As filed with the Securities and Exchange Commission on May 28, 1999
Registration Statement No. 333-_____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------
PEN INTERCONNECT, INC.
(Exact name of registrant as specified in its charter)
Utah
(State or other jurisdiction of
incorporation)
3357
(Primary Standard Industrial
Classification Code Number)
87-0430260
(I.R.S. Employer Identification
No.)
Pen Interconnect, Inc.
1601 Alton Parkway
Irvine, CA 92606
(949) 798-5800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive
offices)
Stephen J. Fryer, President
Pen Interconnect, Inc.
1601 Alton Parkway
Irvine, CA 92606
(949) 798-5800
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies To:
Oscar D. Folger, Esq.
James W. Lucas, Esq.
521 Fifth Avenue
New York, New York 10175
(212) 697-6464
Approximate date of commencement of proposed sale to public: From time to time
after the effective date of this Registration Statement depending on market
conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. /__/
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. / X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement for the same offering. [
]___________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[ ]___________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [ ].
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of Each Class of Amount Being Offering Price Aggregate Amount of
Securities Being Registered Registered per Share (1) Offering Price Registration Fee
Common Stock 10,777,453 $0.921875 $9,935,465 $2,762.06
=============================== ================= ======================= ====================== ===================
(1) Estimated for purposes of computing the registration fee pursuant to Rule
457(c) at $0.921875 per share based upon the average of the high and low prices
of $1.00 and $0.84375 on May 24, 1999, respectively.
-----------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
----------------------
2
SUBJECT TO COMPLETION, DATED MAY 28, 1999
PROSPECTUS
PEN INTERCONNECT, INC.
10,777,453 Shares of Common Stock
--------------------------------
Some stockholders of Pen Interconnect, Inc. are offering and selling up
to 10,777,453 shares of Pen common stock under this prospectus. Up to 3,600,000
of these shares may be issued on conversion of our Series A Preferred Stock and
up to 5,000,000 shares may be issued on conversion of our Series B Preferred
Stock. Of the remaining shares, 1,477,453 are issuable on conversion of various
warrants and options, and 700,000 are currently outstanding and owned by some of
the selling stockholders.
Some or all of the selling stockholders expect to sell their Pen stock.
The selling stockholders may offer their Pen stock through public or private
transactions, on or off the OTC Bulletin Board, at prevailing market prices, or
at privately negotiated prices. All net proceeds from the sale of the shares
will go to the stockholders who offer and sell their shares.
Pen's common stock is traded on the OTC Bulletin Board under the symbol
PENC. The last sale price for Pen's common stock reported by the OTC Bulletin
Board for May 24, 1999 was $1.00.
---------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5.
---------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED
THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
The date of this Prospectus is May __, 1999.
1
THE FOLLOWING LEGEND WILL APPEAR IN RED INK ON THE FRONT PAGE OF THE
PROSPECTUS IF THE PROSPECTUS IS CIRCULATED PRIOR TO BEING DECLARED
EFFECTIVE BY THE COMMISSION:
"The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities in any state where the offer or sale is not permitted."
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY 3
RISK FACTORS 5
USE OF PROCEEDS 11
DILUTION 12
CAPITALIZATION 12
PRICE RANGE OF COMMON STOCK 13
DIVIDEND POLICY 14
SELECTED FINANCIAL DATA 14
MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION 17
BUSINESS 24
LEGAL PROCEEDINGS 30
MANAGEMENT 30
EXECUTIVE COMPENSATION 32
PRINCIPAL STOCKHOLDERS 33
CERTAIN TRANSACTIONS 36
SELLING STOCKHOLDERS 36
PLAN OF DISTRIBUTION 38
DESCRIPTION OF CAPITAL STOCK 40
SHARES ELIGIBLE FOR FUTURE SALE 42
LEGAL MATTERS 43
EXPERTS 43
INDEMNIFICATION 43
WHERE YOU CAN FIND ADDITIONAL INFORMATION 44
INDEX TO FINANCIAL STATEMENTS F-1
2
PROSPECTUS SUMMARY
This summary highlights selected information from elsewhere in this
prospectus. It is not complete and may not contain all of the information that
is important to you. To understand this offering fully, you should read the
entire prospectus carefully, including the risk factors and financial
statements.
Pen Interconnect, Inc.
Offices: 1601 Alton Parkway, Irvine, California 92606
Telephone number: (949) 798-5800.
The Business: We develop and produce on a turnkey basis, contract manufacturing
solutions for original equipment manufacturers ("OEMs") in the computer,
computer peripheral, telecommunications, instrumentation, medical and
testing equipment industries. We currently operate three divisions: 1) the
InCirT division, located in Irvine, California, provides sophisticated ISO
9002-certified assembly and testing services for complex printed circuit
boards and subsystems; 2) the PowerStream division, located in Orem, Utah,
designs and manufactures custom power supplies, battery chargers and
uninterruptible power supply (UPS) systems; and 3) the MotoSat division,
located in Salt Lake City, Utah, manufactures mobile satellite equipment.
On February 5, 1999, we closed the sale of our Pen Cable division, located
in Salt Lake City, Utah, to a subsidiary of CTG, Inc. We are also currently
negotiating the sale of the MotoSat division.
The Offering
Common Stock Offered by the Selling Stockholders: 10,777,453 shares
Shares Outstanding Prior to Offering: 7,693,954 shares
Shares to be Outstanding after the Offering: 18,471,407 shares. This does not
include any stock that may be issued in the proposed transaction with
Transdigital Communications Corporation. This also does not include
8,255,200 shares of common stock issuable upon the exercise of outstanding
stock options, warrants, and debentures.
Use of proceeds We will not receive any proceeds from the sale of common stock
in this
3
offering. We will receive proceeds from the exercise of warrants
and options which will be used for general corporate working
capital. See "Use of Proceeds."
OTC Bulletin Board Symbols PENC, PENCW
Risk Factors: For a discussion of the risks you should consider before investing
in the common stock, see "Risk Factors."
Summary Financial Information:
The following financial information has been derived from our financial
statements included elsewhere in this prospectus. This data should be read in
conjunction with those financial statements and the related notes. See
"Financial Statements".
Statement of Operations Data:
Fiscal Year Ended September 30, Six Months Ended March 31,
------------------------------- --------------------------
1998 1997 1999 1998
---- ---- ---- ----
Net sales $17,091,432 $18,238,460 $ 7,585,916 $ 7,603,444
Net loss (5,445,383) (1,735,483) (3,805,328) (11,109)
Loss per Share (1.24) (0.54) (0.72) (0.00)
Weighted Average
Common Shares
Outstanding 4,397,490 3,213,089 5,932,173 4,165,952
Balance Sheet Data:
As of March 31, 1999 As of September 30, 1998
-------------------- ------------------------
Cash and cash equivalents $ 258,681 $ 657,777
Net working capital(deficit) ( 668,388) (1,714,606)
Total assets 10,938,305 14,090,656
Total liabilities 7,689,589 10,224,688
Stockholders' equity 3,248,716 3,865,968
4
The Company
We develop and produce on a turnkey basis, contract manufacturing
solutions for original equipment manufacturers ("OEMs") in the computer,
computer peripheral, telecommunications, instrumentation, medical and testing
equipment industries. We currently operate three divisions: 1) the InCirT
division, located in Irvine, California, provides sophisticated ISO
9002-certified assembly and testing services for complex printed circuit boards
and subsystems; 2) the PowerStream division, located in Orem, Utah, designs and
manufactures custom power supplies, battery chargers and uninterruptible power
supply (UPS) systems; and 3) the MotoSat division, located in Salt Lake City,
Utah, manufactures mobile satellite equipment. On February 5, 1999, we closed
the sale of our Pen Cable division, located in Salt Lake City, Utah, to a
subsidiary of CTG, Inc. We are also currently negotiating the sale of the
MotoSat division. During fiscal 1996 and a portion of fiscal 1997 we operated a
division located in San Jose, California (the "San Jose Division"). We sold the
San Jose Division on November 12, 1996. Our executive offices are located at
1601 Alton Parkway, Irvine, California 92606 and our telephone number is (949)
798- 5800. We were incorporated as a Utah corporation on September 30, 1985.
RISK FACTORS
In addition to the other information in this Prospectus, the following factors
should be considered carefully in evaluating an investment in the securities
offered by this Prospectus.
We have had losses in recent fiscal periods and our auditors have expressed
doubt about our ability to continue as a going concern.
We have had losses from operations in recent fiscal periods. Losses
were $5,445,383 in the fiscal year ended September 30, 1998 ("fiscal1998") and
$1,735,483 in the fiscal year ended September 30, 1997 ("fiscal 1997"). We also
lost $3,805,328 in the six months ended March 31, 1999 and continue to have cash
flow problems. This financial condition is partially the result of delays in
getting contracts with new customers, low margins on a contract that represented
a significant part of fiscal 1998's sales, and disappointing sales performance
for the Cable and Moto-Sat divisions. We had working capital deficits of
$1,714,606 as of September 30, 1998 and $668,388 as of March 31, 1999. We have
issued debentures, preferred stock, and borrowed other funds to provide working
capital to meet current obligations. However, we currently are having difficulty
in generating enough cash to fund operations, and our opportunities to obtain
more cash from capital markets may be diminishing. These factors, among others,
led our auditors, Grant Thornton LLP, to state in their opinion on our financial
statements for fiscal 1998 that there is substantial doubt about our ability to
continue as a going concern.
For most of fiscal 1998, we had to raise additional cash from the
capital markets to support the negative cash flow from operations. We raised
approximately $490,000 from the exercise of stock warrants. We also made private
placements of debentures totaling $2.5 million. These debentures carry an
interest rate of 3% and are convertible into common stock. Each $1,000 of
5
debentures is convertible into common shares at the lower of $2.75 per share or
80% of the current market price. In 1999, we have issued 2,800 shares of
convertible preferred stock to various foreign investors. The conversion and
sale of Common Stock from warrants, debentures, and preferred stock dilutes the
equity interests of existing stockholders and may tend to reduce the price of
the Common Stock.
We are taking a number of steps to cure our cash flow problems. We may
not succeed in achieving these steps or in obtaining further funding on
acceptable terms. Our ability to continue as a going concern depends on
successfully completing the following:
o Restructuring our loan agreement with our major lender, FINOVA,
including the loan covenants with which we were not in compliance.
o Obtaining new contracts for the PowerStream and InCirT divisions.
o Selling the Moto-Sat division.
o Negotiating mergers and acquisitions with other companies to help bring in
additional financing resources and new and more profitable sales contracts.
We may continue to experience losses and may not be able to generate
revenues at levels sufficient to support profitable operations. See also the
risk factors with the headings "The potential merger with Transdigital
Communications could substantially change our business" and "We must obtain
additional funds in order to meet future operating costs and expand our
business."
Many factors could reduce our sales or profitability.
There are a wide variety of factors which could adversely impact our
net sales and profitability. Many of these factors are beyond our control. These
factors include:
o our ability to design and introduce new products on a timely and cost-
effective basis,
o market acceptance of both our products and those of our customers,
o the level of orders that are received and can be shipped,
o customer order patterns and seasonality,
o changes in product mix, product performance and reliability,
o product obsolescence and technological changes,
o the amount of any product returns,
o the availability and costs of raw materials, equipment and other supplies,
o the cyclical nature of both the computer industry and other markets for our
products,
o competition and competitive pressures on prices,
o the impact of new manufacturers in East Asia, and
o economic conditions in the markets we serve.
Our products are used in a wide variety of computer, computer
peripheral, medical, telecommunications, and industrial control products. A
slowdown in demand for the products of the OEMs that use our products as a
result of economic, technological, or other market conditions could
6
adversely affect our operating results. In addition, we will be adversely
affected if OEMs increase their own manufacture of printed circuit board
assemblies, or if manufacturing is moved to East Asian suppliers.
The potential merger with Transdigital Communications could substantially change
our business.
In December 1998, we signed a non-binding letter of intent with
Transdigital Communications Corporation ("TCC") to negotiate a possible merger.
TCC is a privately-held developer of entertainment and database systems for
transportation markets which include narrow bodied commercial aircraft and
cruise ships. The merger with TCC would result in a change of control of our
company and significantly change the direction of our business. The merger with
TCC may have unexpected adverse effects on our future operations and financial
results. Also, the equity interests of existing stockholders will be
substantially diluted. We may not conclude the merger with TCC or any other
strategic partnership, acquisition, or merger.
We need to expand our customer base so that loss of sales to one customer does
not harm our business.
Our sales have historically been concentrated with several large
customers. Although we have tried to reduce our dependence on a few large
customers, sales to only one customer accounted for approximately 59% of total
sales for fiscal 1998 and approximately 50% of total sales for the six months
ended March 31, 1999. We have since entered into business relationships with
additional customers. Our business could be harmed if we lost any major
customer.
Our sales to a particular customer can vary significantly depending on
the life cycles of the customer's products. As a result of the rapid pace of
technological development in the computer and computer peripheral industries,
products frequently have life cycles of less than a year. Demand for our
products and services can diminish significantly as a customer's products reach
the end of their useful sales lives or become so standardized as to be
appropriate for high volume, low cost foreign production. We must expand our
customer base to consistently have customers that have products at the beginning
of their life cycles when demand for our production services is greatest.
Therefore, our future prospects depend significantly on our ability to establish
and maintain long-term customer relationships over the sales lives of multiple
products and to add new customers in rapidly changing markets.
We must obtain additional funds in order to meet future operating costs and
expand our business.
We will need additional working capital to meet our future operating
costs, for business expansion opportunities, and for acquisitions. The amount of
additional working capital needed is greater than our existing cash balances,
borrowings available under the line of credit, and cash generated from
operations. However, additional financing may not be available on favorable
terms, if at all. Also, additional financing, if available, may result in
substantial dilution of the equity interests of existing stockholders. If we can
not obtain additional working capital, we will not be
7
able to continue to fund potential mergers, acquisitions, or other growth
opportunities. See also the risk factor with the heading "We have had losses in
recent fiscal periods and our auditors have expressed doubt about our ability to
continue as a going concern."
If we are unable to stay current with new technologies our business could be
harmed by technological obsolescence.
The industries that we serve are marked by rapid technological change.
Technologies developed by others may render our customers' products
noncompetitive or obsolete. We may not be able to adapt new technological
developments quickly enough to remain competitive. The success of our customers'
new product introductions depends on various factors, including proper new
product selection, timely completion and introduction of new product designs,
and the market acceptance. Some of our products also require compatibility with
products manufactured by third-party vendors. We may not be able to maintain
compatibility if vendors modify their products.
Our products have limited proprietary protection.
In 1997 we acquired the PowerStream division, which included the rights
to several patent applications. We have not yet determined if it would be
economically worthwhile to pursue these patent applications. Our other divisions
do not have any patented technology. We consider some aspects of our
manufacturing processes as trade secrets and seek to protect this know-how with
secrecy agreements. However, these agreements may not be enforceable in the
event of a breach. Therefore, even if we are able to develop successful new
products, we may not be able to prevent competitors from copying these products.
In addition, we have no registered trademarks, and our products typically do not
refer to our company by name or mark. If we are unable to prevent competitors
from copying our products, we will be subject to increased competition and our
business may be harmed.
Many factors could limit our ability to get supplies.
Some of our suppliers are located outside the United States. Political
and economic conditions abroad may interfere with the purchase of materials from
these foreign suppliers. Protectionist trade legislation in either the United
States or foreign countries, such as a change in the current tariff structures,
could also interfere with our ability to purchase materials from our foreign
suppliers. We may be exposed to exchange rate fluctuations if foreign
transactions are in currencies other than the U.S. dollar. To date we have not
entered into non-U.S. dollar transactions and have not incurred any material
exchange gains or losses. However, we may enter into these transactions in the
future and fluctuations in the currency exchange rates could then have an
adverse effect on our operations.
Some key component parts used in our products are available from only
one or a limited number of suppliers, and we currently do not have long-term
agreements with all suppliers of components. A reduction or interruption in
supply from third-party contractors would adversely
8
affect our results of operations unless or until alternative sources are
established. Other potential problems with suppliers include defective
components, an increase in prices from suppliers, or our inability to obtain
lower prices when our competitors reduce prices.
We have many strong competitors who have more resources than we do.
Many of the markets for our products are highly competitive. We compete
directly with numerous other contract manufacturers that, like us, obtain raw
material from suppliers and in turn manufacture for customers. Generally, these
other contract manufacturers and OEMs are substantially larger than us and have
more resources than we do. As new products become standardized and are produced
in large quantities, foreign producers in countries with lower labor costs than
the United States compete with us for production of those products since they
generally can offer lower prices than ours. We also compete with other companies
to obtain supplies. A number of the companies from which we buy material
maintain proprietary control of their newly designed products, which can make it
difficult to replace them with other supplies.
We may not be able to recover increased prices of raw materials.
The raw materials that go into the components of the circuit boards we
make are a significant component of our cost of sales. The prices of materials
such as petroleum that are used to make plastics can vary substantially based
upon many factors, including world economic and political conditions. Sometimes
we can pass on these increases in raw material costs to our customers. However,
we generally bid on projects in advance and may not be able to pass on all of
the increased costs if raw material costs increase more than anticipated.
We must be able to retain and hire qualified personnel.
Our success depends to a significant extent upon the continued services of
Stephen J. Fryer, our Chief Executive Officer; Mehrdad Mobesarri, President of
the InCirT Division; Daniele Reni, President of the PowerStream Division; and
Robert Albrecht, Chief Financial Officer. We have employment agreements with Mr.
Reni expiring in April 2000 and with Mr. Fryer expiring in October 2002. Mr.
Weaver's employment agreement expired in April 1999. We have obtained $500,000
key person life insurance on Messrs. Fryer and Reni. We will continue to depend
on other members of our senior staff as well as on our ability to attract,
retain, and motivate additional qualified personnel. The competition for
experienced personnel is intense, and the loss of the services of one or more of
our key employees could harm our business. We may not be successful in retaining
our existing key employees or in attracting and retaining any additional
personnel we may require.
Our common stock and warrants have been delisted from Nasdaq and could now be
subject to the SEC's "penny stock" rules.
As of March 30, 1999, our Common Stock and Warrants were delisted from the
National Association of Securities Dealers Automated Quotation System ("Nasdaq")
National Market System
9
because Nasdaq claimed that we did not have sufficient net tangible assets. The
market value of our Common Stock and Warrants has declined since the Nasdaq
delisting and our stockholders may find it more difficult both to sell our
securities and to obtain accurate quotations as to their market value.
In addition, any broker engaging in a transaction in our securities may
be required to comply with certain "penny stock" rules. These rules require that
the broker provide any customer with a risk disclosure document, disclosure of
market quotations, disclosure of the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market values of our securities held in the customer's accounts. The market
quotation and compensation information must be provided before effecting the
transaction and must be contained on the customer's confirmation. These
requirements may make brokers less willing to engage in transactions in our
securities. This may make it more difficult for our stockholders to sell their
securities.
We may reduce the exercise price of our warrants which could result in the
dilution of our current stockholders.
We can reduce the exercise price of our outstanding Warrants upon
notice to the Warrant holders and may seek to promote the exercise of the
Warrants by reducing the exercise price. We have no current plans to reduce the
exercise price of the Warrants and holders of Warrants should not anticipate
such a reduction. If the exercise price is reduced, Warrant holders may be able
to purchase Common Stock for a price less than the then market value of the
Common Stock. This could result in a material dilution to the then current
holders of Common Stock.
Issuing preferred stock could reduce the price of our Common Stock.
Our Certificate of Incorporation allows us to issue Preferred Stock
with voting, liquidation and dividend rights senior to those of the Common Stock
without the approval of our stockholders. The issuance of Preferred Stock could
make it more difficult for a third party to acquire a majority of our
outstanding stock and could also result in the dilution of the value of the then
current stockholders' Common Stock. In February 1999, we issued 1,800 shares of
Series A Preferred Stock and in April 1999 we issued 1,000 shares of Series B
Preferred Stock. See also the risk factor with the heading "We have had losses
in recent fiscal periods and our auditors have expressed doubt about our ability
to continue as a going concern.."
Shares eligible for future sale could reduce the price of our Common Stock.
The market price of our Common Stock could be adversely affected if
substantial amounts of our Common Stock are sold in a short time. All of the
7,693,954 shares of Common Stock outstanding as of April 30, 1999 are eligible
for resale in the public market in compliance with Rule 144 under the Securities
Act of 1933, (the "Securities Act") or are currently registered for public sale.
In addition, up to approximately 18,330,000 shares of Common Stock may be issued
upon exercise or conversion of the Series A Preferred Stock, Series B Preferred
Stock, and various
10
debentures, warrants, and stock options. The conversion and sale of these shares
of Common Stock would dilute the equity interests of current stockholders and
may tend to depress the price of our Common Stock.
It is unlikely that we will pay dividends.
We have never paid dividends on our Common Stock and do not anticipate
that we will pay dividends in the foreseeable future. Any earnings that may be
generated will be used to finance the growth of our business. In addition, our
revolving credit facility prohibits the payment of cash dividends without the
lender's consent.
The stock ownership of current directors gives them substantial influence over
our company.
As of April 30, 1999, the current directors own approximately 11.4% of
the issued and outstanding shares of Common Stock (assuming no exercise of any
outstanding options or warrants). Accordingly, the current directors may be able
to substantially influence the election of our Board of Directors, to cause an
increase in the authorized capital or the dissolution, merger, or sale of the
assets of our company, and generally to control the affairs of our company.
USE OF PROCEEDS
We would receive approximately $1,249,000 from the sale of 1,477,453
shares of Common Stock included in this prospectus issuable upon exercise of the
warrants and options after taking into account estimated offering expenses of
approximately $75,000. We will receive no proceeds from the sale of securities
by any selling stockholders. None or few of the warrants and options may be
exercised and accordingly, we may receive no or only minimal proceeds from this
offering. Any proceeds received from the exercise of the warrants and options
would be added to working capital. We have no definite plans for the use of any
proceeds from the exercise of the warrants and options nor have we made specific
allocations as to the use of any such proceeds. The proceeds could be used for:
o current manufacturing, administrative, marketing or research and development
expenses,
o the acquisition of inventory or related businesses,
o the repurchase of certain of our outstanding securities, or
o the repayment of debt.
Future events may make shifts in the allocation of funds amongst these
categories necessary or desirable. These events may include changes in the
economic climate and our planned business operations or the success or failure
of our intended business activities Any shifts in the use of proceeds will be at
the discretion of our Board of Directors. We have not assumed the receipt of any
funds from the exercise of the warrants or options in our financial planning.
Prior to expenditure, any net proceeds will be invested in short-term interest
bearing securities or money market funds.
11
DILUTION
Our net tangible book value as of March 31, 1999 was approximately
$1,207,199 or $0.18 per share. Our net tangible book value per share is
determined by subtracting the total amount of our liabilities from the total
amount of our tangible assets and dividing the remainder by the number of shares
of our common stock outstanding. The price per share to the public of the shares
of common stock offered hereby exceeds the net tangible book value per share
prior to this offering. Therefore, purchasers of shares of common stock in this
offering will realize immediate and substantial dilution in the net tangible
book value of their shares. The following table, based upon our net tangible
book value as of March 31, 1999, illustrates the dilution to purchasers of
shares of our common stock in this offering assuming the receipt of $1,249,000
from exercixe of warrants and options, based on the closing bid price of $0.8438
per share on April 30, 1999:
Assumed offering price per share $ 0.84
Net tangible book value per share at 3/31/99 $0.18
Decrease per share attributable to this offering (0.04)
------
Proforma net tangible book value per share
after this offering 0.14
Dilution per share to new investors (1) $ 0.70
======
- - ------------------------------
(1) Does not include 8,255,200 shares of common stock issuable upon the
exercise of stock options, warrants, and debentures.
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of March 31, 1999 and as adjusted to reflect the receipt of
$1,249,000 upon exercise of warrants and options for which the underlying common
stock is registered in this prospectus and the conversion and issuance of all of
the warrants, options, and preferred stock for which the underlying common stock
is registered in this prospectus.
As of March 31, 1999
Actual Pro Forma
Cash and cash equivalents $ 258,681 $ 1,507,681
=========== ============
Long-term obligations,
less current maturities $ 7,314 $ 7,314
Stockholders' equity (1)
Preferred stock, $0.01 par value,
authorized 5,000,000 shares, 1,800
issued at March 31, 1999 18 0
Common stock,$0.01 par value,
authorized 50,000,000 shares; issued
and outstanding 6,864,838 shares at
March 31, 1999 68,648 169,423
Additional paid-in capital 14,059,616 15,207,859
Accumulated deficit (10,879,566) (10,879,566)
------------ ------------
Total stockholders' equity 3,248,716 4,497,716
--------- ---------
Total capitalization $ 3,256,030 $ 4,505,030
=========== ===========
- - ------------------------
(1) Does not include 8,255,200 shares of common stock issuable upon the
exercise of stock options, warrants, and debentures.
12
PRICE RANGE OF COMMON STOCK
Our common stock and warrants have been traded on the OTC Bulletin Board
since they were delisted from the National Association of Securities Dealers
Automated Quotation system as of March 30, 1999. They are traded under the
symbol "PENC" for the common stock and "PENCW" for the warrants. The common
stock and warrants were first publicly traded on November 17, 1995.
The following table sets forth the range of high and low bids for our
common stock for the last two years.
High Low
Fiscal Year 1999 Quarter Ended
March 31, 1999 $ 2.00 $0.7188
December 31, 1998 2.50 0.7656
Fiscal Year 1998 Quarter Ended
September 30, 1998 $ 2.22 $ 0.81
June 30, 1998 3.09 1.88
March 31, 1998 3.19 2.50
December 31, 1997 3.13 1.88
Fiscal Year 1997 Quarter Ended
September 30, 1997 $ 2.50 $ 1.13
June 30, 1997 1.88 1.38
March 31, 1997 2.75 0.88
December 31, 1996 3.38 1.94
On April 30, 1999, the closing quotation for the common stock on the
OTC Bulletin Board was $0.8438 per share. As of April 30, 1999, there were
7,693,954 shares of common stock issued and outstanding, held by approximately
1,100 shareholders, including several holders who are nominees for an
undetermined number of beneficial owners.
13
DIVIDEND POLICY
Pen has not paid any dividends with respect to its common stock and
does not anticipate paying any dividends in the near future. Pen's credit
facility with its bank prohibits the payment of dividends without the consent of
the bank.
SELECTED FINANCIAL DATA
The following selected financial information concerning Pen has been
derived from the financial statements included elsewhere in this prospectus and
should be read in conjunction with the financial statements and the notes
thereto. See "Financial Statements." The selected financial data should be read
in conjunction with and is qualified in its entirety by, Pen's financial
statements, related notes and other financial information included elsewhere in
this prospectus.
Statement of Operations Data:
Fiscal Year Ended September 30, Six Months Ended March 31,
1998 1997 1999 1998
Net sales $ 17,091,432 $ 18,238,460 $7,585,916 $7,603,444
Cost of sales 15,892,456 17,493,122 6,968,163 5,897,521
Gross Profit 1,198,976 745,338 617,753 1,705,923
Operating expenses
Sales and marketing 565,185 807,207 137,411 69,405
Research and development 550,843 260,554 492,634 193,369
General and administrative 2,357,875 1,925,710 2,035,143 997,628
Depreciation and amortization 675,753 454,886 191,307 241,937
Total operating expenses 4,736,421 3,659,583 2,856,495 1,502,339
Operating income (loss) (3,537,445) (2,914,245) (2,238,742) 203,584
Interest expense 1,100,717 612,143 (385,775) (254,707)
Loss on sale of division 0 611,912 (948,312) 0
Other income (expense), net (39,361) 69,393 (232,499 ) 34,337
Loss before income taxes (4,677,523) (2,845,083) (3,805,328) (16,786)
Provision (benefit) for income taxes 767,860 (1,109,600) 0 (5,677)
Net Loss (5,445,383) (1,735,483) (3,805,328) (11,109)
========== ========== ========== =======
14
Loss per common share - basic (1.24) (0.54) (0.72) (0.00)
- diluted (1.24) (0.54) (0.72) (0.00)
Weighted-average common
shares outstanding - basic 4,397,490 3,213,089 5,932,173 4,165,952
- diluted 4,397,490 3,213,089 5,932,173 4,165,952
Balance Sheet Data
March 31,1999 September 30, 1998
CURRENT ASSETS
Cash and cash equivalents $ 258,681 $ 657,777
Receivables
Trade accounts, less allowance for doubtful
accounts of $67,434 and $108,575 at March 31,
1999 and September 30, 1998, respectively 1,840,858 3,350,970
Current maturities of notes receivable 762,409 35,675
Investments in common stock 242,739 242,739
Inventories (Note B) 2,777,230 3,680,169
Prepaid expenses and other current assets 410,078 261,375
Deferred tax asset 41,324 41,324
------ ------
Total current assets 6,333,319 8,270,029
--------- ---------
PROPERTY AND EQUIPMENT, AT COST
Production equipment 655,423 2,624,513
Furniture and fixtures 243,178 837,594
Transportation equipment 22,149 83,522
Leasehold improvements 242,274 613,248
------- -------
1,163,024 4,158,877
Less accumulated depreciation 275,307 1,680,266
---------- ---------
887,717 2,478,611
OTHER ASSETS
Notes receivable, less current maturities 8,798 3,989
Investments in common stock 482,220 482,220
Deferred income taxes 725,667 725,667
Goodwill and other intangibles (net) 2,041,517 2,031,685
Other 4,325 98,455
------ ------
3,717,269 3,342,016
------------- ---------
$10,938,305 $14,090,656
=========== ===========
15
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31,1999 September 30, 1998
CURRENT LIABILITIES
Subordinated debentures $ 325,000 $ 1,401,429
Line of credit 2,922,349 4,064,361
Current maturities of long-term obligations 717,871 1,132,538
Current maturities of capital leases 0 69,621
Accounts payable 2,130,094 2,926,797
Accrued liabilities 906,393 389,889
------- -------
Total current liabilities 7,001,707 9,984,635
LONG-TERM OBLIGATIONS, less
current maturities 7,314 51,965
CAPITAL LEASE OBLIGATIONS,
less current maturities 0 22,333
LIABILITIES TRANSFERRED UNDER
CONTRACTUAL ARRANGEMENTS 514,813 0
DEFERRED INCOME TAXES 165,755 165,755
------- -------
Total liabilities 7,689,589 10,224,688
STOCKHOLDERS' EQUITY (Note D)
Preferred stock, $0.01 par value,
authorized 5,000,000 shares, none issued at
September 30, 1998 and 1,800 issued at March 31, 1999 18 --
Common stock,$0.01 par value,
authorized 50,000,000 shares; issued
and outstanding 6,864,838 shares at
March 31, 1999 and 5,018,437 shares
at September 30, 1998 68,648 50,184
Additional paid-in capital 14,059,616 10,890,022
Accumulated deficit (10,879,566) (7,074,238)
------------ -----------
Total stockholders' equity 3,248,716 3,865,968
============ ============
$ 10,938,305 $ 14,090,656
============ ============
See notes to "Financial Statements"
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-looking Statements
This report contains certain forward-looking statements intended to
come within the meaning of section 27A of the Securities Act of 1933, and
section 21E of the Securities Exchange Act of 1934, that involve risks and
uncertainties. In addition, Pen 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 the timing of
operating and changes in the mix of products ordered by customers. As a result,
the actual results may differ materially from those projected in the
forward-looking statements. Because of these and other factors that may affect
Pen'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
Pen's management believes is relevant to an assessment and understanding of
Pen's results of operations and financial condition for the three and six months
ended March 31, 1999 and 1998 and the fiscal years ended September 30, 1998 and
1997. This discussion should be read in conjunction with the financial
statements and notes of Pen included in this Prospectus.
Results of Operations - Three and Six Months Ended March 31, 1999 and 1998
Net sales. Net sales for Pen decreased $870,649 or approximately 24% for
the three month period ended March 31, 1999 as compared to the same period in
the prior year. This decrease resulted primarily from the sale of the Cable
division in January 1999 and a decline in sales at the InCirT division as the
contract expansion for a major customer was completed and sales returned to
regular levels. Net sales for the six months ending March 31, 1999 decreased
$17,528 or 0.2% from the same period during the prior fiscal year. The contract
expansion in the InCirT division was still ongoing the first fiscal quarter
which offset the decline of sales following the sale of the Cable division in
the second quarter.
Cost of sales. Cost of sales as a percentage of net sales have
increased to approximately 85% for the three months ended March 31, 1999 as
compared to 77% for the same period in the prior year. This increase is due to a
decline in sales at the InCirT division and the impact of fixed manufacturing
costs on a lower sales base. Cost of sales as a percentage of net sales for the
first six months of fiscal 1999 increased to 92% compared to 78% for the same
period last year. This increase was further worsened by declining sales in the
Cable division during the first quarter with no corresponding reduction in
overhead costs. The increase was also due to a decrease in the margins on a
major
17
contract at the InCirT division.
Operating expenses. Operating expenses increased $981,988 or 152% for
the three months ended March 31, 1999 over the same three month period during
the prior fiscal year. For the first six months of fiscal 1999, operating
expenses increased $1,354,156 or 90% compared to the same period from the prior
fiscal year. The increases for both the second quarter and for the six months
were mostly associated with an increase in general and administrative expenses
of $916,914 and $1,037,515, respectively. The increases in general and
administrative expenses during the second quarter are primarily responsible for
the increase. These included:
o $208,599 in professional fees associated with the negotiation of proposed
merger agreements and agreements for the sale of the Cable and Motosat
divisions, Nasdaq compliance hearings, and the issuance of Pen's Series A
preferred stock;
o $429,259 for financial representation services, and
o $97,000 in supplemental payroll expenses associated with the
termination of employees with the sale of the Cable division.
Operating expenses also increased for the quarter and for the six months
due to expensing rather than capitalizing certain development costs at the
PowerStream division.
Other income and expenses. Other expenses increased $179,618 net of the
loss on the sale of the Cable division or 105% for the three months ended March
31, 1999 as compared to the same period in the prior year. These expenses also
increased $397,904 or 81% for the first six months of fiscal 1999 as compared to
the same period in the prior fiscal year. The increases in other expenses for
the second quarter of fiscal 1999 primarily include brokerage fees and other
expenses in connection with the issue of the Series A Preferred Stock in the
second quarter and of subordinated debentures during the prior fiscal year.
Interest expense for both the second quarter and for the first six months of
fiscal 1999 are higher than corresponding amounts from the prior year because of
interest expense associated with the favorable conversion feature of the
subordinated debentures issued during the prior fiscal year.
Net earnings (loss) and earnings (loss) per share. Net loss for the
second fiscal quarter ended March 31, 1999 totaled ($2,499,934) or ($0.47) per
basic share, compared with a gain of $23,057 or $0.01 per basic share for the
second quarter of fiscal 1998. The change in the loss per basic share of ($0.48)
is mostly comprised of
o ($0.15) related to the increase in General and Administrative expenses,
o ($0.03) related to the increase in other expenses,
o ($0.07) related to the decline in sales and the decline in profit margins on
sales, and
o ($0.15) related to the loss on the sale of the Cable division.
18
The loss for the first six months of fiscal 1999 of $3,805,328 or
($0.72) per basic share was ($0.72) per share more than that of the first six
months of the prior fiscal year. The change in loss per basic share for this
period was mostly comprised of:
o ($0.17) related to the increase in General and Administrative expenses,
o ($0.05) related to the increase in development costs,
o ($0.04) related to the increase in Other Expenses,
o ($0.18) related to the decline in margins on sales, and
o ($0.16) related to the loss on the sale of the Cable division.
Fiscal Years Ended September 30, 1998 and 1997
The acquisition of the net assets of PowerStream Technology, Inc.
("PowerStream"), which was effective as of April 1, 1997 has been accounted for
as a purchase. The statement of operations data for the fiscal year ended
September 30, 1997 includes the results of operations of PowerStream since April
1, 1997.
The San Jose Division was acquired on March 24, 1995 and was accounted
for as a purchase. The division was subsequently sold effective November 1,
1996. The statement of operations data for the fiscal year ended September 30,
1997 includes the results of operations of the San Jose Division for one month.
Net sales. Net sales decreased $1,147,028 (6.3%) from $18,238,460 for
fiscal 1997 to $17,091,432 for fiscal 1998. The decrease is primarily the result
of continual declines in sales of the Cable division. Sales in fiscal 1998 for
the Cable division were $3.8 million compared to $6.9 million in 1997. This
decline was offset by an increase in sales for the InCirT division of $2.7
million for the same period. The decline in sales for the Cable division has
been a result of delays in expected contracts for new orders. The decline in
sales at the Cable division was offset by an increase in sales at InCirT as a
result of a contract expansion with Alaris Medical Systems. Monthly sales
averaging approximately $700,000 in the third quarter increased to an average of
approximately $1.5 million by the end of fiscal 1998. The increased volume at
InCirT from Alaris has declined in fiscal 1999.
Cost of sales. Cost of sales as a percentage of net sales decreased
from approximately 96% in fiscal 1997 to 93% in fiscal 1998. This decrease in
costs was primarily attributable to the Cable division as a result of
significant reserves for inventory obsolescence booked in fiscal 1997 and the
loss of production contracts which had very low margins due to competitive
pricing.
Operating expenses. Operating expenses increased from $3,659,583 in
1997 to $4,736,421 in 1998 for a total increase of $1,076,838. This increase
resulted from the following areas:
o An increase of $290,089 in research and development costs based on an
entire year's operations for the PowerStream division in fiscal 1998
compared to only six months in fiscal 1997.
19
o An increase in general and administrative expenses totaling $432,165
resulting from an increase in legal and accounting fees associated with
potential merger and acquisition negotiations as well as the issuance of
debentures. General and administrative expenses also increased due to
clerical staff increases at the InCirT division as a result of the higher
sales volume associated with the expanded Alaris contract and a
reclassifying of $100,000 in salaries and benefits from marketing expense
in fiscal 1997 to general and administrative expense in fiscal 1998.
o A decline in sales and marketing expenses of $242,022 as a result of
cash flow restrictions and reclassifying $100,000 of salaries and
benefits from marketing expense in fiscal 1997 to general and
administrative in fiscal 1998 due to a change in assignment.
o A decrease in abandoned lease fees of $195,226 which represents a
payment made on the sale of the San Jose division in fiscal 1997.
o An increase in depreciation and amortization expense of $220,867
resulting from normal acquisitions of fixed assets during the year and
a full year's amortization of research and development at PowerStream
compared to a partial year for fiscal 1997 when much of the research
and development costs were being incurred.
o An adjustment for impairment of investment assets totaling $303,351 and
intangible assets totaling $267,414.
Other income and expenses. Pen experienced an increase in other income
and expenses totaling $1,209,240 from $69,162 in fiscal 1997 to $(1,140,078) in
fiscal 1998. This increase stems from two primary sources:
o The fiscal 1997 statements included a gain on the sale of the San Jose
division totaling $611,912 which is not included in fiscal 1998.
o Interest expense totaling $541,052 resulting from the issuance of
debentures. The difference between the market price of the stock and
the most favorable conversion price stated in the debenture at the time
the debentures are issued is considered as additional interest expense
and must be recognized over the period until the debentures are
convertible into shares of common stock
Net loss and loss per share. Net losses increased to ($5,445,383)
($1.24) per share in fiscal 1998 from ($1,735,483) ($0.54) per share in fiscal
1997 or an increase of ($3,709,900) ($0.70).
This increased loss resulted from the following:
o the gain on the sale of the San Jose division which was recorded in fiscal
1997 for $611,912
20
with no corresponding entry in fiscal 1998,
o the increased interest expense of $541,052 associated with the debentures
recorded in fiscal1998,
o the negative adjustment of $1,071,211 to tax and investment assets due to
impaired value
o the increase in operating expenses of $1,076,838 and
o a tax benefit of $1,109,600 recorded in fiscal 1997 which was not repeated
in fiscal 1998.
Inflation and Seasonality
Pen does not believe that it is significantly impacted by inflation.
Historically, the computer industry sales tend to decline in December, January,
July and August when activity in the personal computer industry as a whole is
reduced. However, Pen has recently diversified into the medical and
telecommunications products in an effort to offset the seasonality in the
computer industry.
Year 2000 Readiness
In general, the Year 2000 issue relates to computers and other systems
being unable to distinguish between the years 1900 and 2000 because they use two
digits, rather than four, to define the applicable year. Systems that fail to
properly recognize this information will likely generate erroneous data or cause
a system to fail possibly resulting in a disruption of operations. Pen's
products do not incorporate such date coding so Pen's efforts to address the
Year 2000 issue fall in the following three areas:
o Pen's information technology (IT) systems;
o Pen's non-IT systems (i.e., machinery, equipment and devices which utilize
technology which is "built-in" such as embedded mirocontrollers); and
o third-party suppliers.
Pen's management has initiated a program to prepare for compliance in
these three areas and expects Pen programs to be implemented and completed by
July 1999. Costs will be expensed as incurred and currently are not expected to
be material.
Pen believes its current IT systems, with a few exceptions which are
being addressed, are year 2000 compliant. Pen is currently conducting an
inventory of non IT systems which may have inadequate date coding and will
commence efforts to remedy any non-compliant systems by the end of June 30,
1999. Third party suppliers and customers present a different problem in that
Pen cannot control the efforts of Pen third parties. Pen anticipates requesting
confirmations from third party suppliers that they are year 2000 compliant to
avoid disruptions of services and supplies. However, any failure on the part of
companies with whom Pen transacts business to be year 2000 compliant on a timely
basis may adversely affect Pen's operations.
Liquidity and Capital Resources
The working capital deficit at March 31, 1999 is ($668,388) compared to
($2,263,049) at
21
December 31, 1998 and ($1,714,606) at September 30, 1998. The decrease in
negative working capital is primarily due to 1) the decrease in accounts payable
and Pen's line of credit from the proceeds of the sale of the Cable division,
and 2) the issuance during the second quarter of the Series A Preferred Stock.
During the second quarter of fiscal 1999 Pen sustained losses from
operations of ($1,200,438) compared to a loss incurred during the first fiscal
quarter of ($1,038,304). Pen's management believes that a significant portion of
the losses in the second quarter were due to nonrecurring items. These include
increases in general and administrative expenses related to divisional sale and
potential merger transactions. If these nonrecurring items were excluded, Pen's
management believes that the loss from operations in the second quarter would
have been only approximately $600,000, or roughly half of that incurred during
the first quarter.
Cash from operations has not been sufficient during the recent quarter
or during the current fiscal year to cover expenses. Pen anticipates an increase
in sales and new contracts with more profitable margins generating a return to
profitability beginning in the third quarter of fiscal 1999. Pen's management
has also taken steps to reduce losses by selling the Cable division to CTG Inc
and by signing a letter of intent to sell the MotoSat division. With the sale of
these two divisions, Pen expects to save approximately $170,000 per month in
operating costs and interest. The sale of the Cable division yielded proceeds of
$1,075,000.
As a result of these losses, Pen has had to raise cash in fiscal 1998 and
1999 through two bridge loans, the exercise of warrants from a reduction in
exercise price, and issuing two series of convertible preferred stock. The
bridge loans raised a total of $900,000 while the exercise of warrants yielded
an additional $213,000. In addition to raising approximately $490,000 from the
exercise of stock warrants, Pen completed private placements of debentures
totaling $2.5 million. Debentures totaling $1,100,000 were issued during
December 1997, $400,000 were issued in April 1998 and the remaining $1,000,000
were issued in June 1998. Of these debentures, $1,000,000 were converted into
shares of common stock in fiscal 1998 and another $1,175,000 have been converted
in fiscal1999. The conversion of these debentures increases shareholder equity
and net tangible assets and reduces the interest charge.
Pen's management estimates that approximately $1 million may have to be
raised to sustain operations. Funds have been realized from the issuance of
Series A Preferred Stock and Series B Preferred Stock in the second and third
fiscal quarters of fiscal 1999. 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% in the
case of the Series A Preferred Stock and 20% in the case of the Series B
Preferred Stock (the "Conversion Price"). The maximum Conversion Price for the
Series A Preferred Stock is $1.17 per share. The shares of Series B Preferred
Stock are convertible into Common Stock at the same Conversion Price as the
Series A Preferred Stock with a maximum Conversion Price of $0.79 per share.
Warrants to acquire 335,453 shares of Common Stock at
22
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. These two private
placements resulted in total net proceeds to Pen of $1,650,000 in addition to
paying approximately $800,000 of outstanding notes payable. The sale of the
Cable and Moto-Sat divisions, the anticipated increases in sales from the
remaining divisions and the anticipated return to profitability should generate
sufficient cash to fund operations for the rest of calendar year 1999. However,
Pen may be unable to raise funds and the anticipated increases in sales may not
occur.
23
BUSINESS
General
We develop and produce on a turnkey basis, contract manufacturing
solutions for original equipment manufacturers ("OEMs") in the computer,
computer peripheral, telecommunications, instrumentation, medical and testing
equipment industries. We currently operate three divisions: 1) the InCirT
division, located in Irvine, California, provides sophisticated ISO
9002-certified assembly and testing services for complex printed circuit boards
and subsystems; 2) the PowerStream division, located in Orem, Utah, designs and
manufactures custom power supplies, battery chargers and uninterruptible power
supply (UPS) systems; and 3) the MotoSat division, located in Salt Lake City,
Utah, manufactures mobile satellite equipment. On February 5, 1999, we closed
the sale of our Pen Cable division, located in Salt Lake City, Utah, to a
subsidiary of CTG, Inc. We are also currently negotiating the sale of the
MotoSat division. During fiscal 1996 and a portion of fiscal 1997 we operated a
division located in San Jose, California (the "San Jose Division"). We sold the
San Jose Division on November 12, 1996. (See Note C of Notes to Financial
Statements for September 30, 1998 and 1997).
Summary of Current Year Events and Subsequent Events
Since the end of fiscal 1998, Pen has entered into several agreements
which have had, or will have, a material impact on Pen. Over the course of
fiscal 1998, Pen experienced a lower level of profitability than was anticipated
at the beginning of the year and Pen has consequently experienced continued cash
flow problems. The lower than expected level of profitability has been the
result of several delays in expected contracts with new customers and lower
margins realized on a new contract that yielded significantly higher sales. For
most of the year, the market price of Pen's stock was sufficient to raise
additional cash to support the negative cash flow from operations. Pen's stock
price has since declined and Pen's securities have been delisted from the Nasdaq
National Market.
Pen signed a Letter of Intent in June 1998 to enter into merger discussions
with Touche Electronics, Inc. (Touche), a subsidiary of TMCI Electronics Inc.
(TMCI). The intent to merge with Touche was seen by the Board of Directors of
Pen as a means to take advantage of synergies resulting from the strategic mix
of the two companies' products and vertical integration which would result from
the merger. The merger would also supply needed working capital to help fund the
operations of Pen's divisions. As due diligence was conducted by each company,
the ratio of stock conversion became less attractive to Pen and the merger
discussions were terminated.
In September 1998 Pen entered into discussions with a prospective buyer
for the MotoSat and the Pen Technology Cable divisions because of continued
losses generated by these divisions and the lack of capital to adequately fund
and grow the business of these two divisions. Moreover, new management
determined that the MotoSat business and products did not strategically fit the
goals and directions established by Pen. Pen has entered into a letter of intent
with James
24
Pendleton, Pen's former CEO, for the sale of the MotoSat division and
anticipates this sale will be completed in summer 1999. The sale will not
generate cash proceeds but will eliminate monthly operating losses associated
with MotoSat.
In February 1999, Pen closed an Asset Purchase Agreement with Pen
Cabling Technologies, LLC, a wholly-owned subsidiary of CTG, Inc. ("CTG"),
whereby CTG acquired substantially all of the assets relating to the Cable
division. The purchase price was $1,075,000 and the assumption by CTG of certain
lease obligations of the Cable division. The purchase price was based upon the
approximate book value of the assets and liabilities divested. Pen, CTG, and its
subsidiary also entered into a Consulting Agreement whereby Pen will receive
royalties on future sales of the Cable division business and products. Of the
purchase price, $847,823 was paid to Pen's principal lender, FINOVA, and
$227,177 was paid to satisfy certain outstanding liabilities relating to the
Cable division which were not assumed by CTG. The transaction resulted in a loss
for financial reporting purposes of approximately $1 million.
In December 1998, Pen entered into an agreement with Laminating
Technologies, Inc. ("LTI"), whereby a newly formed subsidiary of Pen would merge
into LTI and LTI would become a wholly-owned subsidiary of Pen. This agreement
was terminated by mutual agreement of the parties in April 1999.
In December 1998, Pen signed a letter of intent with Transdigital
Communications Corporation (TCC) to negotiate a possible merger. TCC is a
privately held developer of entertainment and database systems for the
transportation markets which includes narrow bodied commercial aircraft and
cruise ships. Pen believes that its manufacturing capability will provide
vertical integration to TCC as it begins production of these database systems
for their customers while giving Pen the opportunity to diversify its product
offerings. Pen and TCC are currently engaged in due diligence investigations and
the negotiation or terms for definitive contracts. Pen's management can not
determine at the present time if it is likely that the merger with TCC will be
completed.
Principal Products and Services
Pen focuses on providing services to OEMs interested in utilizing
contract manufacturing for some or all components incorporated in OEM products.
OEMs have been increasing their use of contract manufacturers to provide
components and expertise in order to reduce the capital investment necessary to
manufacture subassemblies thereby enabling the OEMs to focus their resources on
their end products.
Advances in technology of electronic products and increased unit volume
would require OEMs to invest more heavily in internal manufacturing through
increased working capital, capital equipment, labor, systems and infrastructure.
Use of contract manufacturers such as Pen allow OEMs to maintain advanced
manufacturing capabilities while minimizing overall resource requirements.
Contract manufacturers also allow OEMs to focus more sharply on their own core
25
competencies where they add the greatest value such as product development and
marketing.
Pen markets its products and services to its customers through in-house
salesmen and independent sales representatives. Pen's OEM customers are located
throughout the continental U.S. and Canada and certain foreign countries.
The following is a summary of the products and markets of each of Pen's
three divisions.
InCirT Division
Pen's InCirT division is engaged in the Electronic Manufacturing
Services Industry and provides sophisticated ISO 9002-certified assembly and
testing services for complex printed circuit boards and subsystems through
advanced surface mount technology (SMT) manufacturing as well as traditional
through-hole assembly. These products are used primarily in computer
instrumentation, testing, and medical equipment.
The InCirT division has experienced a significant increase in sales as
a result of a contract with Alaris Medical Systems (See "Dependence on Major
Customers"). The Alaris contract, while providing a significant increase in
revenue for the InCirT division, provides for lower margins than most contracts
secured by the InCirT division. (See "Management's Discussion and Analysis or
Plan of Operation"). In March and April 1999, Pen began to secure business with
new customers for the InCirT division, including ongoing contracts with Imaging
Technologies Corporation, TCC, and Xtend Micro Products.
PowerStream Division
The PowerStream division designs custom power supplies, battery
chargers and UPS systems for OEMs and has been able to produce several of those
designs for sale to other companies. It is expected that a major share of Pen's
future business will come from this division and market. Since Pen acquired the
PowerStream division, sales of PowerStream products grew from an average monthly
amount of $42,935 for fiscal 1998 to $270,000 for the month of December1998. The
division has a major contract with L3 Communications which is expected to yield
significant sales in the next fiscal year. (See "Dependence on Major
Customers"). The power supply units being supplied to L3 are being manufactured
in China. Contracts with other customers are manufactured by domestic contract
manufacturers.
PowerStream has no material backlog of orders but suffers instead from
delays by their customers in the projected shipping dates for orders placed.
These delays have resulted from product modifications, testing by the customers
of the products they are purchasing and securing quality approvals from various
customer and independent agencies. Most delays have been remedied and greater
sales are now beginning to materialize.
MotoSat Division
26
The MotoSat division manufactures satellite receivers for mobile homes
and yachts. This division markets its products primarily to distributors of
mobile homes and boats with a small percentage being sold to electronics
distributors. Marketing projections show that the recreational vehicle business
will grow substantially in the coming years as the "Baby Boom" generation
expands significantly into this consumer market. In addition, many retired
persons are choosing recreational vehicles as their main means of housing in
their golden years which affords low cost and mobility.
MotoSat has also been developing mobile satellite technology allowing
signals to continue to be received as the mobile home or boat receiving the
signal is in motion. This technology is still in the development stage but will
add to the marketability of MotoSat's products once it is developed. Projected
completion on the continual tracking technology is for fiscal 1999.
Pen has entered into a letter of intent for the sale of the MotoSat
division. (See "Summary of Current Year Events and Subsequent Events").
Distribution Methods
Pen receives orders directly from OEM's and ships the product directly
to them. No other distribution method is employed.
Competition
Pen's primary products and services are sold to OEM's in high
technology industries. The computer industry in particular has been under
intense pressure to provide faster and more powerful products at a lower cost.
Consequently, many contracts calling for large production runs are now being
processed in the Pacific Rim countries due to favorable labor rates. As a result
of this sales declined 44% in the Cable division in the last year.
The InCirT division provides services producing products for which the
OEMs do not require large enough quantities to make production in Asia
economical. The InCirT division competes on the basis of price, quality, and
speed of production and delivery. Its principal competitors include Superior
Manufacturing, Comtel, and Qtron, among others.
PowerStream has only a small number of competitors. Furthermore, Pen
has a policy of flexibility in working with customers on product modifications
and the PowerStream products are competitively priced. As a result, PowerStream
has been successful in securing contracts for its products.
The MotoSat division has developed a good reputation among the
recreational vehicle industry. Furthermore, there are not many competitors for
this market. Marketing efforts focus on advertising in industry publications and
displays at RV shows which MotoSat has participated in.
27
Sources and Availability of Raw Material
There are a large number of vendors which provide the raw materials
used by all of Pen's divisions and Pen does not foresee any shortages or other
restrictions on the availability of the necessary raw materials. Pen's principal
suppliers are Arrow Electronics, Praegitzer Industries, Future Electronics, and
Winonics.
The availability of raw materials has been hampered by the lack of cash
flow and the corresponding inability to pay vendors in a timely manner. As a
result of slow or untimely payments to vendors, some vendors have withheld
necessary raw materials until payments have been brought current. The impact of
this is potential delays in meeting customer shipping deadlines, incurring
overtime expenses to comply with customer shipping schedules and more expensive
freight costs to have materials arrive in a timely manner, all of which
negatively impact profitability. Through the divestiture of the Cable and
MotoSat divisions, the merger opportunity with TCC, and securing new sales
orders through an expanded sales staff, Pen expects to create a positive cash
flow which will allow for timely payment for the raw materials.
Dependence on Major Customers
Pen sells its products and services principally to OEMs. Because the
products are not sold at retail to the public, Pen is always dependent on having
supply contracts with OEMs. Consequently, at any given time Pen can be dependent
on one or a few major customers until new contracts can be secured.
During the past year, sales of the InCirT division's medical
application SMT has grown substantially with the short-term expansion of a
contract with Alaris Medical Systems. This contract expansion generated 24% of
Pen's total revenues for fiscal 1998. The increase in sales to Alaris have
decreased to levels existing before the contract expansion since its expiration
at the end of 1998. Total sales to Alaris Medical Systems comprised
approximately 59% of Pen's sales in fiscal 1998 and sales to Alaris would
comprise approximately 47% of Pen's sales in fiscal 1999 based on the existing
customer base. The loss of this customer would impair Pen's ability to continue
operating. As the contract expansion winds down, it is critical that InCirT
replace the Alaris contract expansion with other contracts that have higher
margins. Pen is currently investing in efforts to build its marketing and sales
force to assist in this effort. In March and April 1999, Pen began to secure
business with new customers for the InCirT division, including ongoing contracts
with Imaging Technologies Corporation, TCC, and Xtend Micro Products.
Pen's PowerStream division also has significantly increased its sales
as a result of a contract with L3 Communications. Fiscal 1999 projections for L3
comprise 35% of the total projected revenues for PowerStream.
Intellectual Property
28
Pen, through its PowerStream division, has submitted applications for
patents on various technologies developed by PowerStream. These applications are
pending and are in various stages of evaluation. Pen does not have any other
intellectual property.
Effect of Governmental Regulation on Business
Pen is not aware of any existing governmental regulation and does not
anticipate any governmental regulation which materially affects its ability to
conduct its business operations.
Research and Development
Pen had an increase in research and development costs in fiscal 1998
which is related to an entire year of operations for the PowerStream division in
fiscal 1998 as opposed to six months of operations in fiscal 1997.
Compliance with Environmental Laws
Pen has not incurred, and does not presently anticipate incurring, any
material costs in complying with all federal and state environmental laws.
Employees
As of April 30, 1999, Pen employed approximately 135 full and part-time
employees. Five employees were executive personnel, nine were technical and
engineering personnel, 11 were in marketing, sales, administrative, accounting,
information systems, and clerical, and 110 were manufacturing personnel.
Properties
In July 1998, the InCirT division moved into a new manufacturing and
office facility in Irvine, California. This new facility consists of 51,400
square feet of which 46,400 is currently being used; 35,000 square feet of
manufacturing space and 16,400 of office space. The expansion capacity can be
converted into both office and manufacturing space as the need arises. The lease
on the property runs until July of 2005.
The PowerStream division's sales and engineering facilities are located
in Orem, Utah. The premises contain approximately 5,200 square feet of space,
all of which is utilized for sales, research, development, prototype production
and administration. The space is currently rented monthly for $2,450 per month.
Management believes that the above properties and their contents are
adequately covered by insurance and that the square footage is sufficient to
meet Pen's needs.
29
LEGAL PROCEEDINGS
Currently, there are no legal proceedings against Pen of a material
nature.
MANAGEMENT
Directors and Executive Officers.
Pen's directors and executive officers, and their respective ages and
positions with Pen, are set forth below in tabular form. Biographical
information on each person is set forth following the tabular information. There
are no family relationships between any of Pen's directors or executive
officers. Pen's board of directors is currently comprised of six members, each
of whom is elected for a term of one year. Executive officers are chosen by and
serve at the discretion of the Board of Directors.
Name and Age Position
James S. Pendleton, 61 Chairman of Board of Directors
Stephen J. Fryer, 61 President, Chief Executive Officer and Director
Robert Albrecht, 45 Vice President and Chief Financial Officer
Mehrdad Mobasserri, 47 President, InCirT Division
Daniele Reni, 47 Vice President of Engineering; President, PowerStream
Division
Wayne R. Wright, 60 Director; Vice Chairman of the Board of Directors
C. Reed Brown, 52 Director
James E. Harward, 46 Director
Milton Haber, 75 Director
James S. Pendleton was Chairman of the Board of Directors and Chief
Executive Officer of Pen from 1985 through 1998 and is currently President of
Mobile Technology, Inc. Mr. Pendleton attended Foothill College of Business
Administration.
Stephen J. Fryer has served as President and Chief Operating Officer of
Pen since 1998, as a director of Pen since 1995, and as Senior Vice President of
Sales and Marketing from October
30
1996 to October 1997. He has also been Chief Executive Officer since February
1999. From 1989 to 1996, Mr. Fryer was a principal in Ventana International,
Ltd., an Irvine, California based venture capital and private investment banking
firm. Mr. Fryer graduated from the University of Southern California in 1960
with a Bachelors Degree in Mechanical Engineering and has spent over 28 years in
the computer business in the United States, Asia and Europe.
Robert Albrecht has served as the Vice-President and Chief Financial
Officer of Pen since 1998. He was most recently Controller for Star Buffet,
Inc./Summit Family Restaurants from 1997 to 1998, and also was the Controller
for Laidlaw Waste Industry Company, in charge of internal audits and analysis of
business acquisitions, from 1995 to 1997. Mr. Albrecht has a Masters Degree from
Brigham Young University and is a Certified Public Accountant.
Daniele Reni joined Pen in April of 1997 as President of the
PowerStream Technology Division and was appointed the Vice President of
Engineering in 1998. From 1978 to 1980 he was self-employed as an electronic
engineer consultant. From 1980 to 1981, he was a Design Engineer for General
Dynamics and from 1981 to 1984, he was Design Engineer for Teledyne Systems. He
was Project Engineer from 1984 to 1987 in the R&D Department at Quoltron Systems
and from 1987 to 1991, he was the Project Engineer for Power Products for Apple
Computer. He became President and owner of PowerStream Technology, Inc. in 1991
and operated that company until his employment with Pen in 1997.
Mehrdad Mobasserri has been President of InCirT Technology since October
1998. Prior to that he was the Vice President/General Manager for eight years
while InCirT Technology was owned by The Cerplex Group, Inc. Before joining
InCirT Technology, Mr. Mobasseri served in other management positions in the
high technology market place, with responsibility for production, engineering
and sales of contract manufacturing services. He holds a BSME from the State
University of New York.
Wayne R. Wright has served as Vice Chairman of the Board of Directors
since 1985. From 1985 to 1998, he was Chief Financial Officer of Pen. From 1984
to 1985, he was Vice President and Chief Financial Officer of PenTec
Enterprises. From 1968 to 1984, he was Controller, Vice President of Operations
and Division General Manager for Beehive International, a computer peripheral
company. Mr. Wright received his Bachelor of Science Degree in Accounting and
Finance from the University of Utah.
C. Reed Brown has served as a director of Pen since 1989. Since 1973,
he has been a practicing attorney. From 1992 to 1996 he served as Vice President
and General Counsel of Exerhealth, Inc.
James E. Harward received his B.A. from Brigham Young University and his
J.D. from the University of California, Hastings School of Law. He was in
private practice for the following six years. For five years he was an
Administrative Law Judge for the Utah State Tax Commission after which he became
Director of Legal Affairs for the Utah State Industrial Commission. For the two
31
years following that, he was corporate attorney for Sinclair Oil, and from 1997
to 1998 he was President of ELM Management and Leasing. He has been a director
of Pen since February 1997.
Milton Haber has been the CFO of Airline Management Corporation since
1996 and is a private investor. From 1949 through 1983 Mr. Haber was a business
consultant, small business owner and a private investor. He attended Brooklyn
College from 1946 through 1948 after serving in the United States Air Force
during World War II.
EXECUTIVE COMPENSATION
The following table shows the compensation paid by Pen to its Chairman
and Chief Executive Officer during fiscal 1998, and Pen's other most highly paid
executive officer in fiscal 1998. None of the other executive officer's total
annual salary and bonus exceeded $100,000 for the years presented.
Summary Compensation Table
Annual Compensation
Name and Principal Position
Fiscal
Year Salary Bonus
James S. Pendleton 1998 $139,000 0
Chairman 1997 $144,236 $6,000
1996 $133,500 $45,000
Stephen J. Fryer 1998 $108,000 0
President 1997 $67,053 $45,000
Mr Fryer was not an officer of Pen in fiscal 1996. Mr. Fryer replaced Mr.
Pendleton as CEO in February 1999. The table above does not include certain
insurance, the use of a car, and other personal benefits, the total value of
which does not exceed $50,000 or 10% of each person's salary and bonus. Neither
Mr. Pendleton nor Mr. Fryer were granted any stock options in fiscal 1998. The
following table gives information regarding stock options held by Messrs.
Pendleton and Fryer as of September 30, 1998.
Aggregated Option/SAR Exercises in Fiscal
Year 1998 and Fiscal Year End Option Values
Shares Acquired Number of Securities Value of Unexercised
Name on Exercise Value Realized Underlying In-the-Money Options
Unexercised
32
Options at
Fiscal Year End
Exercisable / Exercisable /
Unexercised Unexercised
James S. Pendleton -0- None 200,000/200,000 0/0
Stephen J. Fryer -0- None 28,500/28,500 0/0
PRINCIPAL STOCKHOLDERS
The following table sets forth the number of shares of Pen's common
stock beneficially owned as of April 30, 1999, (i) by each person who is known
by Pen to own beneficially more than 5% of Pen's common stock, (ii) by each
director, (iii) by each of Pen's named executive officers, and (iv) by all
directors, director nominees and executive officers, as a group, as reported by
each person. Unless otherwise indicated, each stockholder's address is c/o Pen,
1601 Alton Parkway, Irvine, California 92606.
Name and Address Amount and Nature Percentage of Outstanding
of Beneficial Owner of Beneficial Owner(1) Common Stock
James S. Pendleton (2) (3) 761,295 9.6%
Stephen J. Fryer (4) 186,500 2.4
Robert Albrecht 20,000 *
Wayne R. Wright (5) 464,109 5.8
C. Reed Brown (6) 60,000 *
Milton Haber 12,222 *
James E. Harward (7) 4,000 *
James S. Pendleton Family Trust 456,441 5.9
JWGenesis Securities, Inc. (8) 535,000 6.5
980 North Federal Highway
Boca Raton, FL 33432
AMRO International, S.A. (9)(12) 1,560,550 16.9
Grossmunster Platz 26
Zurich, Switzerland
Austost Anstalt Schaan (10)(12) 780,274 9.2
Landstrasse 163
Vaduz, Liechenstein
Balmore Funds, S.A. (10)(12) 780,274 9.2
Trident Chambers
Road Town, Tortola
33
British Virgin Islands
RBB Bank AG (11)(12) 1,220,402 13.7
Burgring 16
Graz, Austria
All Officers and Directors as a Group
(7 persons) (2) (3) (4) (5) (6) (7) 1,508,126 18.1%
* Less than 1%.
(1) Except as noted otherwise, all shares are owned beneficially and of record.
(2) Includes 456,441 shares of Common Stock held by the James S. Pendleton
Family Trust of which Mr. Pendleton is a trustee and beneficiary,
15,144 shares in Mr. Pendleton's account in Pen's ESOP, and 200,000
shares that are unissued but with respect to which Mr. Pendleton has
the right to acquire beneficial ownership through the exercise of stock
options within 60 days of the date of this filing.
(3) Includes 89,710 shares of Common Stock held by the Virginia C.G.
Pendleton Family Trust. Mr. Pendleton has voting control of these
shares but disclaims beneficial ownership.
(4) Includes 98,500 shares that are unissued but with respect to which Mr.
Fryer has the right to acquire beneficial ownership through the
exercise of stock options within 60 days of the date of this filing.
(5) Includes 100,000 shares held by the Wayne R. Wright Family Trust,
50,000 shares held by the LaRae Wright Family Trust, of which Mr.
Wright is a trustee and beneficiary, 7,109 shares in Mr. Wright's
account in Pen's ESOP, and 267,000 shares that are unissued but with
respect to which Mr. Wright has the right to acquire beneficial
ownership through the exercise of stock options within 60 days of the
date of this filing.
(6) Includes 60,000 shares that are unissued but with respect to which Mr.
Brown has the right to acquire beneficial ownership through the
exercise of stock options within 60 days of the date of this filing.
(7) Includes 4,000 shares that are unissued but with respect to which Mr.
Harward has the right to acquire beneficial ownership through the
exercise of stock options within 60 days of the date of this filing.
(8) Consists of shares issuable upon exercise of warrants.
(9) Consists of shares issuable upon conversion of 500 shares of Series A
Preferred Stock and 500 shares of Series B Preferred Stock based on a
market price equal to $0.8438 per share. See "Description of Capital
Stock -- Preferred Stock" for the formulae for calculating the
34
conversion price of the Preferred Stock. Also includes warrants
exercisable to acquire 122,727 shares of Common Stock.
(10) For each of Austost Anstalt Schaan and Balmore Funds, S.A. consists of
shares issuable upon conversion of 250 shares of Series A Preferred
Stock and 250 shares of Series B Preferred Stock based on a market
price equal to $0.8438 per share. See "Description of Capital Stock --
Preferred Stock" for the formulae for calculating the conversion price
of the Preferred Stock. Also includes for each warrants exercisable to
acquire 61,363 shares of Common Stock.
(11) Consists of shares issuable upon conversion of 800 shares of Series A
Preferred Stock based on a market price equal to $0.8438 per share. See
"Description of Capital Stock -- Preferred Stock" for the formulae for
calculating the conversion price of the Preferred Stock. Also includes
warrants exercisable to acquire 105,000 shares of Common Stock. RBB
Bank disclaims beneficial ownership of all of the shares of Common
Stock .
(12) The terms of the Series A and Series B Preferred Stock prevent the
holders from converting their shares of Preferred Stock if the
conversion would cause the holder to be deemed the beneficial owner of
more than 9.9% of Pen's Common Stock, except with the prior consent of
the holder.
Except as set forth above, Pen knows of no beneficial owner of five
percent or more of Pen's Common Stock, and does not know of any arrangement
which may at a subsequent date result in a change of control of Pen other than
the potential merger with TCC. See "Business - Summary of Current Year Events
and Subsequent Events."
35
CERTAIN TRANSACTIONS
In 1989, Pen loaned Mr. Pendleton $370,335, bearing interest at 10% per
annum. The note was satisfied in full as of September 30, 1996. Interest income
received was $5,006 during fiscal 1996.
During fiscal 1995, Pen guaranteed personal indebtedness of Mr.
Pendleton in the maximum amount of $180,000. This indebtedness was paid in full
during fiscal 1996, and the guarantee has been released.
During fiscal 1997, Pen paid to ELM Management and Leasing, of which
Mr. Harward was the president, approximately $55,000 for payroll processing and
employee benefit services.
During the first fiscal quarter of fiscal 1999, Pen entered into a
letter of intent with a company controlled by Mr. Pendleton for the sale of the
MotoSat division.
SELLING STOCKHOLDERS
An aggregate of up to 10,777,453 shares of Common Stock are being
offered for sale by Selling Stockholders. The following table sets forth certain
information with respect to the Selling Stockholders. Pen will not receive any
of the proceeds from the sale of the shares of Common Stock, although it will
receive proceeds from the exercise of the warrants or stock options, if
exercised.
Securities Owned Securities Securities to be Owned
Name Before Offering(1) to be Sold after Offering(2)
------------------- ----------- -----------------
Amro International, S.A.(3) 3,622,727 3,622,727 0
Robert Albrecht 20,000 13,000 7,000
Atlas Trust 200,000 200,000 0
Austost Anstalt Schaan(3) 1,811,363 1,811,363 0
Balmore Funds, S.A.(3) 1,811,363 1,811,363 0
BNC Bach International Ltd. 210,000 210,000 0
C. Reed Brown 60,000 20,000 40,000
Richard S. Carpenter 178,000 153,000 25,000
Robert "Duke" DeForrest 81,000 25,000 56,000
FINOVA Capital Corporation 125,000 125,000 0
36
Stephen J. Fryer(4) 186,500 80,000 106,500
James E. Harward 4,000 3,000 1,000
Jeffery M. Lamberson 147,000 147,000 0
JWGenesis Financial Corp.(5) 535,000 90,000 445,000
Liviakis Financial
Communications, Inc. 281,250 281,250 0
Mehrdad Mobaserri 10,000 8,000 2,000
Gordon Mundy 125,000 125,000 0
James S. Pendleton(6) 761,295 65,000 696,295
Robert B. Prag 93,750 93,750 0
Carl Rasmussen 47,348 8,000 39,348
RBB Bank AG(3)(7) 1,705,000 1,705,000 0
Redstone Securities, Inc. 50,000 50,000 0
Alan Weaver 70,000 40,000 30,000
Wayne R. Wright(8) 464,109 90,000 374,109
- --------------------
(1) Beneficial ownership is determined in accordance with the rules of the
SEC as of the date of this Prospectus and generally includes voting or
investment power with respect to securities and includes any securities
which the person has the right to acquire within 60 days of the date of
this Prospectus through the conversion or exercise of any security or
right. See also note 3 below.
(2) Assumes that all of the offered shares held by the Selling Stockholders
are sold, and that the Selling Stockholders acquire no additional
shares of Common Stock before the completion of this offering.
(3) Includes Common Stock issuable upon conversion of Series A Preferred
Stock determined based upon a conversion price of the Series A
Preferred Stock equal to $0.50 per share and of Series B Preferred
Stock based on a conversion price equal to $0.20 per share. See
"Description of Capital Stock -- Preferred Stock" for the actual
conversion formulas for the Series A and Series B Preferred Stock.
Accordingly, the actual number of shares of Common Stock beneficially
owned by these Selling Stockholders may be higher or lower than the
number of shares shown in this table, and will change based upon the
actual market price of Pen's Common Stock. The terms of the Series A
and Series B Preferred Stock prevent the holders from converting their
shares of Preferred Stock if the conversion would
37
cause the holder to be deemed the beneficial owner of more than 9.9% of
Pen's Common Stock, except with the prior consent of the holder. Also
includes Common stock issuable upon the exercise of warrants.
(4) After the sale of all of the Common Stock listed above, Mr. Fryer would
own, control, or have the right to acquire approximately 1.4% of Pen's
outstanding Common Stock.
(5) After the sale of all of the Common Stock listed above, JWGenesis
Financial Corp. or its affiliates would have the right to acquire
approximately 5.5% of Pen's outstanding Common Stock.
(6) After the sale of all of the Common Stock listed above, Mr. Pendleton
would own, control, or have the right to acquire approximately 8.9% of
Pen's outstanding Common Stock.
(7) RBB Bank disclaims beneficial ownership of all of the shares of Common Stock
.
(8) After the sale of all of the Common Stock listed above, Mr. Wright
would own, control, or have the right to acquire approximately 4.8% of
Pen's outstanding Common Stock.
PLAN OF DISTRIBUTION
The common stock offered by this Registration Statement is being
offered on behalf of the Selling Stockholders. This common stock may be sold or
distributed from time to time by the Selling Stockholders, or by others who
received the offered shares from Selling Stockholders. These sales may be
directly to one or more purchasers or through brokers, dealers or underwriters
who may act solely as agents or may acquire the common stock as principals, at
market prices prevailing at the time of sale, at prices related to prevailing
market prices, at negotiated prices, or at fixed prices, which may be changed.
The sale of the common stock offered by this prospectus may be effected in one
or more of the following methods:
o ordinary brokers' transactions;
o transactions involving cross or block trades or otherwise on the OTC
Bulletin Board;
o purchases by brokers, dealers or underwriters as principal and resale by
purchasers for their own accounts by this prospectus;
o "at the market" to or through market makers or into an existing market for
the common stock;
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through
agents;
o through transactions in options, swaps or other derivatives which may or
may not be listed on an exchange;
o in privately negotiated transactions;
o to cover short sales; or
o any combination of the foregoing.
38
From time to time, one or more of the Selling Stockholders may pledge,
hypothecate or grant a security interest in some or all of the offered shares
owned by them, and the pledgees, secured parties or persons to whom the
securities have been hypothecated shall, upon foreclosure in the event of
default, be deemed to be Selling Stockholders. The number of Selling
Stockholder's offered shares beneficially owned by those Selling Stockholders
who so transfer, pledge, donate or assign Selling Stockholders' offered shares
will decrease as and when they take these actions. The plan of distribution for
Selling Stockholders' offered shares sold will otherwise remain unchanged,
except that the transferees, pledgees, donees or other successors will be
Selling Stockholders. In addition, a Selling Stockholder may, from time to time,
sell short Pen's common stock, and then this prospectus may be delivered in
connection with the short sales and the offered shares may be used to cover the
short sales.
A Selling Stockholder may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the common
stock in the course of hedging the positions they assume with a Selling
Stockholder, including, without limitation, in connection with distributions of
the common stock by broker-dealers. A Selling Stockholder may also enter into
option or other transactions with broker-dealers that involve the delivery of
the offered shares to the broker-dealers, who may then resell or otherwise
transfer the offered shares. A Selling Stockholder may also loan or pledge the
offered shares to a broker-dealer and the broker-dealer may sell the offered
shares so loaned or upon a default may sell or otherwise transfer the pledged
offered shares.
Brokers, dealers, underwriters or agents participating in the
distribution of the offered shares as agents may receive compensation in the
form of commissions, discounts or concessions from the Selling Stockholders
and/or purchasers of the common stock for whom these broker-dealers may act as
agent, or to whom they may sell as principal, or both. Compensation as to a
particular broker-dealer may be less than or in excess of customary commissions.
The Selling Stockholders and any broker-dealers who act in connection with the
sale of the offered shares may be deemed to be "underwriters" within the meaning
of the Securities Act of 1933, or the Securities Act, and any commissions they
receive and proceeds of any sale of the offered shares may be deemed to be
underwriting discounts and commissions under the Securities Act. Neither Pen nor
any Selling Stockholder can presently estimate the amount of this compensation.
Pen knows of no existing arrangements between any Selling Stockholders or any
other stockholder, broker, dealer, underwriter or agent relating to the sale or
distribution of the offered shares.
Pen will pay substantially all of the expenses incident to the
registration, offering and sale of the offered shares to the public other than
commissions or discounts of underwriters, broker-dealers or agents. Pen has also
agreed to indemnify some of the Selling Stockholders and certain related persons
against certain liabilities, including liabilities under the Securities Act.
Pen has advised the Selling Stockholders that while they are engaged in
a distribution of the offered shares included in this prospectus they are
required to comply with Regulation M promulgated under the Exchange Act. With
certain exceptions, Regulation M precludes any Selling
39
Stockholder, any affiliated purchasers, and any broker-dealer or other person
who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security. All of
the foregoing may affect the marketability of the offered shares.
DESCRIPTION OF CAPITAL STOCK
Pen is authorized to issue up to 50,000,000 shares of Common Stock, par
value $0.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01
per share, of which 7,693,954 shares of Common Stock and 2,800 shares of
Preferred Stock currently are outstanding. The following is a summary of the
material terms of Pen's Common Stock, Preferred Stock and certain other
securities.
Common Stock
Holders of the Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. See "Dividend
Policy." Upon the liquidation, dissolution, or winding up of Pen, the holders of
Common Stock are entitled to share ratably in all assets of Pen which are
legally available for distribution, after payment of all debts and other
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
being sold by Pen in this offering will be, when issued and delivered, validly
issued, fully paid and nonassessable.
Warrants
Each Warrant entitles the holder to purchase one share of Pen's Common
Stock at a price of $6.50 per share, subject to adjustment in certain
circumstances, until November 17, 2000, at which time the Warrants will expire.
The Warrants are redeemable in whole and not in part by Pen upon 30 days' notice
at a price of $.05 per Warrant if the average closing bid price of Pen's Common
Stock equals or exceeds $9.00 for any 20 trading days ending on the third day
prior to the day on which Pen mails the notice of redemption to the Warrant
holders. In the event Pen gives notice of its intention to redeem the Warrants,
a holder would be forced to either exercise his Warrant within 30 days of the
notice of redemption or accept the redemption price. The holders of Warrants
will have exercise rights until the close of business on the date fixed for the
redemption thereof.
The Warrants are subject to a Warrant Agreement between Pen and
American Stock Transfer & Trust Company, New York, New York, as "Warrant Agent."
The shares of Pen's Common Stock underlying the Warrants, when issued upon
exercise thereof and payment of the purchase price, will
40
be fully paid and nonassessable, and Pen will pay any transfer tax incurred as a
result of the issuance of Common Stock to the holder upon exercise.
The Warrants contain provisions that protect holders against dilution
by adjustment of the exercise price in certain events such as stock dividends
and distributions, stock splits, recapitalizations, mergers, and consolidations.
Pen will not be required to issue fractional shares upon the exercise of a
Warrant. The holder of a Warrant will not possess any rights as a stockholder of
Pen until such holder exercises the warrant. A copy of the form of Warrant
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
Preferred Stock
The Board of Directors is authorized, subject to any limitations
prescribed by the laws of the State of Utah, but without further action by Pen's
stockholders, to provide for the issuance of Preferred Stock in one or more
series, to establish from time to time the number of shares to be included in
each such series, to fix the designations, powers, preferences and rights of the
shares of each such series and any qualifications, limitations or restrictions
thereof, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding) without any
further vote or action by the stockholders.
The Board of Directors may authorize and issue Preferred Stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of Common Stock. In addition, the issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of Pen.
Pen has issued 1,800 shares of Series A Preferred Stock and 1,000
shares of Series B Preferred Stock. The number of shares of Common Stock
issuable upon conversion of the Series A and Series B Preferred Stock is that
number of shares of Common Stock equal to the quotient obtained by dividing (i)
the Stated Value of the Series A and Series B Preferred Stock ($1,000 per
share), plus stock dividends, divided by (ii) the average of the two lowest
closing bid prices for the Common Stock during the period of 22 consecutive
trading days ending with the last trading day prior to the date of conversion
after discounting that market price by 15% in the case of Series A Preferred
Stock and 20% in the case of Series B Preferred Stock. The maximum conversion
prices are $1.17 per share for the Series A Preferred Stock and $0.79 per share
for the Series B Preferred Stock. No holder of the Series A or Series B
Preferred Stock is entitled to convert or exercise such securities to the extent
that the shares to be received by such holders upon such conversion or exercises
would cause such holders in the aggregate to beneficially own more than 19.9% of
the outstanding Common Stock of Pen following such conversion until such time as
Pen's stockholders have ratified the issuance of the Series A and Series B
Preferred Stock, or individually to beneficially own more than 9.9% of Pen's
outstanding Common Stock at any time.
41
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our stock may fall as a result of sales of a large
number of shares of common stock in the market after this offering or the
perception that sales could occur.
There are 7,693,954 shares of common stock outstanding. All but 824,642
of these shares are fully transferable without restriction or further
registration under the Securities Act or are eligible for sale in the public
market in compliance with Rule 144 under the Securities Act ("Rule 144"). The
other 824,642 shares are held by "affiliates" of Pen (in general, any person who
has a control relationship to Pen) and may be resold only if registered under
the Securities Act or if transferred pursuant to an exemption from registration,
including resales pursuant to Rule 144 and Regulation S under the Securities Act
("Regulation S").
Generally, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
Pen, after at least one year has elapsed from the sale by Pen of the restricted
securities may sell, within any three-month period, a number of shares of
restricted securities that does not exceed the greater of 1% of the total number
of outstanding shares of the same class, or, if the Common Stock is quoted on
Nasdaq or a stock exchange, the average weekly trading volume during the four
calendar weeks preceding the sale. After a period of two years have elapsed from
the date of sale of the restricted securities by Pen or an affiliate thereof,
any person who has not been an affiliate of Pen for at least three months, will
be entitled to sell restricted shares under Rule 144 without regard to the
volume limitations described above.
Up to 347,000 shares of common stock may be issued upon exercise of
outstanding employee stock options. An additional 163,000 shares of common stock
are reserved for issuance pursuant to options available for future grant under
our stock option plans. Up to another approximately 17,820,000 shares are
issuable under other options, warrants, debentures, and convertible preferred
stock. We have filed various registration statements on Forms S-8, S-3 and the
registration statement on Form SB-2 of which this prospectus is a part to
register all of these shares of common stock reserved for issuance under stock
options, warrants, debentures, and preferred stock. As a result, any shares
issued upon exercise of stock options, warrants, debentures, and convertible
preferred stock are available for resale in the public market, subject to
special rules for affiliates.
42
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock
offered hereby have been passed upon for Pen by Oscar D. Folger, Esq., New York,
New York.
EXPERTS
The financial statements of Pen Interconnect, Inc., as of September 30,
1998, and for each of the two years then ended have been audited by Grant
Thornton LLP, independent certified public accountants, as set forth in their
report appearing therein, and are included in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
INDEMNIFICATION
The Certificate of Incorporation of Pen provides that all directors,
officers, employees and agents of Pen shall be entitled to be indemnified by Pen
to the fullest extent permitted by law. The Certificate of Incorporation also
provides as follows:
The corporation shall, to the fullest extent permitted by the Act, as
the same may be amended and supplemented, indemnify all directors, officers,
employees, and agents of the corporation whom it shall have power to indemnify
thereunder from and against any and all of the expenses, liabilities, or other
matters referred to therein or covered thereby. Such right to indemnification or
advancement of expenses shall continue as to a person who has ceased to be a
director, officer, employee, or agent of the corporation, and shall inure to the
benefit of the heirs, executives, and administrators of such persons. The
indemnification and advancement of expenses provided for herein shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement may be entitled under any bylaw, agreement, vote of stockholders or
of disinterested directors or otherwise. The corporation shall have the right to
purchase and maintain insurance on behalf of its directors, officers, employees
or agents to the full extent permitted by the Act, as the same may be amended or
supplemented.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers or persons
controlling Pen pursuant to the foregoing provisions, or otherwise, Pen has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
43
WHERE YOU CAN FIND FURTHER INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission ("SEC"). You may
read and copy any document we file at the SEC's public reference rooms at Room
1024, 450 Fifth Street, N.W., Washington, D.C., and at the SEC's Regional
Offices: Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois; 7 World Trade Center, New York, New York, and Suite 500, 5757
Wilshire Boulevard, Los Angeles, California, and with respect to registration
statements, Suite 788, 1375 Peachtree Street, Atlanta, Georgia. Copies of these
materials can be obtained from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, and can also be
accessed electronically through the SEC's Web site at http://www.sec.gov. Pen's
securities are traded on the Nasdaq OTC Bulletin Board and reports and proxy
statements can also be obtained from The Nasdaq Stock Market, Inc. at 1735 K
Street NW, Washington, D. C. 20006.
This prospectus is part of a registration statement we filed with the
SEC. You should rely only on the information or representations provided in this
prospectus. The SEC allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information. This
prospectus also does not contain all the information in the registration
statement. For further information, you can obtain the complete registration
statement and the documents incorporated herein by reference from the SEC
offices listed above.
We have authorized no one to provide you with different information. We
are not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front of the document.
44
INDEX TO FINANCIAL STATEMENTS
Page
Annual Financial Statements
Report of Independent Certified Public Accountants F-2
Balance Sheets as of September 30, 1998 and 1997 F-3
Statements of Operations for the Years Ended
September 30, 1998 and 1997 F-5
Statement of Stockholders' Equity for the Years Ended
September 30, 1998 and 1997 F-6
Statements of Cash Flows for the Years Ended
September 30, 1998 and 1997 F-7
Notes to Financial Statements F-11
Interim Financial Statements
Balance Sheets as of March 31, 1999
(unaudited) and September 30, 1998 F-30
Statements of Operations for the three and six months ended
March 31, 1999 (unaudited) and 1998 (unaudited) F-32
Statements of Cash Flows for the six months ended
March 31, 1999 (unaudited) and 1998 (unaudited) F-33
Notes to Condensed Financial Statements (unaudited) F-35
F-1
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Pen Interconnect, Inc.
We have audited the accompanying balance sheets of Pen Interconnect, Inc. (a
Utah Corporation), as of September 30, 1998 and 1997, and the related statements
of operations, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pen Interconnect, Inc., as of
September 30, 1998 and 1997, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and as of September 30, 1998, the Company's current liabilities exceeded its
current assets by $1,714,606. These factors, among others, as discussed in Note
B to the financial statements, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note B. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Grant Thornton LLP
Salt Lake City, Utah
January 12, 1999
F-2
Pen Interconnect, Inc.
BALANCE SHEETS
September 30,
ASSETS
1998 1997
CURRENT ASSETS
Cash and cash equivalents $ 657,777 $ 272,148
Receivables (Notes D and I)
Trade accounts, less allowance for doubtful accounts of
$108,575 in 1998 and $137,058 in 1997 3,350,970 2,093,056
Current maturities of notes receivable (Notes C and E) 35,675 357,006
Inventories (Notes F and I) 3,680,169 3,355,871
Investments (Note C) 242,739 400,000
Prepaid expenses and other current assets 261,375 289,991
Deferred income taxes (Note L) 41,324 141,324
Total current assets 8,270,029 6,909,396
------------- ---------------
PROPERTY AND EQUIPMENT, AT COST (Notes I, J and K)
Production equipment 2,624,513 2,418,368
Furniture and fixtures 837,594 834,971
Transportation equipment 83,522 69,217
Leasehold improvements 613,248 368,137
4,158,877 3,690,693
Less accumulated depreciation 1,680,266 1,303,063
2,478,611 2,387,630
OTHER ASSETS
Notes receivable, less current maturities (Notes C and E) 3,989 607,524
Deferred income taxes (Note L) 725,667 1,392,658
Goodwill and other intangibles, net of accumulated amortization
(Note Q) 2,031,685 2,287,146
Investments (Note C) 482,220 -
Other 98,455 322,630
3,342,016 4,609,958
$ 14,090,656 $ 13,906,984
============= ===============
The accompanying notes are an integral part of these statements.
F-3
Pen Interconnect, Inc.
BALANCE SHEETS - CONTINUED
September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
--------------- ---------------
CURRENT LIABILITIES
Notes payable (Note G) $ - $ 641,505
Bridge loan (Note H) - 100,000
Line of credit (Note I) 4,064,361 2,237,690
Subordinated debentures (Note P) 1,401,429 -
Current maturities of long-term obligations (Notes I and J) 1,132,538 263,255
Current maturities of capital leases (Note K) 69,621 66,464
Accounts payable 2,926,797 2,053,348
Accrued liabilities 389,889 481,356
Total current liabilities 9,984,635 5,843,618
LONG-TERM OBLIGATIONS, less current
maturities (Notes I and J) 51,965 681,722
CAPITAL LEASE OBLIGATIONS,
less current maturities (Note K) 22,333 70,889
DEFERRED INCOME TAXES (Note L) 165,755 165,755
Total liabilities 10,224,688 6,761,984
COMMITMENTS AND CONTINGENCIES (Notes K, M and N) - -
STOCKHOLDERS' EQUITY (Notes C, I, M and P)
Preferred stock, $0.01 par value, authorized 5,000,000 shares,
none issued - -
Common stock,$0.01 par value, authorized 50,000,000 shares;
issued and outstanding 5,018,437 shares in 1998
and 4,072,863 shares in 1997 50,184 40,729
Additional paid-in capital 10,890,022 8,733,126
Accumulated deficit (7,074,238) (1,628,855)
--------------- ---------------
Total stockholders' equity 3,865,968 7,145,000
$ 14,090,656 $ 13,906,984
=============== ===============
The accompanying notes are an integral part of these statements.
F-4
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
Year ended September 30,
1998 1997
Net sales (Note D) $ 17,091,432 $ 18,238,460
Cost of sales 15,892,456 17,493,122
Gross profit 1,1,98,976 745,338
Operating expenses
Sales and marketing 565,185 807,207
Research and development 550,843 260,554
General and administrative 2,357,875 1,925,710
Abandoned lease fees (Note C) 16,000 211,226
Asset impairment charges (Notes Q and R) 570,765 -
Depreciation and amortization 675,753 454,886
--------------
Total operating expenses 4,736,421 3,659,583
Operating loss (3,537,445) (2,914,245)
Other income (expense)
Interest expense (Note P) (1,100,717) (612,143)
Gain on sale of division (Note C) - 611,912
Other income (expense) net (39,361) 69,393
(1,140,078) 69,162
-------------- ---------------
Loss before income taxes (4,677,523) (2,845,083)
Income tax expense (benefit) (Note L) 767,860 (1,109,600)
NET LOSS $ (5,445,383) $ (1,735,483)
Loss per common share (Note O)
Basic $ (1.24) $ (0.54)
Diluted (1.24) (0.54)
Weighted-average common and dilutive
common equivalent shares outstanding
Basic 4,397,490 3,213,089
Diluted 4,397,490 3,213,089
The accompanying notes are an integral part of these statements.
F-5
Pen Interconnect, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended September 30, 1998 and 1997
Retained
earnings
Common Stock Additional (accumu-
Number paid-in lated
of shares Amount capital deficit) Total
Balances at October 1, 1996 3,033,407 $ 30,334 $ 7,431,669 $ 106,628 $ 7,568,631
Common stock issued in acquisition
(Note C) 150,000 1,500 223,500 - 225,000
Contingent common stock issued in
acquisition (Note C) 55,568 556 82,796 - 83,352
Common stock issued in payment of
notes payable 88,888 889 103,111 - 104,000
Common stock issued upon exercise of
warrants (Note M) 745,000 7,450 892,050 - 899,500
Net loss - - - (1,735,483) (1,735,483)
Balances at September 30, 1997 4,072,863 40,729 8,733,126 (1,628,855) 7,145,000
Common stock issued as compensation 10,833 108 28,953 - 29,061
Common stock issued upon conversion
of subordinated debentures (Note P) 689,332 6,893 993,107 - 1,000,000
Common stock issued upon exercise of
warrants (Note M) 245,000 2,450 487,549 - 489,999
Favorable conversion feature of
subordinated debentures (Note P) - - 639,623 - 639,623
Common stock issued as interest on
subordinated debentures (Note P) 409 4 7,664 - 7,668
Net loss - - - (5,445,383) (5,445,383)
Balances at September 30, 1998 5,018,437 $ 50,184 $ 10,890,022 $ (7,074,238) $ 3,865,968
============ =========== ============== ============== ==============
The accompanying notes are an integral part of this statement.
F-6
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
Year ended September 30,
1998 1997
--------------- ----------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (5,445,383) $ (1,735,483)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 675,753 454,886
Amortization of favorable conversion feature on subordinated
debentures charged to interest expense 541,052 -
Allowance for bad debts (28,482) (118,339)
Allowance for obsolete inventory 634,497 16,641
Deferred income taxes 766,991 (1,068,227)
Loss on disposal of property and equipment (2,779) -
Asset impairment charges 570,765 -
Stock issued in payment of compensation 29,061 -
Stock issued in payment of interest 7,668 -
Gain on sale of division - (611,912)
Changes in assets and liabilities
Trade accounts receivable (1,269,432) 1,624,593
Inventories (958,795) 1,187,444
Prepaid expenses and other current assets (168,165) 62,929
Other assets 30,760 (240,362)
Accounts payable 873,449 (793,139)
Accrued liabilities (91,467) (722,971)
Income taxes - 228,341
Total adjustments 1,610,876 19,884
Net cash used in operating activities (3,834,507) (1,715,599)
Cash flows from investing activities
Purchase of property and equipment (449,814) (243,097)
Issuance of notes receivable - (49,730)
Collection on notes receivable 24,866 5,616
Proceeds from sale of investments 395,690 -
Net cash used in investing activities (29,258) (287,211)
--------------- ----------------
(Continued)
F-7
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended September 30,
1998 1997
Cash flows from financing activities
Proceeds from notes payable - 902,469
Principal payments on notes payable (641,505) (144,244)
Principal payments on bridge loans (100,000) -
Proceeds from issuance of subordinated debentures 2,500,000 -
Net change in line of credit 1,826,671 (2,732,174)
Proceeds from long-term obligations 500,000 1,000,000
Principal payments on long-term obligations (260,474) (128,390)
Principal payments on capital leases (65,297) -
Proceeds from sale of division - 2,000,000
Exercise of warrants 489,999 899,500
Stock issued in acquisition of assets - 308,352
Net cash provided by financing activities 4,249,394 2,105,513
Net increase in cash and cash equivalents 385,629 102,703
Cash and cash equivalents at beginning of year 272,148 169,445
Cash and cash equivalents at end of year $ 657,777 $ 272,148
============== ===============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 605,627 $ 627,522
Income taxes 869 800
Noncash investing and financing activities
Favorable conversion feature of subordinated debentures
As discussed in Note P - Subordinated Debentures, the Company recognized charges
related to the favorable conversion feature of the subordinated debentures
issued during fiscal 1998. The favorable conversion feature was recognized as a
deferred charge against the subordinated debenture balance with an offset to
additional paid-in capital. The deferred charge is being amortized over a period
corresponding to the time restrictions on conversion of the debentures into
stock. The amortization of the favorable conversion feature is recognized as
interest expense. At September 30, 1998, recognition of the favorable conversion
feature and subsequent amortization has resulted in a $541,052 increase in
interest expense, a $98,571 decrease in subordinated debentures, and a $639,623
increase in additional paid-in capital.
(Continued)
F-8
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended September 30, 1998 and 1997
Noncash investing and financing activities - continued
Conversion of subordinated debentures and notes payable
During fiscal 1998, convertible debentures in the amount of $1,000,000 were
converted into 689,332 shares of common stock. During fiscal 1997, 88,888 shares
of common stock were issued in payment of notes. Notes receivable and
investments
During fiscal 1998, the Company received stock in another company with a
guaranteed value of $1,024,000 as satisfaction for $900,000 of notes receivable,
$84,000 of accrued interest, and $40,000 of accounts receivable. Acquisition of
PowerStream Technology, Inc.
Effective April 1, 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of PowerStream Technology, Inc., in exchange for
150,000 shares of the Company's common stock, valued at $1.50 per share (Note
C). Assets acquired and liabilities assumed in conjunction with this acquisition
were as follows:
Accounts receivable, net $ 20,432
Inventories, net 5,900
Prepaid expenses and other current assets 603
Furniture and equipment 53,325
Account payable (169,315)
Accrued liabilities (402,861)
Long-term obligations (32,198)
Liabilities assumed, net (524,114)
Plus stock issued (150,000 shares @ $1.50 per share) 225,000
Excess purchase price over net assets acquired
allocated to goodwill $ 749,114
===========
(Continued)
F-9
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Years ended September 30, 1998 and 1997
Noncash investing and financing activities - continued
Sale of Division
On November 1, 1996, the Company sold substantially all of the assets and
liabilities of its San Jose Division (Note C). Assets and liabilities sold were
as follows:
Accounts receivable, net $ 680,420
Inventories 1,644,336
Prepaid expenses 34,177
Other assets 26,099
Property and equipment 638,373
Accounts payable (277,429)
Accrued liabilities (35,373)
Capital leases (22,515)
Assets sold, net 2,688,088
Less noncash consideration received
Notes $ 900,000
Stock 400,000 1,300,000
Cash received 2,000,000
Gain on sale of division $ 611,912
==============
Pro forma data. The following unaudited pro forma summary represents the results
of operations as if the disposition of the San Jose Division had occurred at the
beginning of the period presented, and does not purport to be indicative of what
would have occurred had the transaction actually occurred on that date, or of
results which may occur in the future. The pro forma weighted shares are
reported as if outstanding at the beginning of the period.
Fiscal year
ended
September 30,
1997
(in thousands
except per
share amount)
Net sales $ 17,955
Operating income (loss) (2,931)
Net loss (2,347)
Loss per share - basic (0.73)
Weighted shares outstanding 3,213
The accompanying notes are an integral part of these statements.
F-10
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the
preparation of the accompanying financial statements follows:
1. Business activity
Pen Interconnect, Inc. (the Company) was incorporated on September 30,
1985, in the State of Utah. The Company is a total interconnection
solution provider offering internal and external custom cable and harness
interconnections, mobile satellite equipment, electronic manufacturing
services industry (EMSI) manufacturing (circuit board assembly) and
custom design and manufacturing of battery chargers, power supplies and
uniterrupted power supply (UPS) systems for original equipment
manufacturers ("OEMs") in the computer, peripherals, telecommunications,
instrumentation, medical and testing equipment industries. The Company's
products connect electronic equipment, such as computers, to various
external devices (such as video screens, printers, external disk drives,
modems, telephone jacks, peripheral interfaces and networks) and connect
devices to one another within the equipment (such as power supplies,
computer hard drives and PC cards). Most of the Company's sales consist
of custom cable interconnections and printed circuit boards. The
Company's customers include OEMs of computers including mainframes,
desktops, notebooks, pens and palmtops, as well as, OEMs of computer
peripheral equipment such as modems, memory cards, LAN adapters, cellular
phones, faxes and printers. Other customers include OEMs of
telecommunications, instrumentation and testing equipment.
2. Inventories
Inventories consist primarily of cable, components, and boards and are
valued at the lower of cost or market (first-in, first-out basis). Costs
include materials, labor, and overhead.
3. Property and equipment
Property and equipment are recorded at cost. Expenditures for additions
and major improvements are capitalized. Expenditures for repairs and
maintenance and minor improvements are charged to expense as incurred.
Gains or losses from retirements and disposals are recorded as other
income or expense.
Property and equipment are depreciated over their estimated useful lives.
Leasehold improvements and assets financed under capital leases are
amortized over their estimated useful lives or the lease term, whichever
is shorter. Depreciation and amortization are calculated using
straight-line and accelerated methods over the following estimated useful
lives:
Years
Production equipment 5-10
Furniture and fixtures 7
Transportation equipment 5-10
Leasehold improvements 7-10
F-11
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Goodwill and other intangibles
The Company capitalized as goodwill, the excess acquisition costs over
the fair value of net assets acquired, in connection with business
acquisitions, which costs are being amortized on a straight-line method
over 15 years. The carrying value of goodwill is reviewed periodically
based on the undiscounted cash flows of the entities acquired over the
remaining amortization period. Should this review indicate that goodwill
is impaired, the Company's carrying value of the goodwill will be reduced
by the estimated shortfall of undiscounted cash flows.
5. Income taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to
reverse. An allowance against deferred tax assets is recorded when it is
more likely than not that such tax benefits will not be realized.
6. Revenue recognition
Revenue is recognized when products are shipped.
7. Cash and cash equivalents
For financial statement purposes, the Company considers all highly liquid
investments with an original maturity of three months or less when
purchased to be cash equivalents.
8. Warranties
The Company's standard warranty is one year on parts and labor. Warranty
costs are accrued and expensed when revenue is recognized based upon the
Company's experience with such costs. Returns have been insignificant to
date.
9. Research and development
Research and development costs are expensed as incurred.
10. Earnings (loss) per common share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128). SFAS No. 128
established new standards for computing and presenting earnings per share
(EPS). SFAS No. 128 requires the presentation of basic and diluted EPS.
F-12
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Basic EPS are calculated by dividing earnings (loss) available to common
stockholders by the weighted-average number of common shares outstanding
during each period. Diluted EPS are similarly calculated, except that the
weighted-average number of common shares outstanding includes common
shares that may be issued subject to existing rights with dilutive
potential. The EPS for prior periods have been restated as required by
SFAS No. 128.
11. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting period. Estimates also affect
the disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those estimates.
Such estimates of significant accounting sensitivity include the
allowance for doubtful accounts and the allowance for inventory overstock
or obsolescence, and the estimated useful lives of goodwill and other
intangibles.
On an ongoing basis, management reviews such estimates, and if necessary,
makes changes to them. The effect of changes in estimates are reflected
in the financial statements in the period of the change. Management
believes the estimates used in determining carrying values of assets as
of the respective balance sheet dates were reasonable at the dates the
estimates were made. During 1998 adjustments to certain estimates were
recognized.
12. Accounting standards not yet adopted
Comprehensive income
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 (SFAS No. 130), "Reporting Comprehensive Income." SFAS No. 130
requires entities presenting a complete set of financial statements to
include details of comprehensive income that arise in the reporting
period. Comprehensive income consists of net earnings or loss for the
current period and other comprehensive income, which consists of revenue,
expenses, gains, and losses, that bypass the statement of operations and
are reported directly in a separate component of equity. Other
comprehensive income includes, for example foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses of
certain investment securities. SFAS No. 130 requires that components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
statement is effective for fiscal years beginning after December 15,
1997, and requires restatement of prior period financial statements
presented for comparative purposes. Adoption of SFAS No. 130 is not
expected to have a material effect on the Company's financial statements.
F-13
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
12. Accounting standards not yet adopted - continued
Disclosure of segments
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (SFAS No. 131), "Disclosures about Segments of the
Enterprise and Related Information." This statement requires an entity to
report financial and descriptive information about their reportable
operating segments. An operating segment is a component of an entity for
which financial information is developed and evaluated by the entity's
chief operating decision maker to assess performance and to make
decisions about resource allocation. Entities are required to report
segment profit or loss, certain specific revenue and expense items and
segment assets based on financial information used internally for
evaluating performance and allocating resources. This statement is
effective for fiscal years beginning after December 15, 1997, and
requires restatement of prior period financial statements presented for
comparative purposes. Adoption of SFAS No. 131 will not have an effect on
the Company's financial position or results of operations, but will
result in disclosures about the Company's products and services not
previously required.
Fair value of financial instruments
SFAS No. 107, "Disclosure About Fair Value of Financial
Instruments," requires certain disclosures regarding the fair value of
financial instruments. Cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are reflected in the financial
statements at fair value because of the short-term maturity of these
instruments. Because of the unique aspects of the subordinated debentures
and long-term debt fair values cannot readily be determined.
Stock options
The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for its employee stock options
rather than adopting the alternative fair value accounting provided for
under FASB No. 123 "Accounting for Stock-Based Compensation" (SFAS No.
123). Under APB 25, because the exercise price of the Company's options
equals or exceeds the market price of the underlying shares on the date
of grant, the Company does not recognize any compensation expense.
Reclassifications
Certain reclassifications have been made to the 1997 financial statements
to conform with the 1998 presentation.
F-14
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE B - FINANCIAL RESULTS AND LIQUIDITY
The Company has incurred net losses of $5,445,383, $1,735,483, and
$709,010 in 1998, 1997, and 1996, respectively. In addition, the Company
has a working capital deficit of $1,714,606 as of September 30, 1998.
These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern.
Although net sales of the Cable division had been declining over the last
few years, the Company believed that these declines would stabilize.
However, the Company's 1998 results produced weaker than anticipated
results, including disappointing sales performance for the Cable and
MOTO-SAT divisions. The Company's operations continued to generate
operating losses and to use rather than provide cash flow. This has
caused the Company to be in violation of certain of its debt covenants.
The Company has issued debentures and increased other borrowings to
provide working capital to help meet current obligations. However, the
Company still currently does not generate enough cash to fund operations,
and opportunities to supplement cash from capital markets are
diminishing.
The Company has formulated plans to satisfy its cash flow requirements.
Management's plans include the following:
Taking advantage of opportunities to divest of unprofitable
divisions. Pursuing possibilities to obtain new and more profitable
sales contracts. Negotiating acquisition and/or merger opportunities
with other companies.
Aggressively reducing corporate overhead costs. Renegotiating its
credit facility with its primary lender.
In connection with their plans, the Company and its major lender have
agreed to restructure its loan agreement, including the loan covenants.
In addition, management has secured new contracts for the PowerStream and
InCirT divisions.
Management has also negotiated with various individuals and companies for
the sale of the MOTO- SAT and Cable divisions. Management has also
actively negotiated mergers and/or acquisitions with other companies to
help bring additional financing resources, new and more profitable sales
contracts, and additional profitable sales from existing contracts to the
Company. (Note R)
There can be no assurance that the Company will be successful in its
attempt to consummate any of the above strategic alternatives.
F-15
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE C - ACQUISITIONS/DISPOSITIONS
PowerStream Technology
Effective April 1, 1997, the Company acquired substantially all of the
assets, and assumed certain liabilities and the operations, of
PowerStream Technology, Inc. ("PowerStream") by issuing 150,000 shares of
common stock valued at $1.50 per share. PowerStream is a research and
development company specializing in power recharging devices and power
supply products. In addition, the Company entered into a five year
Employment Agreement with the President of PowerStream who, the Company
believes, is an expert in the area of power recharging devices and power
supply products. This transaction was accounted for using the purchase
method of accounting. Accordingly, the purchased assets and liabilities
have been recorded at their fair value at the date of acquisition and the
excess purchase price over fair value of net tangible assets acquired of
$749,114 is being amortized over 15 years. The results of operations of
the acquired business have been included in the financial statements
since the effective date of acquisition.
Sale of San Jose Division
Effective November 1, 1996, the Company sold substantially all of the net
assets used by the San Jose Division ("Division") to Touche Electronics,
Inc. ("Touche"), a subsidiary of TMCI Electronics, Inc. ("TMCI"). The
sale price for the net assets of the Division was $3,300,000; consisting
of $2,000,000 in cash, $900,000 in promissory notes, and 53,669 shares of
TMCI common stock with an agreed upon guaranteed value of $400,000. In
addition, the Company had the right to receive up to $700,000 in
contingent earnouts for a potential total sale price of $4,000,000. The
Company originally purchased the Division in March 1995, for
approximately $2,100,000. As part of the transaction, Touche and TMCI
also assumed certain liabilities associated with the operations of the
Division.
In February 1997, TMCI filed a notice of demand for rescission of the
purchase and sale of the Division. The Company filed a counterclaim
against TMCI in May 1997, alleging that TMCI had defaulted in its
obligations under the promissory notes. The disputes were subsequently
submitted to arbitration in August 1997. In December 1997, the Company
and TMCI entered into a Settlement and Release Agreement (the "Settlement
Agreement"), releasing each other of any and all respective claims the
parties may have had against each other. The Settlement Agreement
provided, in part, that TMCI issue to the Company, 137,390 shares of
TMCI's common stock (the "Settlement Stock"). The Settlement Stock is
guaranteed to have a minimum value of $7.4532 per share. In the event the
Settlement Stock is sold at less than that amount, TMCI is obligated to
pay to the Company the difference between the sales price and the
guaranteed value. During 1998, the Company sold shares of settlement
stock at a price below the minimum value. TMCI reimbursed the Company for
the difference between the sales price and the guaranteed value. At
September 30, 1998, TMCI stock had a quoted market price of $2.25 per
share. Based upon the market price of TMCI stock and consideration of
realizability of the guaranteed minimum value per share, the carrying
value of the investment was reduced by approximately $300,000 as of
September 30, 1998.
F-16
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE C - ACQUISITIONS/DISPOSITIONS - CONTINUED
Sale of San Jose Division - continued
In addition, the Company entered into a long-term building lease
agreement several months prior to the sale of the San Jose Division with
the intention of relocating the operations. This lease was not sold as
part of the above sale and required fees of $227,226 for abandonment of
the lease. Abandoned lease fees of $16,000 and $211,226 were recognized
in fiscal years 1998 and 1997, respectively.
NOTE D - MAJOR CUSTOMERS AND CREDIT CONCENTRATION
Financial instruments, which potentially subject the Company to credit
risk, consist primarily of trade accounts receivable. The Company sells
to customers in the computer, computer peripheral, telecommunications,
instrumentation, and medical and testing equipment industries located
throughout the United States. Sales have historically been concentrated
with several large original equipment manufacturers (OEMs) on a turnkey
basis. To reduce credit risk the Company performs ongoing credit
evaluations of its customers' financial condition and generally does not
require collateral. The majority of its trade receivables are unsecured.
Allowances are maintained for potential credit losses. The resulting
losses have been insignificant to date and have been within management's
expectations.
Revenue from shipments to the largest customers (representing over ten
percent of sales in fiscal 1998) were 59 percent and 24 percent of sales
(15 percent, 14 percent and 12 percent of sales in fiscal 1997).
At September 30, 1998, the Company had accounts receivable due from the
above largest customers representing approximately 75 percent of trade
receivables (50 percent at September 30, 1997). Remaining trade accounts
receivable at September 30, 1998, were due from a variety of other
customers under normal credit terms.
NOTE E - NOTES RECEIVABLE
Notes receivable consist of the following:
1998 1997
------------- ------------
10%note receivable from a company, due in monthly payments of $1,500 including
interest, collateralized by
inventory, accounts receivable, machinery, and equipment $ 33,377 $ 35,775
10% note receivable from a company, due in monthly
payments of $1,297 including interest, collateralized by
inventory, accounts receivable, machinery, and equipment 6,287 8,124
12% notes receivable from two companies, due in monthly
payments aggregating $1,000 including interest - 5,882
F-17
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE E - NOTES RECEIVABLE - CONTINUED
1998 1997
------------- ------------
Note receivable from a company at prime plus .5% (9% at September 30, 1998), due
in monthly payments of $10,417 including interest, with a balloon payment on
October 31, 1999, secured by security agreement and the personal guaranty of
the owner and principal stockholder of the company. This note was exchanged
for shares of stock
during 1998 (Note C) - 500,000
Note receivable from a company at prime plus .5% (9% at
September 30, 1998), due in monthly payments of $16,667 including interest,
secured by security agreement and the personal guaranty of the owner and
principal stockholder of the company. This note was exchanged for shares of
stock
during 1998 (Note C) - 400,000
10% note receivable from officers/stockholders,
due in monthly payments of $1,500 including interest - 14,749
39,664 964,530
Less current maturities 35,675 357,006
$ 3,989 $ 607,524
============= ============
NOTE F - INVENTORIES
Inventories consist of the following:
1998 1997
-------------- -------------
Raw material $ 3,070,958 $ 2,714,763
Work-in-process 1,391,664 736,928
Finished goods 35,572 87,708
4,498,194 3,539,399
Less allowance for obsolete inventory (818,025) (183,528)
$ 3,680,169 $ 3,355,871
============== =============
NOTE G - NOTES PAYABLE
Notes payable at September 30, 1997, consisted of trade payables to
vendors converted to notes totaling $641,505, payable in semi-monthly
amounts of approximately $147,000, with interest at 9.5 percent per
annum. The notes were paid in full during fiscal 1998.
F-18
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE H - BRIDGE LOAN
At September 30, 1997, the Company had one note payable to an individual
for $100,000 with interest at 8 percent per annum, which was due and paid
in full in November 1997.
NOTE I - CREDIT FACILITY
On September 4, 1997, the Company completed a four year financing
agreement with a bank for $6,300,000. The agreement consists of a
$5,000,000 revolving credit line and two term loans for $800,000 ("Loan
A") and $500,000 ("Loan B"), respectively. The revolving credit loan is
at prime plus 1.75 percent (10 percent at September 1998) and is
collateralized by accounts receivable and inventory. Loan A is at a fixed
rate of 10.16 percent and is collateralized by machinery and equipment.
Loan B is at a fixed rate of 10.32 percent and is collateralized by
machinery and equipment of the Company and personal guarantees of certain
officers of the Company. This agreement requires that the Company
maintain certain financial ratios, meet specific minimum levels of
earnings and net worth; restricts employee advances, capital
expenditures, compensation, and additional indebtedness; and restricts
the payment of dividends. This new line of credit replaced the previous
$6,000,000 revolving line of credit. The Company has borrowed $4,064,361
under the new line of credit at September 30, 1998 ($2,237,690 at
September 30, 1997).
At times, including at September 30, 1998, the Company has been in
violation of certain of the covenants of this credit facility. At
September 30, 1998, the Company has notified the lender of the violations
and is negotiating modifications to the loan agreement with the lender.
As of September 30, 1998, the Company has not received a waiver from the
lender and all obligations under this credit facility are payable on
demand of the lender and are classified as current liabilities in the
balance sheet.
NOTE J - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
1998 1997
------------- ------------
Note to an individual with interest imputed at 10% per
annum, payable in monthly payments of $2,500 $ 80,104 $ 100,604
F-19
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE J - LONG-TERM OBLIGATIONS - CONTINUED
1998 1997
-------------- ------------
10.16% note to a financial institution, payable in 48 monthly installments of
$16,667 plus interest, maturing on August 1, 2001, collateralized by
substantially all of
the Company's property and equipment (Note I) 599,996 800,000
10.32% note to a financial institution, payable in 48
monthly installments of $10,417 plus interest, maturing on August 1, 2002,
collateralized by substantially all of the Company's property and equipment
and personal
guarantees of certain officers of the Company (Note I) 489,583 -
11.25% note to a financial institution, payable in monthly
installments of $375, including interest, collateralized by
personal residence of the president of the PowerStream
Division 3,100 31,653
Noninterest-bearing note to a parts vendor, payable in
monthly installments of $1,000, past due 11,720 12,720
1,184,503 944,977
Less current maturities 1,132,538 263,255
$ 51,965 $ 681,722
============== ============
Maturities of long-term obligations are as follows:
Year ending September 30,
1999 $ 1,132,538
2000 25,972
2001 25,993
Thereafter -
$ 1,184,503
=============
F-20
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE K - LEASES
1. Operating leases
The Company conducts a portion of its operations in leased facilities
under noncancelable operating leases expiring through 2003. In addition,
the Company leases equipment under noncancelable operating leases
expiring through 2000. The minimum future rental commitments under
operating leases are as follows:
Year ending September 30, Facilities Equipment Total
1999 $ 367,083 $ 191,410 $ 558,493
2000 367,083 47,380 414,463
2001 349,933 - 349,933
2002 337,683 - 337,683
2003 337,683 - 337,683
Thereafter - - -
$ 1,759,465 $ 238,790 $ 1,998,255
============= =============== =============
The leases generally provide that property taxes, insurance and
maintenance expenses are obligations of the Company. It is expected that
in the normal course of business, operating leases that expire will be
renewed or replaced by leases on other properties. Rental expense for all
operating leases was $565,490 and $570,486 for the years ended September
30, 1998 and 1997, respectively.
2. Capital leases
Maturities of capital lease obligations are as follows:
Year ending September 30,
1999 $ 76,165
2000 23,916
Thereafter -
Total minimum lease payments 100,081
Less amount representing interest 8,127
Present value of net minimum lease payments 91,954
Less current portion 69,621
$ 22,333
=============
Included in property and equipment is $295,637 of equipment under capital
leases at September 30, 1998. The related accumulated amortization is
$203,683.
F-21
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE L - INCOME TAXES (BENEFIT)
Income tax expense (benefit) consists of the following:
1998 1997
------------- ---------------
Current
Federal $ (36,106) $ (36,067)
State 20,748 (5,306)
(15,358) (41,373)
Deferred
Federal 387,584 (931,233)
State 229,010 (136,994)
616,594 (1,068,227)
$ 601,236 $ (1,109,600)
============= ===============
Reconciliation of income taxes (benefit) computed at the federal
statutory rate of 34 percent is as follows:
1998 1997
------------- ----------------
Federal income taxes at statutory rate $ 635,999 $ (967,300)
State income taxes, net of federal tax benefit (34,763) (142,300)
Income taxes $ 601,236 $ (1,109,600)
============= ================
Deferred tax assets and liabilities consist of the following:
1998 1997
--------------- -------------
Deferred tax assets (liabilities)
Accumulated depreciation $ (171,852) $ (165,755)
Net operating loss 3,183,720 1,392,658
Reserve for inventory obsolescence 316,731 71,576
Allowance for doubtful accounts 138,411 53,453
Reserve for warranties - 10,182
Write off of goodwill 37,833 -
Impairment of investment 117,454 -
Amortization of intangibles (2,910) -
Reserve for vacation 12,785 6,113
Deferred tax asset 3,632,172 1,368,227
Valuation allowance (3,030,936) -
Net deferred tax asset $ 601,236 $ 1,368,227
=============== =============
F-22
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE L - INCOME TAXES (BENEFIT) - (CONTINUED)
The Company has sustained net operating losses in each of the periods
presented. Deferred tax assets or income tax benefits were recorded in
both 1998 and 1997 for net deductible temporary differences or net
operating loss carryforwards. The likelihood of realization of the
related tax benefits cannot be fully established. A valuation allowance
has been recorded in 1998 to reduce the 1997 net deferred tax asset. The
increase in the valuation allowance was $,3030,936 and $0 for the years
ended September 30, 1998 and 1997, respectively.
As of September 30, 1998, the Company had net operating loss
carryforwards for tax reporting purposes of approximately $7,737,000
expiring in various years through 2019.
NOTE M - STOCK OPTION PLAN
The Company has a Stock Option Plan (the Plan). The Plan provides for the
granting of both Incentive Stock Options (ISOs) or NonQualified Options
(NQOs) to purchase shares of common stock. ISOs are granted at not less
than market value on the date of grant whereas NQOs may be granted at not
less than 85 percent of market value on the date of the grant. Options may
be granted under the Plan to all officers, directors, and employees of the
Company. In addition, NQOs may be granted to other parties who perform
services for the Company.
The Company also issues warrants in conjunction with various transactions
with third parties.
The Company accounts for the Plan under APB 25 and related
interpretations. Accordingly, since all options granted under the Plan
were granted at or in excess of fair market value of the stock on the date
of the grant, no compensation costs have been recognized in the
accompanying financial statements for options granted under the Plan. Had
compensation cost for the Plan been determined based on the fair value of
the options at the grant dates for awards under the Plan consistent with
the method prescribed by FAS No. 123, the Company's net loss and loss per
common share would have been increased to the pro forma amounts indicated
below:
Fiscal Year ended September 30, 1998 1997
- -------------------------------
---------------- ----------------
Net loss
As reported $ (5,445,383) $(1,735,483)
Pro forma (6,112,600) (3,185,595)
Loss per common share
As reported - basic $ (1.24) $(0.54)
Pro forma - basic (1.39) (0.99)
F-23
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE M - STOCK OPTION PLAN - CONTINUED
The fair value of these options and warrants was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1998 and 1997, respectively: expected
volatility of 79.07 and 68.08 percent; risk-free interest rate of 5.26 and
6.35 percent; and expected life equal to the actual life for both periods.
The weighted-average fair value of options and warrants granted was $0.83
for both 1998 and 1997.
The following is a summary of the activity relating to options and
warrants through September 30, 1998:
Weighted-
Warrants average
and stock Exercise exercise
options price price
Outstanding at October 1, 1996 3,105,000 $ 6.00-6.50 $ 6.46
Granted 3,668,000 1.38-3.00 1.87
Canceled (154,000) 6.00 6.00
Exercised (550,000) 1.75-2.00 1.88
Outstanding at September 30, 1997 6,069,000 1.38-6.50 4.18
Granted 2,305,000 1.45-6.00 1.83
Canceled (59,000) 1.38-6.00 1.83
Exercised (245,000) 2.00 2.00
Outstanding at September 30, 1998 8,070,000 1.38-6.50 3.55
Exercisable at September 30, 1998 7,745,800 $ 1.38-6.50 $ 3.60
============
The following table summarizes information concerning currently
outstanding options and warrants:
Options and Warrants Outstanding:
Weighted-Average
Range of Remaining
Exercise Number Contractual Weighted-Average
Prices Outstanding Life (Years) Exercise Price
------ ----------- ------------ --------------
$ 1.38-1.45 1,895,500 4.35 $ 1.42
2.00-2.75 3,195,000 5.55 2.12
3.00 32,500 3.64 3.00
6.00-6.50 2,947,000 2.17 6.48
---------
8,070,000
F-24
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE M - STOCK OPTION PLAN - CONTINUED
The following table summarizes information concerning currently
exercisable options and warrants:
Options and Warrants Exercisable:
Weighted-Average
Range of Remaining
Exercise Number Contractual Weighted-Average
Prices Exercisable Life (Years) Exercise Price
------ ----------- ------------ --------------
$ 1.38-1.45 1,707,500 4.45 $ 1.42
2.00-2.75 3,143,000 5.56 2.12
3.00 6,500 3.64 3.00
6.00-6.50 2,888,800 2.17 6.49
---------
7,745,800
NOTE N - COMMITMENTS AND CONTINGENCIES
1. Employment agreements
The Company has entered into agreements with eight key employees and
officers which provide for annual salaries and incentive bonuses.
Incentive bonuses are calculated as a percentage of gross profits and/or
sales of the Company.
Annual salaries under these employment agreements, in the aggregate, are
as follows:
Year ending September 30,
1999 $ 548,000
2000 515,000
2001 485,000
2002 295,000
2003 170,000
Thereafter -
$ 2,013,000
=============
2. Litigation
From time to time the Company is engaged in various lawsuits or disputes
as plaintiff or defendant arising in the normal course of business. In
the opinion of management, based upon advice of counsel, the ultimate
outcome of these matters will not have a material impact on the Company's
financial position or results of operations.
F-25
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE O - EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share"
(SFAS No. 128). SFAS No. 128 is effective for financial statements for
periods ending after December 15, 1997, and requires companies to report
both "basic" and "diluted" earnings per share. "Basic" earnings per share
do not include the addition of common stock equivalents to the shares
outstanding. "Diluted" earnings per share require the addition of common
stock equivalents to the shares outstanding. Average shares outstanding
is the denominator used in "basic" earnings per share calculations.
Accordingly, "basic" earnings per share will be higher than "diluted"
earnings per share. This statement replaces Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share." The effect of adopting SFAS
No. 128 did not materially effect the Company's earnings per share. The
following data show the amounts used in computing earnings (loss) per
common share, including the weighted-average number of shares and
dilutive potential common shares.
Year ended September 30,
--------------------------------
1998 1997
Loss applicable to common stock $ (5,445,383) $ (1,735,483)
============== ================
Common shares outstanding during the entire
period 4,072,863 3,033,407
Weighted-average common shares issued during
the period 324,627 179,682
Weighted-average number of common shares used
in basic EPS 4,397,490 3,213,089
Dilutive effect of stock options and warrants - -
Weighted-average number of common shares and
dilutive potential common stock used in diluted
EPS 4,397,490 3,213,089
============== ================
For the years ended September 30, 1998 and 1997, all of the options
and warrants that were outstanding, as described in Note M, were not
included in the computation of diluted EPS because to do so would
have been anti-dilutive.
F-26
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE P - SUBORDINATED DEBENTURES
On June 16, 1998, the Board of Directors of the Company approved the
issuance of up to $1,000,000 of three percent convertible debentures (the
"Debentures") with a maximum term of 24 months. The Debentures will
mature, unless earlier converted by the holders, into shares of common
stock of the Company. The Company has agreed to file a registration
statement with the United States Securities and Exchange Commission with
respect to the common stock of the Company into which the Debentures may
be converted.
The Debentures are convertible by the holders thereof into the number of
shares of common stock equal to the face amount of the Debentures being
converted divided by the lesser of (i) eighty percent (80 percent) of the
closing bid price of the Company's common stock as reported on the NASDAQ
Small Cap market on the day of conversion, or (ii) $2.75. The Debentures
may be converted in three equal installments beginning on the earlier of
(i) the 75th day of their issuance, and continuing through the 135th day
of their issuance, or (ii) the day following the effective date of the
Registration Statement, through the 60th day following the effective date
of the Registration Statement. The Company may cause the Debentures to be
converted into shares of common stock after the 110th day following the
effective date of the Registration Statement, if the common stock has
traded at or above $5.50 per share for 20 consecutive days.
As of September 30, 1998, the Company had issued all $1,000,000 of these
convertible Debentures and none have been converted.
On October 22, 1997, the Board of Directors of the Company approved the
issuance of up to $1,500,000 of 3 percent convertible Debentures with a
maximum term of 24 months. The Debentures will mature, unless earlier
converted by the holders, into shares of common stock of the Company. The
Company has agreed to file a registration statement with the United
States Securities and Exchange Commission with respect to the common
stock of the Company into which the Debentures may be converted.
As of September 30, 1998, the Company had issued all $1,500,000 of these
convertible Debentures and $1,000,000 had been converted to 689,332
shares of common stock.
Because of the favorable conversion feature of the Debentures, the
Company has recognized interest expense relating to the price below
market at which the Debentures can be converted into common shares of
stock. The interest is initially set up as a deferred charge against the
subordinated debenture balance with an offset to additional paid-in
capital. The deferred interest is amortized over a period corresponding
to time restrictions as to when the Debentures can be converted into
stock. The resulting charge to interest expense increases the effective
interest rate of the Debentures. Deferred interest expense of $250,032
was recorded on the $1,000,000 in Debentures relative to the favorable
conversion feature and is being amortized over four months and charged to
interest expense. As of September 30, 1998, $151,461 of the $250,032
deferred charge had been amortized. This interest along with the stated 3
percent interest rate in the Debentures results in an inherent interest
rate of 31 percent.
F-27
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE P - SUBORDINATED DEBENTURES - CONTINUED
In connection with the $1,500,000 in Debentures, the Company recorded
$389,591 of deferred interest expense related to the beneficial
conversion feature. The entire deferred charge has been amortized and
charged to interest expense at September 30, 1998. This interest when
added to the stated 3 percent interest rate of the Debenture results in
an inherent interest rate of 28 percent over the Debentures life of two
years.
NOTE Q - GOODWILL AND INTANGIBLES
Goodwill and intangibles consist primarily of goodwill acquired in the
purchase of the InCirT, MOTO-SAT, and PowerStream divisions. Intangibles
other than goodwill consist of product development costs. The long-term
value of the product development costs is connected to the application of
technologies to viable products which management believes can be
successfully marketed by the Company. On an ongoing basis, management
reviews the valuation and amortization of intangible assets to determine
possible impairment by comparing the carrying value to the undiscounted
estimated future cash flows of the related assets and necessary
adjustments, if any, are recorded. During 1998, the carrying values of
goodwill and intangibles were adjusted in the amount of $267,414 to
better reflect management's current expectations for the realizablility
of these assets. The adjustments relate to goodwill and intangibles of
the MOTO-SAT division. Management believes current and projected sales
levels of its existing and planned products will support the carrying
costs of assets, as adjusted.
The following is a summary of goodwill and intangible assets:
Fiscal Year ended September 30, 1998 1997
- -------------------------------
------------ ------------
Goodwill $ 2,287,894 $ 2,393,685
Other intangibles 71,150 221,285
2,359,044 2,614,970
Less accumulated amortization (327,359) (327,824)
$ 2,031,685 $ 2,287,146
============ ============
NOTE R - SUBSEQUENT EVENTS
In December, 1998, the Company entered into a letter of intent with the
Company's CEO for the sale of the MotoSat division. The Company
anticipates the sale will be completed in January 1999. The proposed sale
provides for the acquisition of substantially all of the assets,
assumption of all liabilities and the operations of the division. The
proposed sale will not generate cash proceeds to the Company. The Company
expects to recognize a gain of approximately $20,000 on the sale.
F-28
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1997
NOTE R - SUBSEQUENT EVENTS - CONTINUED
Subsequent to year-end, the Company negotiated a contract with a company
for the sale of the Cable division. The sale is subject to the completion
of due diligence and the execution of a definitive agreement. The Company
anticipates completion of the sale in January 1999. Based on terms of the
contract agreed to during November and December, 1998, the Company
expects to receive cash proceeds of approximately $1,075,000 and to
recognize a loss upon completion of the sale of approximately $1,000,000.
On December 21, 1998, the Company entered into an agreement with a
laminating company whereby a proposed newly formed subsidiary of the
Company will merge into the laminating company and the laminating company
will become a wholly-owned subsidiary of the Company. Stockholders of the
laminating company will receive shares of common stock of the Company in
exchange for their shares. The parties have commenced preparation of a
Registration Statement on Form S-4. The merger is subject to Form S-4
becoming effective and approval of the stockholders of the respective
companies.
In December 1998, the Company signed a letter of intent with a company to
negotiate a possible merger. The letter of intent serves as a basis for
the parties to negotiate formal, definitive agreements, memorializing all
the terms of the merger.
The Company has an investment in the publicly traded stock of another
company (Note C). 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. At January 1999, the quoted market value of the stock
decreased to approximately $0.66 per share.
F-29
Pen Interconnect, Inc.
BALANCE SHEETS
ASSETS
March 31, September 30,
1999 1998
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 258,681 $ 657,777
Trade accounts receivable less allowance for
doubtful accounts of $67,434 at March 31, 1999 1,840,858 3,350,970
$108,575 at September 30, 1998, respectively
Current maturities of notes receivable 762,409 35,675
Investments in common stock 242,739 242,739
Inventories 2,777,230 3,680,169
Prepaid expenses and other current assets 410,078 261,375
Deferred tax asset 41,324 41,324
Total current assets 6,333,319 8,270,029
PROPERTY AND EQUIPMENT, AT COST
Production Equipment 655,423 2,624,513
Furniture and fixtures 243,178 837,594
Transportation equipment 22,149 83,522
Leasehold improvements 242,274 613,248
1,163,024 4,158,877
Less accumulated depreciation 275,307 1,680,266
887,717 2,478,611
OTHER ASSETS
Notes receivable, less current maturities 8,798 3,989
Investments in common stock 482,220 482,220
Deferred income taxes 725,667 725,667
Goodwill and other intangibles, net 2,041,517 2,031,685
Assets transferred under contractual arrangement 454,742 0
Other 4,325 98,455
Total other assets 3,717,269 3,342,016
$10,938,305 $14,090,656
================ =================
The accompanying notes are an integral part of these statements.
F-30
Pen Interconnect, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS EQUITY
March 31, September 30,
1999 1998
(unaudited)
CURRENT LIABILITIES
Subordinated debentures $ 325,000 $ 1,401,429
Line of credit 2,922,349 4,064,361
Current maturities of long-term obligations 717,871 1,132,538
Current maturities of capital leases 0 69,621
Accounts payable 2,130,094 2,926,797
Accrued liabilities 906,393 389,889
Total current liabilities 7,001,707 9,984,635
LONG TERM OBLIGATIONS, less current
maturities 7,314 51,965
CAPITAL LEASE OBLIGATIONS, less
current maturities 0 22,333
LIABILITIES TRANSFERRED UNDER
CONTRACTUAL ARRANGEMENTS 514,813 0
DEFERRED INCOME TAXES 165,755 165,755
Total liabilities 7,689,589 10,224,688
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value
authorized 5,000,000 shares, 1,800
issued and outstanding at March 31, 1999 18 0
Common stock, $0.01 par value,
authorized 50,000,000 shares, issued and 68,648 50,184
outstanding 6,864,838 shares at March 31,
1999 and 5,018,437 at September 30, 1998
Additional paid-in capital 14,059,616 10,890,022
Accumulated deficit (10,879,566) (7,074,238)
Total stockholders' equity 3,248,716 3,865,968
$10,938,305 $14,090,656
================ =================
The accompanying notes are an integral part of these statements.
F-31
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
(Uaudited)
Three months ended Six months ended
---------------------------------- --------------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
>C>
Net Sales $ 2,828,078 $ 3,698,727 $ $
7,585,916 7,603,444
Cost of sales 2,400,695 2,842,148 6,968,163 5,897,521
Gross profit 427,383 856,579 617,753 1,705,923
Operating expenses
Sales and marketing 55,692 17,590 137,411 69,405
Research and development 180,606 104,982 492,634 193,369
General and administrative 1,312,513 395,599 2,035,143 997,628
Depreciation and amortization 79,010 127,662 191,307 241,937
Total operating
expenses 1,627,821 645,833 2,856,495 1,502,339
Operating income, (loss) (1,200,438) 210,746 (2,238,742) 203,584
Other income (expense)
Interest expense (192,903) (175,670) (385,775) (254,707)
Loss on sale of division (948,312) 0 (948,312) 0
Other income (expense) net (158,281) 4,104 (232,499) 34,337
Total other income
(expense) (1,299,496) (171,566) (1,566,586) (220,370)
Loss before income taxes (2,499,934) 39,180 (3,805,328) (16,786)
Income tax expense (benefit) 0 16,123 0 (5,677)
Net earnings (loss) $(2,499,934) $ 23,057 $(3,805,328) $ (11,109)
Earnings (loss) per common share
Basic $ (0.47) $ 0.01 $ (0.72) $ (0.00)
Diluted $ (0.47) $ 0.00 $ (0.72) $ (0.00)
Weighted average common shares
outstanding
Basic 6,321,553 4,234,009 5,932,173 4,165,952
Diluted 6,321,553 6,486,509 5,932,173 4,165,952
The accompanying notes are an integral part of these statements.
F-32
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
(Uaudited)
Six months ended
--------------------------------
March 31, March 31,
1999 1998
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $(3,805,328) $ (11,109)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 191,307 241,937
Bad debts 13,247 14,527
Interest on debenture conversion 98,571 0
Loss on sale of cable division 948,312 0
Contingent stock San Jose agreement 0 (40,000)
Loss on disposal of equipment 0 16,534
Changes in asset and liabilities
Trade accounts receivable 1,005,502 (779,795)
Inventories 334,368 (963,648)
Prepaid expenses and other assets (166,211) (164,054)
Accounts payable (513,019) 489,269
Accrued liabilities 619,125 (263,156)
Income taxes 0 21,454
Total adjustments 2,531,202 (1,426,932)
Net cash used in
operating activities (1,274,126) (1,438,041)
Cash flows from investing activities
Purchase of property and equipment (76,395) (158,967)
Issuance of notes receivable (614,920) (72,760)
Collections on notes receivable 0 22,800
--------------- ---------------
Net cash used in
operating activities (691,315) (208,927)
(Continued)
F-33
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINED
(Uaudited)
Six months ended
--------------------------------
March 31, March 31,
1999 1998
Cash flows from financing activities
Principal payments on notes payable 0 (574,902)
Net change in line of credit (393,513) 653,801
Proceeds from bridge loan 900,000 0
Principal payments on bridge loan (800,000) (100,000)
Principal payments on long-term obligations (153,217) (174,767)
Proceeds from issuance of subordinated debentures 0 1,000,000
Proceeds from issuance of long-term obligation 0 500,000
Proceeds from sale of common stock 213,075 181,999
Proceeds from issuance of preferred stock 1,800,000 0
--------------- ---------------
Net cash provided by financing activities 1,566,345 1,486,131
--------------- ---------------
Net decrease in cash and cash equivalents (399,096) (160,837)
Cash and cash equivalents at beginning of period 657,777 272,148
Cash and cash equivalents at end of period $ 258,681 $ 111,311
=============== ===============
Supplemental disclosures of cash flow information Cash paid during the period
for:
Interest expense $ 287,204 $ 243,728
Income tax expense $ 0 $ 0
Noncash investing and financing activities
During the first and second quarters of FY 99 $1,150,000 of subordinated
debentures were converted into 1,566,741 shares of common stock. Along with the
conversion on the debentures, $98,571 of unamortized interest on the
subordinated debentures was charged to interest expense.
The accompanying notes are an integral part of these statements.
F-34
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - PRESENTATION
Pen Interconnect, Inc. (the "Company"), has included the unaudited
condensed balance sheet of the Company as of March 31, 1999 and audited
balance sheet as of September 30, 1998 (the Company's most recent fiscal
year), unaudited condensed statements of operations for the three and six
months ended March 31, 1999 and 1998, and unaudited condensed statements of
cash flows for the six months ended March 31, 1999 and 1998, together with
unaudited condensed notes thereto. In the opinion of managementof 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. The results of operations for the six months ended
March 31, 1999 may not be indicative of the results that may be expected
for the year ending September 30, 1999.
NOTE B - 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.
On January 29, 1999 the Company signed an agreement to sell certain
assets and transfer certain liabilities of the Cable division to Cables
To Go Inc (CTG). CTG purchased certain of the receivables, inventory,
machinery equipment and assumed capital lease liabilities for $1,075,000
thus yielding the Company a net loss on the sale of ($948,312).
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, Chairman and former CEO
of the Company. The letter of intent calls for MTI to assume all assets and
liabilities of the MotoSat division. If the transaction were closed as of
March 31, 1999, it would yield a gain to the Company on the sale of
$60,071. Pending the closing of the sale, the Company has agreed to
maintain and/or provide a $300,000 credit facility with the Company's major
lender. The Company anticipates closing the transaction when MTI is able to
secure independent sources of financing. In the interim, MTI has assumed
operational control of the MotoSat division but the Company retains
ownership of the MotoSat division's receivables and inventory which are
collateral for the Company's credit facility.
Inasmuch as the Company is still at risk for the credit facility made
available to MTI, on the receivables and inventory currently being
submitted to finance the current operations of MotoSat, assets and
liabilities have been reclassified as "Assets /Liabilities Transferred
Under Contractual Arrangements" on the balance sheet at March 31, 1999.
Transdigital Communications Inc.
In December 1998, the Company signed a nonbinding letter of intent to
negotiate a possible merger with Transdigital Communications Inc. (TCC).
TCC is a privately held developer of entertainment and database systems
for the transportation markets which includes narrow bodied commercial
aircraft and cruise ships. Pen and TCC are currently engaged in due
diligence investigations and the negotiation of terms for definitive
contracts.
F-35
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE C - INVENTORIES
Inventories consist of the following:
March 31, September
30,
1999 1999
-------------- ---------------
Raw materials (net of allowance) $ 1,942,174 $ 2,252,933
Work-in-process 835,056 1,391,664
Finished goods - 35,572
-------------- ---------------
$ 2,777,230 $ 3,680,169
============== ===============
NOTE D - 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 E - WARRNATS TO PURCHASE COMMON STOCK
During the first quarter of FY 1999 the Company issued warrants to
purchase 490,000 shares of the Company's common stock. The following
table outlines the features of these warrants:
Number of Exercise Expiration
warrants price date
------------- --------------------
150,000 $1.000 October 2002
125,000 $0.875 October 2002
215,000 $0.875 November 2001
During the second quarter of FY 1999 the Company issued warrants to
purchase 160,000 shares of common stock in conjunction with the issuing
of a Series A Preferred Stock. The terms of the conversion of the
warrants to shares of common stock are discussed in Note F.
NOTE F - PREFERRED STOCK
The Company has 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 D, 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.
F-36
NOTE F - PREFERRED STOCK (CONTINUED)
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").
The maximum Conversion Price for the Series A Preferred Stock is $1.17
per share. The shares of Series B Preferred Stock are convertible into
Common Stock at the same Conversion Price as the Series A Preferred
Stock with a maximum Conversion Price of $0.79 per share. 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.
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.
For the three and six months ended March 31, 1999, 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 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 Preferred Stock
can be converted and the value assigned to the Series A Preferred Stock
in the private placement. The imputed dividend is a one-time non-cash
charge against the loss per common share.
F-37
NOTE G: EARNINGS (LOSS) PER SHARE - CONTINUED
Basic and diluted loss per common share were calculated as follows:
Three months ended Six months ended
----------------------------------- ------------------------------
---------------------------------- -----------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
----------------- -------------- ------------- -------------
Net earnings (loss) $(2,499,934) $ 23,057 $(3,805,328) $ (11,109)
Preferred dividends (30,773) 0 (30,773) 0
Imputed dividend from beneficial
conversion feature (449,438) 0 (449,438) 0
----------------- -------------- ------------- -------------
Net earnings (loss) attributable to
common stockholders $(2,980,145) $ 23,057 $(4,285,539) $ (11,109)
================= ============== ============= =============
Basic EPS
Common shares outstanding entire period 6,069,160 4,147,863 5,018,437 4,072,863
Weighted average common shares issued 252,393 86,146 913,736 93,089
----------------- -------------- ------------- -------------
Weighted average commons shares
outstanding during period 6,321,553 4,234,009 5,932,173 4,165,952
================= ============== ============= =============
Earnings (loss) per common share (0.47) 0.01 (0.72) (0.00)
Diluted EPS
Weighted average common shares 6,321,553 4,234,009 5,932,173 4,165,952
outstanding during period - basic
Dilutive effect of stock options and
warrants 0 2,252,500 0 0
----------------- -------------- ------------- -------------
Weighted average common shares
outstanding during period - diluted 6,321,553 6,486,509 5,932,173 4,165,952
================= ============== ============= =============
Earnings (loss) per common share -
assuming dilution $ (0.47) $ 0.00 $ (0.72) $ (0.00)
F-38
PEN INTERCONNECT, INC.
10,777,453 shares of Common Stock
-------------------------------
PROSPECTUS
-------------------------------
May __, 1999
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Pen has entered into agreements with each director and officer in which
Pen agrees to indemnify each director and officer to the maximum extent
permitted by law.
Pen's Certificate of Incorporation provides that all directors,
officers, employees and agents of the Registrant shall be entitled to be
indemnified by Pen to the fullest extent permitted by law.
The Certificate of Incorporation also provides as follows:
The corporation shall, to the fullest extent permitted by the Act, as
the same may be amended and supplemented, indemnify all directors, officers,
employees, and agents of the corporation whom it shall have power to indemnify
thereunder from and against any and all of the expenses, liabilities, or other
matters referred to therein or covered thereby. Such right to indemnification or
advancement of expenses shall continue as to a person who has ceased to be a
director, officer, employee, or agent of the corporation, and shall inure to the
benefit of the heirs, executives, and administrators of such persons. The
indemnification and advancement of expenses provided for herein shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement may be entitled under any bylaw, agreement, vote of shareholders or
of disinterested directors or otherwise. The corporation shall have the right to
purchase and maintain insurance on behalf of its directors, officers, employees
or agents to the full extent permitted by the Act, as the same may be amended or
supplemented. Sections 16.10a-902 and 16.10a-903 of the Utah Revised Business
Corporation Act concerning indemnification of officers, directors, employees and
agents are set forth below.
16-10a-902 Authority to Indemnify Directors.
(1) Except as provided in Subsection (4), a corporation may indemnify an
individual made a party to a proceeding because he is or was a director, against
liability incurred in the proceeding if:
(a) his conduct was in good faith; and
(b) he reasonably believed that his conduct was in, or not opposed to the
corporation's best interests; and
(c) in the case of any criminal proceeding, he had no reasonable cause to
believe his conduct was unlawful.
(2) A director's conduct with respect to any employee benefit plan for a purpose
he reasonably believed to be in or not opposed to the interests of the
participants in and beneficiaries of the plan is conduct that satisfies the
requirement of Subsection (1)(b).
(3) The termination of a proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contender or its equivalent is not, of itself,
determinative that the director did not meet the standard of conduct described
in this section.
(4) A corporation may not indemnify a director under this section:
(a) in connection with a proceeding by or in the right of the corporation
in which the director was adjudged liable to the corporation; or
(b) in connection with any other proceeding charging that the director
derived an improper personal benefit, whether or not involving action in his
official capacity, in which proceeding he was adjudged liable on the basis that
he derived an improper personal benefit.
(c) Indemnification permitted under this section in connection with a
proceeding by or in the
45
right of the corporation is limited to reasonable expenses incurred in
connection with the proceeding.
16-10a-903 Mandatory Indemnification of Directors.
Unless limited by its articles of incorporation, a corporation shall indemnify a
director who was successful, on the merits or otherwise, in the defense of any
proceeding, or in the defense of any claim, issue or matter in the proceeding,
to which he was a party because he is or was a director of the corporation,
against reasonable expenses incurred by him in connection with the proceeding or
claim with respect to which he has been successful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, (the "Act") may be permitted to directors, officers,
and controlling persons of Pen pursuant to the foregoing provisions, or
otherwise, Pen has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Pen of
expenses incurred or paid by a director, officer or controlling person of Pen in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Pen will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to the court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 25. Other Expenses of Issuance and Distribution
Securities and Exchange Commission Registration Fee $2,762
Printing and Engraving 1,000
Transfer Agent's Fee and Expenses 1,000
Legal Fees and Expenses 45,000
Blue Sky Qualification Fees and Expenses 5,000
Accountants' Fees and Expenses 10,000
Miscellaneous Expenses 10,238
-------
Total $75,000
========
Item 26. Recent Sales of Unregistered Securities
(1) In May 1996, Pen issued 316,737 shares of common stock to the Cerplex
Group Inc. in consideration for the acquisition of InCirT Technology.
(2) In May 1996, Pen issued 9,168 shares of common stock to Ventana
Financial Services in consideration of services rendered in Pen's
acquisition of InCirT Technology.
(3) In July1997, Pen issued 2,789 shares of common stock to Stephanie Fryer
in consideration of services rendered in Pen's acquisition of InCirT
Technology.
(4) In August 1997, Pen issued 44,444 shares of common stock to Ira
Weingarten in consideration of payment of notes payable of $52,000.
(5) In August 1997, Pen issued 22,222 shares of common stock to Milton
Haber in consideration of payment of notes payable of $26,000.
(6) In August 1997, Pen issued 25,000 shares of common stock at $1.21 per
share to Target Capital upon exercise of warrants.
(7) In August 1997, Pen issued 22,222 shares of common stock to The Trading
Post Inc. in consideration of payment of notes payable of $26,000.
(8) In August 1997, Pen issued 150,000 shares of common stock at $1.21 per
share to Yitz Grossman upon exercise of warrants.
(9) In August 1997, Pen issued 52,779 shares of common stock to The Cerplex
Group Inc. in
46
consideration for the acquisition of InCirT Technology.
(10) In August 1997, Pen issued 230,000 shares of common stock at $1.21 per
share to Lisa Grossman upon exercise of warrants.
(11) In September 1997, Pen issued 200,000 shares of common stock at $1.21
per share to Paulette Marie Brodchandel upon exercise of warrants.
(12) In September 1997, Pen issued 40,000 shares of common stock at $1.21
per share to Lisa Grossman upon exercise of warrants.
(13) In September 1997, Pen issued 100,000 shares of common stock at $1.21
per share to National Financial Services Corp. upon exercise of
warrants.
(14) In December 1997, Pen issued 150,000 shares of common stock to
PowerStream Technology Inc. for the acquisition of PowerStream
Technology.
(15) In December 1997, Pen issued 75,000 shares of common stock to Bear
Stearns Securities Corp. upon conversion of subordinated debentures of
$150,000.
(16) In December 1997, Pen issued 7,500 shares of common stock to Alan L.
Weaver as compensation for services.
(17) In March 1998, Pen issued 147,092 shares of common stock to RBB Bank
Aktiengrsellshaft. upon conversion of subordinated debentures of
$213,383.
(18) In April 1998, Pen issued 162,162 shares of common stock to RBB Bank
Aktiengrsellshaft. upon conversion of subordinated debentures of
$235,245.
(19) In April 1998, Pen issued 90,000 shares of common stock at $2.00 per
share to Gordon Mundy upon exercise of warrants.
(20) In May 1998, Pen issued 30,000 shares of common stock at $2.00 per
share to Heracles Holdings Limited upon exercise of warrants.
(21) In May 1998, Pen issued 3,333 shares of common stock to Kostech Small
Cap Research as compensation for services.
(22) In May 1998, Pen issued 50,000 shares of common stock at $2.00 per
share to Louis F. Centofanti upon exercise of warrants.
(23) In June 1998, Pen issued 85,960 shares of common stock to RBB Bank
Aktiengrsellshaft. upon conversion of subordinated debentures of
$124,700.
(24) In July 1998, Pen issued 50,000 shares of common stock at $2.00 per
share to Louis F. Centofanti upon exercise of warrants.
(25) In September 1998, Pen issued 294,118 shares of common stock to RBB
Bank Aktiengrsellshaft. upon conversion of subordinated debentures of
$426,671.
(26) In October 1998, Pen issued 388,846 shares of common stock to BNC Bach
International Ltd. upon conversion of subordinated debentures of
$252,750.
(27) In October 1998, Pen issued 157,935 shares of common stock to RBB Bank
Aktiengrsellshaft. upon conversion of subordinated debentures of
$107,668.
(28) In November 1998, Pen issued 30,000 shares of common stock at $0.75 per
share to Heracles Holdings Limited upon exercise of warrants.
(29) In November 1998, Pen issued 20,000 shares of common stock at $0.75 per
share to Lawson Rollins upon exercise of warrants.
(30) In December 1998, Pen issued 50,000 shares of common stock at $0.75 per
share to Louis F. Centofanti upon exercise of warrants.
(31) In December 1998, Pen issued 20,000 shares of common stock at $0.75 per
share to Neyla Kizner upon exercise of warrants.
(32) In December 1998, Pen issued 10,000 shares of common stock at $0.75 per
share to Rahim Kaba upon exercise of warrants.
(33) In December 1998, Pen issued 307,692 shares of common stock to RBB Bank
Aktiengrsellshaft. upon conversion of subordinated debentures of
$200,000.
(34) In December 1998, Pen issued 90,000 shares of common stock at $0.75 per
share to Gordon Mundy upon exercise of warrants.
(35) In January 1999, Pen issued 46,014 shares of common stock to BNC Bach
International Ltd. upon conversion of subordinated debentures of
$50,846.
(36) In January 1999, Pen issued 103,956 shares of common stock to Dundee
Securities. upon
47
conversion of subordinated debentures of $101,877.
(37) In March 1999, Pen issued 172,681 shares of common stock to BNC Bach
International Ltd. upon conversion of subordinated debentures of
$127,784.
(38) In March 1999, Pen issued 104,372 shares of common stock to BNC Bach
International Ltd. upon conversion of subordinated debentures of
$102,285.
(39) In March 1999, Pen issued 135,135 shares of common stock to RBB Bank
Aktiengrsellshaft. upon conversion of subordinated debentures of
$100,000.
(40) In March 1999, Pen issued 154,199 shares of common stock to BNC Bach
International Ltd. upon conversion of subordinated debentures of
$153,428.
(41) In April 1999, Pen issued 147,000 shares of common stock to Jeffery M.
Lamberson as payment for services.
(42) In April 1999, Pen issued 281,250 shares of common stock to Liviakis
Financial Communications, Inc. as payment for services.
(43) In April 1999, Pen issued 153,000 shares of common stock to Richard S.
Carpenter as payment for services.
(44) In April 1999, Pen issued 93,750 shares of common stock to Robert B.
Prag as payment for services.
All of the foregoing issuances were exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933 because the stockholders were
either accredited investors, officers of Pen, or otherwise sophisticated, fully
informed investors.
Item 27. Exhibits.
3 Articles of incorporation and By-laws, incorporated by reference to
Pen's Registration Statement filed on Form SB-2, SEC File No. 33-96444.
4.1 Certificate of Amendment creating Series A Convertible Preferred Stock
as filed February 10, 1999. See Exhibits to Current Report on Form 8-K
filed on February 17, 1999.
4.2 Certificate of Amendment creating Series B Convertible Preferred Stock as
amended.
5.1 Opinion and Consent of Oscar D. Folger, Esq.
10.1 Asset Purchase Agreement for the purchase of InCirT Technology from the
Cerplex Group, Inc. See Exhibits to Report on Form 10-QSB for quarter
ended June 30, 1996.
10.2 Employment Agreement between James S. Pendleton and Pen. See Exhibits
to Report on Form 10-QSB for quarter ended June 30, 1996.
10.3 Employment Agreement between Wayne R. Wright and Pen. See Exhibits to
Report on Form 10-QSB for quarter ended June 30, 1996.
10.4 Form of 1995 Stock Option Plan. See Exhibits to Registration Statement
on Form SB-2, SEC File No.33-96444.
10.5 Asset Purchase Agreement dated November 12, 1996 for the sale of the
San Jose Division between Touche Electronics, Inc. a subsidiary of TMCI
Electronics, Inc. and Pen. See Exhibits to Report on Form 10-QSB for
quarter ended December 31, 1996.
10.6 Loan and Security Agreement between FINOVA and Pen dated September 4,
1997. See Exhibits to Report on Form 10-KSB for fiscal year ended
September 30, 1997.
48
10.7 Employment Agreement between Stephen J. Fryer and Pen. See Exhibits to
Report on Form 10-KSB for fiscal year ended September 30, 1997.
10.8 Employment Agreement between Daniele Reni and Pen. See Exhibits to
Report on Form 10-KSB for fiscal year ended September 30, 1997.
10.9 Agreement and Plan of Reorganization through Acquisition dated April 1,
1997 between PowerStream Technology, Inc. and Pen. See Exhibits to
Report on Form 10-KSB for fiscal year ended September 30, 1997.
23.1 Consent of Oscar D. Folger, Esq. (included in Exhibit 5.1)
23.2 Consent of Grant Thornton LLP
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any fact or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the high and low and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3, or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That for purposes of determining any liability under the Securities
Act of 1933, each filing
49
of Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
50
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and has authorized this
registration statement to be signed on its behalf by the undersigned in Irvine,
California as of May 27, 1999.
PEN INTERCONNECT, INC.
By /s/ Stephen J. Fryer
Stephen J. Fryer, President/
Chief Executive Officer
Each person whose signature appears below hereby constitutes and appoints
Stephen J. Fryer as his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him or her and in his or her name,
place and stead in any and all capacities to sign any and all amendments
(including post-effective amendments) to this Registration Statement on Form
SB-2 and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission under the
Securities Act of 1933. Pursuant to the requirements of the Securities Act of
1933, this registration statement was signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ James S. Pendleton Chairman May 27, 1999
James S. Pendleton
/s/ Wayne R. Wright Director May 27, 1999
Wayne R. Wright
/s/ C. Reed Brown Director May 27, 1999
C. Reed Brown
/s/ Stephen J. Fryer Director, CEO May 27, 1999
Stephen J. Fryer and President
/s/ James E. Harward
James E. Harward Director May 27, 1999
/s/ Milton Haber
Milton Haber Director May 27, 1999
/s/ Robert Albrecht CFO and Principal Accounting
Robert Albrecht and Financial Officer) May 27, 1999
51
EXHIBIT 4.2
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
PEN INTERCONNECT, INC.
Pursuant to the provisions of the Utah Revised Business Corporation Act
(the "Act"), the undersigned corporation adopts the following Articles of
Amendment to its Articles of Incorporation:
FIRST: The name of the corporation is PEN INTERCONNECT, INC.
SECOND: The amendment consists of an amendment to the Statement of
Rights and Privileges of the Series B Convertible Preferred Stock of Pen
Interconnect, Inc. (dated March ____ , 1999 and filed with the Utah
Department of Commerce Division of Corporations and Commercial Code on
March ____, 1999) (the "Statement").
Amendment to Paragraph 5(a). The amendment is to the fourth sentence
of paragraph number 5(a) of the Statement under the heading Optional
Conversion - Right to Convert; Conversion Price, which currently reads as
follows:
However, in no event shall the Conversion Price be greater than $1.30625
(the "Maximum Conversion Price").
The text of that sentence is amended to read in its entirety, as follows:
However, in no event shall the Conversion Price be greater than $.790625
(the "Maximum Conversion Price").
THIRD: The foregoing amendment was adopted on May _____, 1999.
FOURTH: The foregoing amendment was adopted by the unanimous written
consent of the holders of the Corporation's Series B Convertible Preferred
Stock (the "Series B Stock"). There were 1,100 shares of Series B stock
outstanding at the time the amendment was adopted and 1,100 votes entitled
to be cast by the holders of the Series B Stock who voted separately
52
as a group. The unanimous consent of such holders was sufficient for
approval by that voting group.
DATED this ________ day of May, 1999.
PEN INTERCONNECT, INC.
STEPHEN J. FRYER, PRESIDENT
53
Exhibits 5 and 23(a)
LAW OFFICES OF OSCAR D. FOLGER
521 Fifth Avenue
New York, New York 10175
May 27, 1999
Pen Interconnect, Inc.
1601 Alton Parkway
Irvine, California 92606
Re: Form SB-2 Registration Statement
Gentlemen:
We have acted as counsel for Pen Interconnect, Inc., a Utah
corporation ("Pen"), in connection with the registration by Pen of 10,777,453
shares of Common Stock, par value $0.01 per share (the "Securities"), which are
the subject of a Registration Statement on Form SB-2 under the Securities Act of
1933, as amended. As counsel to Pen we have examined and relied upon the
original or copies, certified or otherwise identified to our satisfaction, of
such documents, corporate records and other instruments as we have deemed
necessary in order to render the following opinion.
On the basis of and subject to the foregoing, it is our
opinion that the Securities to be issued and sold by the Selling Stockholders
have been duly authorized and, when issued and sold, will be duly issued and
fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the use of our name under the heading
"Legal Matters" in the Registration Statement. In giving such consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the Rules
and Regulations of the Securities and Exchange Commission thereunder.
This opinion is to be used only in connection with the offer
and sale of the Securities as variously referred to herein while the
Registration Statement is in effect.
Very truly yours,
/s/ Oscar D. Folger
54
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated January 12, 1999 accompanying the financial
statements of Pen Interconnect, Inc. contained in the Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
\s\ Grant Thornton LLP
Salt Lake City, Utah
May 28, 1999
55