company and its secured asset based lender, Finova
Capital, entered into a voluntary foreclosure in which all collateral
secured under Finova's perfected security interest was transferred to
Finova to satisfy the revolving credit and term loans held by the bank.
As of June 30, 2000 the outstanding line of credit and term loans
amounted to $2,026,849. Finova has sold some of the assets to ADTI, a
subsidiary of Comtel Holdings for promissory notes, which will be paid
down according to usage of inventory and periodic payments for equipment.
The Company's loan will be reduced by the payments made by ADTI as well
as collections of other accounts receivable and sales of other inventory
to third parties. The Company's June 30, 2000 balance sheet reflects the
transfer of all collateral assets to Finova to which the Company has
recognized an offset of the bank's line of credit balance and term loans
owed by the Company. In accordance with FASB 15, the Company recognized a
loss on transfer of assets of $(900,008).
NOTE E - OPTIONS/WARRANTS TO PURCHASE COMMON STOCK
During the first nine months of FY 1999 the Company issued warrants to
purchase 1,230,000 shares of the Company's common stock. All warrants
were issued at an exercise price, which was equal to or above the market
price at the time of issuance. The following table outlines the features
of these warrants:
11
Number of Exercise Expiration
Warrants Price Date
---------------- ------------- -------------------
150,000 $1.000 October 2002
125,000 $0.875 October 2002
215,000 $0.875 November 2001
100,000 $1.3700 February 2002
125,000 $0.0875 October 2003
160,000 $1.2800 February 2002
160,000 $0.8600 April 2002
25,000 $0.8000 May 2001
20,000 $1.0000 June 2003
25,000 $1.0000 June 2002
125,000 $0.8000 August 2004
During the first nine months of FY 1999 the Company issued non-qualified
options to employees to purchase 335,000 shares of common stock. All
options granted were at an exercise price, which was equal to or above
the market price at the time of issuance. The following table outlines
the features of these options:
Number of Exercise Expiration
Warrants Price Date
---------------- ------------- --------------------
60,000 $0.8000 March 2004
250,000 $0.8000 April 2004
25,000 $1.0000 June 2004
During the second quarter of FY 1999, the Company issued warrants to
purchase 160,000 shares of common stock in conjunction with the issuing
of Series A Preferred Stock. The terms of the conversion of the warrants
to shares of common stock are discussed in Note F.
In March 2000 the Board of Directors approved the issuance of 430,000
five-year options shares to key employees at an exercise price of $.30
per share - the market price at the time of issuance. Additionally, the
Board approved 492,500 option shares previously issued to Mr. Stephen J.
Fryer and 105,000 option shares previously issued to Mr. Mehrdad
Mobasseri become fully vested and re-priced to market price of $.30 per
common share.
In March 2000 the Board of Directors approved the issuance of 100,000
warrants be issued to each of the members of the Board at an exercise
price of $.30 per common share.
Options representing 275,000 common shares were exercised in December
1999 at a price of $.134 per share. The option shares were originally
priced at $.30 per share. Proceeds ($36,850) were utilized for corporate
operations.
During the second quarter of FY2000, certain options were re-priced by
the Company. Options representing 1,876,668 common shares were exercised
at a weighted average exercise price of $.097 per share, which generated
$182,866 in proceeds. The Company recognized $294,171 in compensation
expense as a result of the options being exercised below market price.
During the second quarter of FY 2000, the Company re-priced certain
warrants as an inducement to exercise the warrants. Warrants representing
965,000 common shares were exercised at an average weighted exercise
price of $.125 per share.
12
During the third quarter of FY2000, certain options were re-priced by the
Company. Options representing 200,000 common shares were exercised at a
weighted average exercise price of $.15 per share, which generated
$30,000 in proceeds. The Company recognized $13,760 in compensation
expense as a result of the options being exercised below market price.
During the third quarter of FY 2000, the Company re-priced certain
warrants as an inducement to exercise the warrants. Warrants representing
200,000 common shares were exercised at an average weighted exercise
price of $.16 per share.
In light of the financial condition of the Company and the Company's bank
unwillingness to continue funding operations, the exercise of the
warrants and options was completed with the proviso that the funds be
escrowed and that the use of funds be limited to keeping the Company's
administrative operations in tact while the Company found an qualified
acquisition for its previously announced new business strategy. As of
August 4, 2000 the Company has executed a merger agreement to acquire
perFORMplace.com, an Internet based entertainment industry application
service provider. Remaining escrowed funds will be utilized for ongoing
administrative expenses and professional fees in conjunction with the
acquisition and required public filings.
Note F - Preferred Stock
The Company issued two series of Preferred Stock. Series A was issued in
February 1999 consisting of 1,800 shares, par value $0.01 per share, for
$1,000 per share. Series B was issued in April 1999 at the same price but
only 1,000 shares were issued. As mentioned in Note C, part of the funds
raised from the issuance of this stock were used to repay the bridge
loans made earlier in the fiscal year. After repayment of the bridge
loans and paying $238,500 in fees and expenses, the net cash raised by
the Company for operations was $1,665,500. Both series of Preferred Stock
carry a 16 percent dividend rate, which is paid quarterly.
Both issuances of Preferred Stock are convertible into shares of the
Company's Common Stock. Each share of Series A Preferred Stock is
convertible into an amount of shares of Pen Common Stock equal to $1,000
divided by the average of the two lowest closing bid prices for Pen
Common Stock during the period of 22 consecutive trading days ending with
the last trading day before the date of conversion, after discounting
that market price by 15 percent (the "Conversion Price"). During the
first six months the Board of Directors approved a reduction of the
maximum Conversion Price for the Series A Preferred Stock and Series B
Preferred Stock to $.53 from $1.17 and $.79 per share respectively. The
reduction was granted to obtain a waiver in relation to the sale of a
major asset - InCirT Technologies Division. The shares of Series B
Preferred Stock are convertible into Common Stock at the same Conversion
Price as the Series A Preferred Stock. Warrants to acquire 335,453 shares
of Common Stock at conversion prices ranging from $0.86 to $1.434 per
share were also issued to the purchasers of the Series A and Series B
Preferred Stock. The warrants expire three years from date the Preferred
Stock and warrants were initially issued.
13
During the second quarter of FY2000 Series A preferred shareholders
converted 1491 preferred shares into 7,848,661 common shares.
During the third quarter of FY2000 Series A and Series B preferred
shareholders converted 359 preferred shares into 2,178,649 common shares.
Note G - Earnings (loss) per share
Basic earnings (loss) per common share is computed by dividing net
earnings (loss) available to common shareholders by the weighted average
number of common shares outstanding during each period. Diluted earnings
per common share are similarly calculated, except that the weighted
average number of common shares outstanding includes common shares that
may be issued subject to existing rights with dilutive potential.
Outstanding options and warrants are not included in the calculation in
the loss periods because to do so would be anti-dilutive.
For the three and nine months ended June 30, 2000, net loss attributable
to common shareholders includes a non-cash imputed dividend to the
preferred shareholders related to the beneficial conversion feature on
the 1999 Series A and Series B Preferred Stock and related warrants. (See
Note F). The beneficial conversion feature is computed as the difference
between the market value of the common stock into which the Series A and
Series B Preferred Stock can be converted and the value assigned to the
Series A and Series B Preferred Stock in the private placement. The
imputed dividend is a one-time non-cash charge against the loss per
common share.
Note G - Earnings (loss) per share - CONTINUED
Basic and diluted earnings (loss) per common share are calculated as
follows:
Three months ended Nine months ended
----------------------------------- ------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------------- --------------- ------------- --------------
Net earnings (loss) $(853,488) $(716,235) $(3,046,370) $(4,359,908)
Preferred dividends (43,642) (109,063) (180,930) (146,148)
Imputed dividend from beneficial 0 (626,262) 0 (626,262)
conversion feature
----------------- --------------- ------------- --------------
Net earnings (loss) $(809,846) $(1,451,560) $(2,865,440) $(5,132,318)
attributable to common
stockholders
================= =============== ============= ==============
Basic EPS
- -------------------------------------------
Common shares outstanding entire period 21,243,443 6,865,517 9,638,114 5,018,437
Weighted average common shares issued 2,267,897 828,133 5,950,067 1,520,383
----------------- --------------- ------------- --------------
Weighted average commons shares 23,511,340 7,693,650 15,588,181 6,538,820
outstanding during period
================= =============== ============= ==============
Earnings (loss) per common share $ (.03) $ (0.19) $ (0.18) $ (0.78)
Diluted EPS
- -------------------------------------------
Weighted average common shares
outstanding during period - basic 23,511,340 7,693,650 15,588,181 6,538,820
Dilutive effect of stock options and
warrants 0 0 0 0
----------------- --------------- ------------- --------------
Weighted average common shares
outstanding during period - diluted 23,511,340 7,693,650 15,588,181 6,538,820
================= =============== ============= ==============
Earnings (loss) per common share -
assuming dilution $ (.03) $ (0.19) $ (0.18) $ (0.78)
14
NOTE H - SUBSEQUENT EVENTS
The Company on August 4, 2000 entered into a merger agreement with
perfORMplace.com, which is subject to shareholder ratification via proxy and a
shareholder meeting. It is anticipated that the merger will be completed by the
end of October 2000. However, the two companies will immediately begin to
combine their resources and personnel in anticipation of an affirmative vote.
perFORMplace is a business-to-business Internet company operating as an
applications service provider to the entertainment industry. It is focused on
becoming the global online creative and management resource center for the
entertainment industry including motion pictures, television, multimedia,
recording, commercial and live performances. It is establishing the first online
web site to facilitate the electronic processing of union contracts for
entertainers.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS. This report contains certain forward-looking
statements within the meaning of section 27A of the Securities Act of 1933 as
amended, and section 21E of the Securities Exchange Act of 1934, as amended,
that involve risks and uncertainties. In addition, the Company may from time to
time make oral forward-looking statements. Actual results are uncertain and may
be impacted by the following factors. In particular, certain risks and
uncertainties that may impact the accuracy of the forward-looking statements
with respect to revenues, expenses and operating results include without
limitation, cycles of customer orders, general economic and competitive
conditions and changing consumer trends, technological advances and the number
and timing of new product introductions, shipments of products and components
from foreign suppliers, and changes in the mix of products ordered by customers.
As a result, the actual results may differ materially from those projected in
the forward-looking statements.
Because of these, other factors and the fact that the Company's only two
remaining divisions have been sold or liquidated that may affect the Company's
operating results, past financial performance should not be considered an
indicator of future performance, and investors should not use historical trends
to anticipate results or trends in future periods.
The following discussion and analysis provides certain information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition for the three and
nine months ended June 30, 2000 and 1999. This discussion should be read in
conjunction with the audited financial statements of the Company and notes
thereto included in the Annual Report of the Company on Form 10-KSB for the year
ended September 30, 1999.
General
Through March 2, 2000 Pen Interconnect, Inc. was a provider of contract
manufacturing services for original equipment manufacturers. It built electronic
systems and subsystems for customers in a range of industries including
computers, consumer electronics, industrial and medical instrumentation,
avionics, communications, and semiconductor applications. In addition, the
Company provided custom design and manufacturing of battery chargers, power
supplies and uninterrupted power supply systems. Pen Interconnect's services
included product design and prototyping, systems assembly, software duplication,
packaging and warehousing.
Through March 2, 2000 Pen Interconnect, Inc. provided the total manufacturing
solution including circuit design, board design from schematic, mechanical and
product design, prototype assembly, volume board assembly, system services and
end-user distribution. The Company was incorporated under the laws of the State
of Utah on September 30, 1985. Pen Interconnect, Inc. had support manufacturing
facilities in California and Utah.
During the second quarter of FY2000 the Company announced a change in its
strategic direction in disposing of its contract manufacturing operations and
seeking new technologies, with specific interest in Internet business to
business activities. On March 29, 2000 the Company announced the signing of a
letter of intent to acquire perFORMplace.com, a privately held Internet provider
of electronic business-to-business services to the entertainment industry. The
Company on August 4, 2000 entered into a merger agreement with perfORMplace.com,
which is subject to shareholder ratification via proxy and a shareholder
meeting. It is anticipated that the merger will be completed by the end of
October 2000. However, the two companies will immediately begin to combine their
resources and personnel in anticipation of an affirmative vote.
perFORMplace is a business-to-business Internet company operating as an
applications service provider to the entertainment industry. It is focused on
becoming the global online creative and management resource center for the
entertainment industry including motion pictures, television, multimedia,
recording, commercial and live performances. It is establishing the first online
web site to facilitate the electronic processing of union contracts for
entertainers.
Sale of Powerstream Division
On January 21st, 2000 the Company sold its Powerstream Division to Lund
Instrument Engineering of Orem, UT., which purchased certain assets and assumed
certain liabilities of PowerStream Division. Lund remitted $74,324 to the
Company as a partial payment for the acquisition. The Company is to receive for
three years royalties of a) sixteen (16%) percent of the gross profits generated
from sales generated from a contract with L3 Communications, less any customer
advances and b) eight (8%) percent of gross profits on all other sales contracts
in place at closing. The Company recognized a gain of $186,643 on the sale, not
including any possible future royalty payments.
16
Voluntary Foreclosure and Sale of Certain Assets
On March 3, 2000 the Company and its secured asset based lender, Finova Capital,
entered into a voluntary foreclosure in which all collateral secured under
Finova's perfected security interest was transferred to Finova to satisfy the
revolving credit and term loans held by the bank. As of June 30, 2000 the
outstanding line of credit and term loans amounted to $2,026,849. Finova has
sold some of the assets to ADTI, a subsidiary of Comtel Holdings for promissory
notes, which will be paid down according to usage of inventory and periodic
payments for equipment. The Company's loan will be reduced by the payments made
by ADTI as well as collections of other accounts receivable and sales of other
inventory to third parties. The Company's March 31, 2000 balance sheet reflects
the transfer of all collateral assets to Finova to which the Company has
recognized an offset of the bank's line of credit balance and term loans owed by
the Company. In accordance with FASB 15, the Company estimated a loss on
transfer of assets of $(900,008); the loss reflects the difference between book
value and estimated fair market value.
Results of Operations
Net sales. With the sale of Powerstream Division and the voluntary foreclosure
and sale of assets of InCirT Division during the second quarter of FY2000, which
represent the only operating units of the Company, and the fact that each is
accounted for in the financial statements as discontinued operations and that
each division's operations have not been operational since March 2, 2000, a
comparative analysis against prior same quarter and prior same nine months
periods is inappropriate.
Cost of sales. With the sale of Powerstream Division and the voluntary
foreclosure and sale of assets of InCirT Division during the second quarter of
FY2000, which represent the only operating units of the Company, and the fact
that each is accounted for in the financial statements as discontinued
operations and that each division's operations have not been operational since
March 2, 2000, a comparative analysis against prior same quarter and prior same
nine months periods is inappropriate.
Operating expenses. With the sale of Powerstream Division and the voluntary
foreclosure and sale of assets of InCirT Division during the second quarter of
FY2000, which represent the only operating units of the Company, and the fact
that each is accounted for in the financial statements as discontinued
operations, a comparative analysis against prior same quarter and prior same
nine months periods is inappropriate.
17
Other income and expenses. Other expenses decreased by $828,242 or 87.5% for the
three months ended June 30, 2000 as compared to the same period in the prior
year. These expenses also decreased $2,723,495 or 89% for the first nine months
of fiscal 2000 as compared to the same period in the prior year. The reductions
were the result of lower line of credit borrowings, the non-recurrence of a
write-down on investments in securities and lower securities offering costs and
conversions.
Net earnings (loss) and earnings (loss) per share. Net loss for the third fiscal
quarter ended June 30, 2000 totaled ($853,488) or ($0.04) per basic share,
compared with a loss of ($716,235) or ($0.19) per basic share for the third
quarter of fiscal year 1999. The change in the loss per basic share of ($0.15)
is mostly comprised of an increase in continuing and discontinued operating
losses of approximately $0.07 per share; a $.11 per share reduction of other
income and expenses and approximately $0.11 per share decrease as a result of a
206% increase in the number of shares outstanding. The loss for the first nine
months of fiscal year 2000 of ($3,046,370) or ($0.19) per basic share was
($0.56) per share less than that of the first nine months of the prior fiscal
year. The change in loss per basic share for this period was mostly comprised of
a reduction in operating losses from continuing operations of $0.08 per share, a
reduction of $0.01 in losses from discontinued operations, a $.325 per share
reduction of other income and expenses and approximately $0.47 per share
decrease as a result of a 139% increase in the number of shares outstanding.
Liquidity and Capital Resources
During the first three months of FY 2000 the Company sustained losses of
$530,227. Management has taken steps to correct this trend by selling the
PowerStream division during the second quarter of FY 2000, which incurred an
operating loss of approximately $215,000 during the first quarter.
The Company has previously announced its intention to seek a buyer for the
InCirT Division, which incurred an operating loss of approximately $119,000
during the first quarter of FY2000. As of the end of February 2000 the Company
had decided that the sale of InCirT Division at book value or better was not
likely before Finova Capital foreclosed on the Company's assets. The Company and
Finova negotiated the sale of certain InCirT Division's assets to ADTI, a
subsidiary of Comtel Holdings under a prearranged, voluntary foreclosure and
resale transaction on March 2, 2000.
As a result of the Company's lender restricting loan advances during the second
and third quarter of FY2000 and foreclosure on March 2, 2000, the Company raised
additional capital during the quarter from the exercise of warrants ($32,000)
and options ($30,000). In light of the financial condition of the Company and
the Company's bank unwillingness to continue funding operations, the exercise of
the warrants and options required the funds be escrowed and that the use of
funds be limited to keeping the Company's administrative operations in tact
while the Company found an qualified acquisition for its new business strategy.
As of August 4, 2000 the Company has executed a merger agreement to acquire
perFORMplace.com, an Internet based entertainment industry application service
provider. Remaining escrowed funds will be utilized for ongoing administrative
expenses and professional fees in conjunction with the acquisition and required
public filings.
18
Liquidity and Capital Resources - Continued
The Company's management estimates that approximately $2 million may have to be
raised to support post acquisition activity of perFORMplace.com until the
acquisition reaches a positive cash flow estimated to be during FY 2001by
perFORMplace.com's management. This does not include any payments to trade
creditors of the former operations of the Company. The Company has an offer to
such creditors to replace approximately $3 million in trade debt with 1 million
restricted common shares. As of this date of filing this Form 10QSB,
seventy-four (74%) percent representing approximately $2.2 million of the
outstanding trade debt have acknowledged in writing their willingness to convert
stock for debt. The Company is continuing its efforts to obtain a positive
response from the remainder of the trade creditors.
Inflation and Seasonality
The Company does not believe that its discontinued operations were significantly
impacted by inflation or seasonality. It does not believe that the operating
performance of its announced acquisition in process of perFORMplace.com will be
significantly impacted by inflation or seasonality.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
From time to time the Company has been a party to various legal proceedings
arising in the ordinary course of business. As of the date of this filing, the
Company and it's CEO, Steve Fryer, are being sued by a former officer of the
Company for fraud and misrepresentation. Per the Company's legal counsel, there
are no grounds for the lawsuit and there is no expectation that any judgment
will be made against the Company.
During the first three quarters of FY2000 lawsuits were filed against the
Company:
1) In January 2000, McBride Electric Inc. obtained a judgment against the
Company for $2,963 . As of this writing McBride has accepted the
Company's stock for debt offer, contingent upon the Company's receiving
an acceptable acceptance rate on all other vendors.
2) On October 28, 1999 Color Savvy Systems, Ltd. filed suit to recover
$165,750 in past due uncontested vendor obligations. On February 16,
2000 Color Savvy obtained a judgment against the Company for $165,783.
3) On February 9, 2000 Totex Manufacturing Inc. file suit against the
Company to recover $169,404 in uncontested past due vendor obligations.
As of this writing Totex has accepted the Company's stock for debt
offer, contingent upon the Company's receiving an acceptable acceptance
rate on all other vendors.
4) On February 15, 2000 Amistar Corporation suit against the Company to
recover $95,733 in uncontested past due vendor obligations. As of this
writing Amistar has accepted the Company's stock for debt offer,
contingent upon the Company's receiving an acceptable acceptance rate
on all other vendors.
5) On March 1, 2000 Xstatic, LLC. filed suit against the Company to
recover $21,549.90 uncontested past due vendor obligations. As of this
writing Xstatic has accepted the Company's stock for debt offer,
contingent upon the Company's receiving an acceptable acceptance rate
on all other vendors.
6) On March 21, 2000 Interworks Computer Products, Inc. filed suit to
recover $35,771 in past due uncontested vendor obligations.
7) On April 7, 2000 Wyle Electronic filed suit to recover $90,437.87 in
past due uncontested vendor obligations. As of this writing Wyle has
accepted the Company's stock for debt offer, contingent upon the
Company's receiving an acceptable acceptance rate on all other vendors.
8) In July 2000 Force Electronics filed suit to recover $69,949.02 in past
due uncontested vendor obligations.
19
Item 2. Changes in the Securities and Use of Proceeds. During the first six
months the Board of Directors approved a reduction of the maximum Conversion
Price for the Series A Preferred Stock and Series B Preferred Stock to $.53 from
$1.17 and $.79 per share respectively. The reduction was granted to obtain a
waiver in relation to the sale of a major asset - InCirT Technologies Division.
During the third quarter of FY2000 Series A and Series B preferred shareholders
converted 359 preferred shares into 2,178,649 common shares.
As a result of the Company's lender restricting loan advances during the second
and third quarter of FY2000 and foreclosure on March 2, 2000, the Company raised
additional capital during the quarter from the exercise of warrants ($32,000)
and options ($30,000). In light of the financial condition of the Company and
the Company's bank unwillingness to continue funding operations, the exercise of
the warrants and options required the funds be escrowed and that the use of
funds be limited to keeping the Company's administrative operations in tact
while the Company found an qualified acquisition for its new business strategy.
As of August 4, 2000 the Company has executed a merger agreement to acquire
perFORMplace.com, an Internet based entertainment industry application service
provider. Remaining escrowed funds will be utilized for ongoing administrative
expenses and professional fees in conjunction with the acquisition and required
public filings.
During the third quarter of FY2000, certain options were re-priced by the
Company. Options representing 200,000 common shares were exercised at a weighted
average exercise price of $.15 per share, which generated $30,000 in proceeds.
The Company recognized $13,760 in compensation expense as a result of the
options being exercised below market price.
During the third quarter of FY 2000, the Company re-priced certain warrants as
an inducement to exercise the warrants. Warrants representing 200,000 common
shares were exercised at an average weighted exercise price of $.16 per share.
Item 3. Defaults Upon Senior Securities. On March 3, 2000 the Company and its
secured asset based lender, Finova Capital, entered into a voluntary foreclosure
in which all collateral secured under Finova's perfected security interest was
transferred to Finova to satisfy the revolving credit and term loans held by the
bank. As of June 30, 2000 the outstanding line of credit and term loans amounted
to $2,026,849.
Item 4. Submission of Matters to a Vote of Security Holders. None during the
quarter.
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K. None
A. Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEN INTERCONNECT, INC.
By: /s/ Stephen J Fryer
- -------------------------------------------- ---------------------
August 14, 2000 Stephen J. Fryer
Chairman, CEO and
Principal Accounting Officer
20