UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 2001
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[] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 1-14072
PEN INTERCONNECT, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0430260
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
13765 Alton Parkway, Irvine CA. 92618
(Address of Principal Executive Offices) (Zip Code)
(949) 859-6279
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, par value $0.01 per share
Common Stock Warrants
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. check
State issuer's revenues for its most recent fiscal year. Discontinued
operations. The Company disposed of all its' operations and had no revenue for
the year.
As of December 14, 2001, there were 311,282,242 shares of the Issuer's
common stock, par value $0.01, issued and outstanding. The aggregate market
value of the Issuer's voting stock held by non-affiliates of the Issuer was
approximately $1,447,230 at the closing quotation for the Issuer's common stock
of $0.014 December 14, 2001.
DOCUMENTS INCORPORATED BY REFERENCE See Item 13 -
Exhibits and reports on form 8-K
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FORM 10-KSB
PEN INTERCONNECT, INC.
Table of Contents
Page
PART I
1. Description of Business 3
2. Description of Property 5
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
PART II
5. Market for Common Equity and Related Stockholder Matters 6
6. Management's Discussion and Analysis or Plan of Operation 7
7. Financial Statements 9
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 9
10. Executive Compensation 11
11. Security Ownership of Certain Beneficial Owners and Management 12
12. Certain Relationships and Related Transactions 12
13. Exhibits and Reports on Form 8-K 12
Signatures 14
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS. This annual report contains certain forward-looking
statements within the meaning of section 27A of the Securities Act of 1933, as
amended, and section 21E of the Securities Exchange Act of 1934, as amended,
that involve risks and uncertainties. In addition, the Company may from time to
time make oral forward-looking statements. Actual results are uncertain and may
be impacted by many factors. In particular, certain risks and uncertainties that
may impact the accuracy of the forward-looking statements with respect to
revenues, expenses and operating results include without limitation; cycles of
customer orders, general economic and competitive conditions and changing
consumer trends, technological advances and the number and timing of new product
introductions, shipments of products and components from foreign suppliers, and
changes in the mix of products ordered by customers. As a result, the actual
results may differ materially from those projected in the forward-looking
statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
(A) BUSINESS DEVELOPMENT
General
Pen is at present a fully reporting public shell company. The company in
2001 negotiated the merger with The Automatic Answer, Inc., (tAA). tAA, located
in Irvine, California, is a convergence and innovation technology company with
roots in the voice-processing space. The Amanda, principal software product, is
a client server telephony enabled software solution optimized for Microsoft's
Windows operating systems. Utilizing the worldwide public switched telephone
network and both Intranet and Internet computer based technologies, Amanda
seamlessly integrates the computer and the telephone enabling the PC to be the
communications medium. tAA currently has a network of 550 dealers that resell
the Amanda line of products to the small business market and four distribution
houses strategically located in the country serving more than 25,000 independent
dealers. The Amanda software product has been sold to more than 55,000 small
business users.
Historically, the Company developed and produced on a turnkey basis,
contract manufacturing solutions for original equipment manufacturers in the
computer, telecommunications, electronic instrument, medical and testing
equipment industries.
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Summary of Current Year Events and Subsequent Events
Since the end of FY 1999, Pen has gone through substantial changes and
problems caused by a default notice from our bank, due to one of our major
customers going into receivership and leaving Pen with over $1.5 million in
accounts receivable and inventory. In February 2000, Pen sold its' PowersStream
division to Lund Engineering of Orem, Utah for cash and notes. Lund took over
the assets and debts of PowerStream, which paid off PowerStream's obligations to
Finova which also owns the notes through its' foreclosure actions.
During the last six (6) months of FY 2000, Pen focused on completing a
merger and reducing its' debt through a stock for debt program with its'
vendors. Seventy-six (76) percent of the vendors agreed to the program, thus
reducing Pens' outstanding vendor debt from $3.2 million to $689,541. Pen issued
761,747 shares of unregistered common stock. In FY 2001 Pen issued 10,178 shares
of common stock to pay vendor debt of $25,390.
In October of 1999 the Company received notice from its primary lender
(Finova) that they were placing the Company's loan in default status for
non-compliance with loan covenants. The Company was originally given until
December 18, 1999 to pay off the loan balance.
Finova extended the deadline to February 28, 2000 but no other lending
arrangements or definitive agreements to sell the Company or any of its
divisions were made. In March 2000, Finova caused a foreclosure of all of Pens'
assets as a result of the default notice not being satisfied. This left Pen as
only a fully reporting public shell company without assets, nor operating
divisions.
In May 2001, the Company and Finova reached an agreement, whereby the
Company would pay $150,000, issue 250,000 shares of Pen's Common Stock and
modify the strike price on 375,000 warrants to One Tenth of One Cent ($0.001).
The expiration date for such warrants shall remain September 4, 2004. In return
the Company received back from Finova, certain assets which do not have
significant value as of the current date.
(B) BUSINESS OF ISSUER
(1) Principal Products and Services
For the year ended September 30, 2001, the Company had no products or
services.
(2) Business Strategy
The Company, envisions, with the merger of The Automatic Answer Company,
Inc., to build upon the current Amanda product line. The addition of other
products as well as adding additional dealers and expanding its products
internationally. The acquisition of other companies which would fit into the
company's long-term strategy. In addition the Company expects to achieve
continued growth by adding recurring service revenue to its base of equipment
sales.
(3) Employees
Our success is dependent, in part, upon our ability to attract and retain
qualified management and technical personnel. Competition for these personnel is
intense, and we will be adversely affected if we are unable to attract key
employees.
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ITEM 2. DESCRIPTION OF PROPERTY FACILITIES
In February 1999, the Company's corporate offices moved into a building
leased by its' InCirT division. After the Company was foreclosed on by its'
bank, we were able to negotiate a month-to-month rental agreement with InCirT's
landlord for approximately 2000 square feet in an industrial building in Irvine,
California. In July, 2001, the Company moved it's corporate office to Irvine,
California.
ITEM 3. LEGAL PROCEEDINGS
1. On October 28, 1999 Color Savvy Systems, Ltd., filed suit to recover
$165,750 in past due uncontested vendor obligations. On February 16,
2000, Color Savvy obtained a judgment against the Company for
$165,750.
2. On February 15, 2000, Amistar Corporation filed suit against the
Company to recover $95,733 in uncontested past due vendor obligations.
As of this writing, Amistar has accepted the Company's stock for debt
offer.
3. On March 21, 2000, Interworks Computer Products, Inc., filed suit to
recover $35,771 in past due uncontested vendor obligations.
4. On July 22, 2000, Force Electronics filed suit to recover $68,816 in
past due uncontested vendor obligations, and obtained a judgment on
September 15, 2000.
5. Control Design Supply/Nedco filed suit to recover $6,788 in past due
uncontested vendor obligations.
6. On March 20, 2000, DHL Airways Inc. obtained a judgment in the amount
of $3,868 for past due uncontested vendor obligation.
7. On April 5, 2001, Sony Recording Media Products obtained a judgment
against the Company in the amount of $35,000. The company has made
payment totaling $25,000.
On November 15, 1999, Alan L. Weaver, former CEO of Pen Interconnect, Inc.,
obtained a judgment against the Company in the amount of $118,500 for breach of
a settlement agreement relative to Mr. Weavers' employment agreement with the
Company. The Company has reserved $135,300 as a liability as of September 30,
2001 for this agreement as the company owes interest from the date of the
judgment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted on by the shareholders at the annual
meeting of the stockholders, which took place on August 30,2001:
1. The election of six persons to serve as Directors on the Company's
board of directors;
2. The ratify the appointment of Pohl, McNabola, Berg & Company LLP as
independent auditors for the Company, for the fiscal year ending
September 30, 2001, for the purpose of auditing the financial
statements and books of the Company, for, and during, the period
ending on that date;
3. To vote on the merger with tAA Inc., by an exchange of shares;
4. To vote on an amendment to the Company's certificate of incorporation
to increase the number of shares of the Common Stock, authorized to be
issued, to 500,000,000 shares;
5. To approve an amendment to the Certificate of Incorporation in order
to effect a stock combination (reverse split) of the Common Stock in
an exchange ratio to be approved by the Board, ranging from one newly
issued share for each two outstanding shares of Common Stock to one
newly issued share for each ten outstanding shares of Common Stock;
6. To vote on changing the Company name from Pen Interconnect, Inc., to
The Amanda Company, Inc.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our common stock and warrants have been traded on the OTC Bulletin Board
since they were de-listed from the National Association of Securities Dealers
Automated Quotation system as of March 30, 1999. They were traded under the
symbol "PENC:OB" for the common stock and "PENCW" for the warrants. On December
11, 2001, the stock symbols changed to AMND.OB for the common stock and AMND-W
for the warrants The common stock and warrants were first publicly traded on
November 17, 1995. The following table sets forth the range of high and low bids
for our common stock for the last three years.
High Low
Fiscal Year 2000-Quarter Ended
September 30, 2001 $0.04 $0.03
June 30, 2001 0.05 0.04
March 31, 2001 0.11 0.03
December 31, 2000 0.19 0.02
Fiscal Year 1999-Quarter Ended
September 30, 2000 $0.30 $0.17
June 30, 2000 0.36 0.18
March 31, 2000 0.55 0.20
December 31, 1999 0.53 0.25
Fiscal Year 1998 Quarter Ended
September 30, 1999 $0.81 $0.52
June 30, 1999 1.19 0.78
March 31, 1999 2.00 0.72
December 31, 1998 2.50 0.77
On December 14, 2001 the closing quotation for the common stock on the OTC
Bulletin Board was $0.014 per share. As of December 14, 2001, there were
311,282,242 shares of common stock issued and outstanding, held by approximately
4,100 shareholders, including several holders who are nominees for an
undetermined number of beneficial owners.
On December 14, 2001, the closing quotation for the warrants was $0.002 per
warrant. The Company extended the public warrants for one more year to November
17, 2002 as they were to expire on November 17, 2001. As of September 30, 2001,
there were issued and outstanding public and private warrants to purchase
10,509,700 shares of the Company's common stock.
The trading volume of the common stock and warrants of the Company is
limited, creating significant changes in the trading price of the common stock
and warrants as a result of relatively minor changes in the supply and demand.
Consequently, potential investors should be aware that the price of the common
stock and warrants in the trading market can change dramatically over short
periods as a result of factors unrelated to the operations, earnings and
business activities of the Company.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis provides certain information, which
the Company's management believes is relevant to an assessment and understanding
of the Company's results of operations and financial condition for the fiscal
years ended September 30, 2001 and 2000. This discussion and analysis should be
read in conjunction with the Company's financial statements and related
footnotes.
Results of Operations
Net sales and cost of sales: There were no sales from continuing operations
for the years ended September 30, 2001 and 2000. All operating divisions were
disposed of during 1999 and 2000, and all operating activity was reclassified as
discontinued operations. Since March 2, 2000, the Company decided to maintain
its' situation as a reporting public company, and to reduce its' debt in order
to make the Company attractive to private companies that would want to use Pen
to go public. This approach is designed to maintain shareholder value.
The Company did enter into a Letter of Intent to reverse merge with a small
private .com company, perFORMplace.com, in the entertainment services business.
A definitive agreement was signed in late August 2000 with the intent to obtain
shareholder ratification at the next shareholders' meeting. However, on November
8, 2000, before the meeting could be held, perFORMplace.com terminated the
merger. This caused a serious drop in the Company's stock price and the need to
go back out to seek a new merger partner or acquisition.
The Company entered into Agreement to Acquire Shares with The Automatic
Answer, Inc., a California company on April 10, 2001
Since the disposition of the net assets and operations of our historical
operations, the Company has reduced its' staff to two employees and one
part-time financial consultant.
Operating Expenses
Since the foreclosure on the assets and the sale of its' operating
divisions, the operating costs of the Company have been kept to a minimum, with
two employees and limited travel and expenses. As a result, general and
administrative expenses decreased from $1,733,596 to $787,591, a net change of
55%.
Depreciation increased $771 from 2000 to 2001. Most of the Company's fixed
assets were disposed of during 2000 and the remainder in 2001.
Interest expense decreased $315,147 during 2001, primarily due to the
foreclosure of the assets of its' InCirT division, and the resulting affect
against the Company's line of credit. Interest expense of $43,048 resulted
predominantly from the issuance of convertible debentures.
The Company recorded in ,$320,500 loss from impairment due to the write-off
of advances made to a merger candidate in 2000. In 2001, an additional amount of
$63,000 was recognized as a loss relating to the same event.
Other Income/Expenses
As part of the merger between the Company and tAA, the Company made several
loans to tAA in 2001 totaling $461,200. The loans were used to fund tAA's
pre-merger operations. The merger was effective October 1, 2001 and these loans
will be eliminated upon the consolidations of the two companies. The $461,2000
was expensed as acquisition expense.
The Company recorded a $135,300 loss in FY 2000 from a lawsuit brought by a
former executive of the Company.
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Losses from discontinued operations decreased to $497,827 in 2000 from
$5,695,148 in 1999. The Company disposed of two divisions during 1999 and the
remaining two divisions early in 2000.
Losses on the disposal of the Company's two remaining operating divisions
in 2000 was $776,384.
Extraordinary Income
The Company recorded a gain from extinguishments of debt of $149,642 in
2001 and $2,018,547 during 2000 resulting from the conversion of vendor payables
to equity.
Net Loss and Loss Per Share
Net loss and loss per share. Net losses decreased to $1,294,784 or $0.03
per common share in fiscal year 2000 from $1,891,199 or $0.10 per common share
in fiscal year 2000; a decrease of $596,415 or $0.07 per share. Decreased losses
result from a reduction in operating expenses as the Company sought merger
candidates.
Liquidity and Capital Resources
The Company had negative working capital at September 30, 2001 of $2,377692
compared to negative working capital of $1,977,914 at September 30, 2000 for a
decrease in working capital of $399,778. The decrease is due to the raising of
additional capital through the issuance of convertible debentures which allowed
the company to have sufficient working capital to pay salaries, office rent and
other expenses while the company looked for a merger partner.
During fiscal 2001 Pen continued to experience cash flow problems. For most
of fiscal 2000, the market price of Pen's stock was sufficient to raise
additional funds to support the negative cash flow from operations. Pen's stock
price has continued to decline since Pen's securities were de-listed from the
NASDAQ National Market in March of 1999.
In March 2000, because of Pens' inability to clear the default notice, our
bank, Finova Capital caused a pre-packaged foreclosure of all of Pens' assets,
including the take-over of our largest division, InCirT, which was subsequently
sold to ADTI, a subsidiary of Comtel Holdings, Inc. Since that time, Pen has
maintained its' fully reporting public status and sought a new asset/company
that would benefit from a merger with a public company.
Additional capital infusions will be necessary if the Company is to
continue its' Operations. The investors which purchased the preferred stock in
FY99 have been willing to continue limited funding to assist the Company. There
is no guarantee that this will continue for any sustained period. If Pen cannot
raise additional funding, Pen will have to seek bankruptcy protection.
In February 2000, Pen sold its' PowerStream division to Lund Engineering or
Orem, Utah for cash and notes. Lund took over the assets and debt of PowerStream
which paid off its' obligations to Finova, which also owns the note through its'
foreclosure actions.
In September 1999, Pen completed the sale of the MotoSat division to a
company controlled by James Pendleton, Pen's former Chairman and CEO. The sale
did not generate cash proceeds but eliminated monthly operating losses
associated with MotoSat. All assets and liabilities of the MotoSat division were
transferred to Mr. Pendleton's company in exchange for Mr. Pendleton's agreement
to waive any claim to post employment, deferred compensation or retirement
benefits. The transfer of the MotoSat division to Mr. Pendleton resulted in a
loss to the Company of approximately $68,000.
-8-
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data are included beginning at
page A.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers.
The Company's directors and executive officers, and their respective ages
and positions with the Company, are set forth below in tabular form.
Biographical information on each person is set forth following the tabular
information. There are no family relationships between any of the Company's
directors or executive officers. The Company's board of directors is currently
comprised of 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 Age Position
Stephen J. Fryer 63 Chairman of the Board, Chief
Executive Officer
And Principal Accounting
Officer
Brian Bonar 53 Director
Jose Candia 52 Director
David Woo 39 Director
Bill Prevot 57 Director
Tim Morgan 42 Director
Stephen J. Fryer has served as Chief Executive Officer of the Company
since 1999 and as a director of the Company since 1997. He served as Senior
Vice President of Sales and Marketing from October 1996 to October 1997.
From 1989 to 1996, Mr. Fryer was a principal in Ventana International,
Ltd., an Irvine, California based venture capital and private investment
banking firm. Mr. Fryer graduated from the University of Southern
California in 1960 with a Bachelors Degree in Mechanical Engineering and
has spent over twenty-eight years in the computer business in the United
States, Asia and Europe.
Brian Bonar was appointed a director of the Company on November 30,
1999. Mr. Bonar currently serves as CEO and President of Imaging
Technologies Corporation (Itec) and has held this position since April
1998. Prior to his appointment as CEO of Itec, Mr. Bonar served in other
capacities with Itec since August 1992. From 1991 to 1992 Mr. Bonar was
Vice President of Worldwide Sales and Marketing for Bezsier Systems, Inc.
From 1990 to 1991 he was Worldwide Sales Manager for Adaptec, Inc. From
1988 to 1990 Mr. Bonar was Vice President of Sales and Marketing for Rastek
Corporation. From 1984 to 1988 Mr. Bonar was employed as Executive Director
of Engineering at QMS, Inc. Prior to these appointments, Mr. Bonar was
employed by IBM, U.K. Ltd. for approximately 17 years.
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Jose Candia was appointed a director of the Company on August 30,
2001. Mr. Candia currently serves as CEO and President of The Amanda
Company, Inc. He brings 20 years of experience in the telecommunications
and business arena. He was Senior V.P. of Sales and Operations for
Centrecom. com, a VOLP enterprise. Mr. Candia directed a sales force of
over 250 individuals for AT&T Wireless/L.A. Cellular; managed the western
regions of Mitel, Intecom-Matra and United Technologies Communications;
directed the national sales efforts for Fujitsu Communications Company and
managed overseas for Warner-Lambert International. Mr. Candia has a
business administration degree from Northwood University, Midland, Michigan
and a business management degree from the Institoto Superior De
Administracion Y Productividad in Lima, Peru.
David Woo, was appointed Chairman of the Board of the Company on
August 30, 2001. Mr. Woo was the Founder and CEO of tAA. He received his
Bachelors Degree in Computer Science from Columbia College, Columbia
University.
Bill Prevot was appointed a director of the Company on August 30,
2001. Mr. Prevot recently served as Chief Operating Officer of OhGolly.com.
He brings more than eleven years of experience from AT&T Wireless and the
cellular telephone industry, where he has served as Vice President of
Customer Care, Chief Information Officer and Director of Administration and
Operations, overseeing staff expansion of over 300% to accommodate the
rapid growth of this division and customer responsiveness.
E. Timothy Morgan was appointed a director of the Company on August
30, 2001. Mr. Morgan is a Founder and Senior Vice President of Advanced
Research at Mr. Morgan has over twenty years experience in computer
programming and soft ware engineering. His work in concurrent software
design includes software tools and authoring of several publications
explicity for the analysis of concurrent systems.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934, and the rules and
regulations promulgated thereunder, require the Company's executive officers and
directors, and persons who beneficially own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and to furnish the Company with copies thereof. It is our understanding that
these reports have been filed on a timely basis.
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ITEM 10. EXECUTIVE COMPENSATION
The following table shows the compensation paid by the Company to its
current Chairman and Chief Executive Officer, and the Company's other most
highly paid executive officer.
None of the other executive officer's total annual salary and bonus
exceeded $100,000 for the years presented.
Summary Compensation Table
Annual Compensation
Name and Principal Fiscal Year Salary Bonus
Stephen J. Fryer 2001 $ 63,267 $ 0
President & CEO 1200 148,802 4,116
1999 139,000 17,304
Jim Pendleton (1) 1999 139,666 0
Chairman/CEO
Mehrdad Mobasseri (1) 1999 96,000 89,282
President-InCirT
Alan Weaver (1) 1999 100,000 30,881
Vice President
o The tables above do not include certain insurance, the use of a car,
and other personal benefits, the total value of which does not exceed
$50,000 or 10% of such person's salary and bonus.
(1) - Resigned in 1999/2000.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of the Company's common
stock beneficially owned as of September 30, 2001, (i) by each person who is
known by the Company to own beneficially more than 5% of the Company's common
stock, (ii) by each director and director nominee, (iii) by each of the
Company's named executive officers, and (iv) by all directors, director nominees
and executive officers, as a group, as reported by each such person. Unless
otherwise indicated, each stockholder's address is c/o the Company, 13765 Alton
Parkway, Suite F Irvine, CA. 92618.
Name and Address of Amount and Nature of Amount Issuable on Percentage of
Beneficial Owner Beneficial Owner Exercise of Options Outstanding Common stock
----------------------------- ------------------------- -------------------------- -------------------------
Steven Fryer 3,092,500 1.0
Brian Bonner 1,150,000 .4
E. Timothy Morgan 43,344,769 13.9
David L. Woo 55,786,309 17.9
All Officers and Directors as
A Group (4 persons) 103,373,578 33.2
(1) In addition to shares issuable on exercise of warrants, consists of
shares issuable upon conversion of shares of Series A preferred stock
and Series B preferred stock based on a market price equal to $0.34
per share. The terms of the Series A and Series B preferred stock
prevent the holders from converting their shares of preferred stock if
the conversion would cause the holder to be deemed the beneficial
owner of more than 9.9% of Pen's common stock, except with the prior
consent of the holder.
Except as set forth above, the Company knows of no beneficial owner of five
percent or more of the Company's Common Stock, and does not know of any
arrangement which may at a subsequent date result in a change of control of the
Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information summarizes certain transactions, either engaged
in within the last two (2) years or, proposed to be engaged in, by the Company
and the individuals described.
Former officers and board members, James Pendleton and Wayne Wright reached
a modified settlement with the Company, per their management and deferred income
statements, by each accepting 250,000 warrants, priced at $0.65 per share, and
376,000 shares of common stock in place of monetary payments.
ITEM 13 - Index of Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
Reports on Form 8-K were filed by the Company during the three months
ended September 30, 2001.
(b) Exhibits
Exhibit
No. Description
1. Underwriter's Warrant Agreement including Form of Underwriter's
Warrant, incorporated by reference to the Company's Registration
Statement filed on Form SB-2, SEC File No. 33-96444.
3. Articles of Incorporation and By-Laws, incorporated by reference
to the Company's Registration Statement filed on Form SB-2, SEC
File No. 33-96444
4.1 Certificate of Amendment creating Series A Convertible Preferred
Stock as amended, as filed February 10, 1999. See Exhibit to
report on Form 8-K filed on February 17, 1999.
4.2 Certificate of Amendment creating Series B Convertible Preferred
Stock as amended.
10.4 Form of Warrant between the Registrant and JW Charles Securities,
Inc., BMC Bach International Ltd., Gordon Mundy, Louis Centofanti
and Heracles Holdings. See Registration Statement filed on Form
S-3, SEC File No. 333-60451.
10.5 Form of 1995 Stock Option Plan. See Registration Statement filed
on Form SB-2, SEC File No. 33-96444.
10.7 Loan and Security Agreement between FINOVA and the Company. See
Exhibit to Report on Form 10-KSB, dated September 30, 1997.
10.8 Employment Agreement between Stephen J. Fryer and the Company.
See Exhibit to Report on Form 10-KSB, dated September 30, 1997.
10.11.1 Finder's Agreement between the Registrant and JW Charles
Securities, Inc., dated June 2, 1998. See Registration Statement
filed on Form S-3, SEC File No. 333-60451.
10.12 Convertible Preferred Stock and Warrant Purchase Agreement
between Pen, RBB Bank AG, Austost Anstalt Schaan, Balmore Funds
SA and AMRO International, SA dated as of February 12, 1999. See
Exhibits to Report on Form 8-K filed February 17, 1999.
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Exhibit
No. Description
10.13 Amendment in Total and Complete Restatement of the Deferred
Compensation Salary Continuation Plan and Employment Agreement
between Pen and James S. Pendleton, dated as of July 23, 1999.
10.14 Amendment in Total and Complete Restatement of the Deferred
Compensation Salary Continuation Plan and Employment Agreement
between Pen, Wayne R. Wright, and Rent A Profession, dated as of
October 1, 1999.
10.15 Change in Pen's Auditors from Grant Thornton LLP to Berg &
Associates as of March 7, 2000, and FINOVA's foreclosure action
on Pen's assets to recover its' loans to the Company. See
Exhibits to Report on Form 8-K filed on March 14, 2000, SEC File
No. 1-14072.
10.16 Amended Registration Rights Agreement for registration of Common
stock, Form S-B2 filed February 16, 2000. Registration Statement
# 333-79631.
10.17 1999 Consulting Services Agreement and Compensation Plan for
outside consultants (Incorporated by reference to Form S-8, filed
September 3, 1999.
10.18 2000 Consulting Services Agreement and compensation plan for
outside consultants. (Incorporated by reference to Form S-8 filed
May 17, 2000.
10.19 2001 Consulting and Advisors Service Agreement for outside
consultants (Incorporated by reference to Form S-8 filed on May
19, 2001; Form S-8 filed on August 14, 2001; Form S-8 filed on
February 23, 2001 and Form S-8 filed on January 25, 2001.
-13-
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: January 11, 2002 PEN INTERCONNECT, INC.
By:_/s/ Stephen J. Fryer
Stephen J. Fryer
Chairman, CEO and
Chief Accounting Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated below.
Date: January 11, 2002 By:/s/ Stephen J. Fryer
Stephen J. Fryer
Chairman, CEO and
Chief Accounting Officer
Date: January 11, 2002 By:/s/ Brian Bonar
Brian Bonar
Director
Date: January 11, 2002 By:/s/ Jose M. Candia
Jose M. Candia
Director
Date: January 11, 2002 By:/s/ David L. Woo
David L.Woo
Director
Date: January 11, 2002 By:/s/ Bill Prevot
Bill Prevot
Director
Date: January 11, 2002 By:/s/ E. Timothy Morgan
E. Timothy Morgan
Director
-14-
Pen Interconnect, Inc.
AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
SEPTEMBER 30, 2001 AND 2000
Page A
PEN INTERCONNECT, INC.
AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
Page
Report of Independent Auditors.....................................1
Balance Sheets.....................................................2
Statements of Operations and Retained Earnings...................3-4
Consolidated Statement of Stockholders Equity ...................5-6
Statements of Cash Flows.........................................7-9
Notes to Financial Statements..................................10-31
Report of Independent Auditors
Board of Directors
Pen Interconnect, Inc.
Irvine, California
We have audited the accompanying balance sheets of Pen Interconnect, Inc., a
Utah Corporation, as of September 30, 2001 and 2000, and the related statements
of operations, stockholders' deficit, and cash flows for the years then ended.
These financial statements are the responsibility of the management of Pen
Interconnect, Inc. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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, 2001 and 2000, and the results of its operations and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations.
The Company has a stockholders' deficit of ($2,313,110) and ($1,977,041) and its
current liabilities exceeded its current assets by $817,888 and $972,729 as of
September 30, 2001 and 2000, respectively. These factors, among others, as
discussed in Note 2 to the financial statements, raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regards to these matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/Pohl, McNabola, Berg & Company LLP
San Francisco, California
January 11, 2002
1
Pen Interconnect, Inc.
BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND 2000
ASSETS
2001 2000
----------------------------------
Current assets:
Cash and cash equivalents (Note 1) $ 6,839 $ 9,319
----------------------------------
Total Current Assets 6,839 9,319
----------------------------------
Property and equipment, net of accumulated depreciation (Note 1) - 874
Discontinued operations - 9,605
----------------------------------
Total assets $ 6,839 $ 19,798
==================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable 176,017 200,751
Accrued liabilities 648,710 781,296
----------------------------------
Total current liabilities 824,727 982,047
Convertible debentures 800,000 150,000
Advances payable 40,000 -
----------------------------------
Total non-current liabilities 840,000 150,000
Liabilities from discontinued operations 655,222 864,791
----------------------------------
Total liabilities 2,319,949 1,996,838
Stockholders deficit:
Convertible preferred stock, $.01 par value, authorized 5,000,000
shares Series A, issued and outstanding, 91 shares in 2001
And 130 shares in 2000 1 1
Series B, issued and outstanding, 886 shares in 2001
and 926 shares in 2000 9 9
Common stock, $.01 par value, authorized 50,000,000 shares
issued and outstanding 49,873,603 shares in 2001
and 27,596,946 shares in 2000 498,736 275,969
Additional paid in capital 20,008,060 19,282,402
Accumulated deficit (22,819,916) (21,535,421)
----------------------------------
Total stockholders' deficit (2,313,110) (1,977,040)
----------------------------------
Total liabilities and stockholders' deficit $ 6,839 $ 19,798
==================================
The accompanying notes are an integral part of these financial statements.
- 2 -
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000
------------------- ---------------------
Revenues:
Net revenues (Note 1) $ - $ -
Costs of revenues - -
------------------- ---------------------
- -
------------------- ---------------------
General and administrative expenses 951,355 1,733,596
Depreciation 874 103
------------------- ---------------------
Loss from operations 952,229 1,733,699
Other income and expense
Interest (income) expense 33,048 358,195
Acquisition Expense 461,200 -
Loss on impairment 63,000 320,500
Loss on lawsuit - 135,300
Liquidation damage waiver - 86,941
------------------- ---------------------
Total other income and expense 557,248 900,936
Loss from continuing operations before income taxes 1,509,477 2,634,635
Income Taxes 800 900
------------------- ---------------------
Loss from continuing operations 1,510,277 2,635,535
(Gain) loss from discontinued operations, net of taxes of $-0-
InCirT (65,851) -
Powerstream - 269,356
------------------- ---------------------
Total (gain) loss from discontinued operations (65,851) 269,356
(continued)
The accompanying notes are an integral part of these financial statements.
-3-
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000
------------------------------------
Loss from foreclosed segment:
InCirT - 228,471
(Gain) loss from disposal of discontinued operations, net of
taxes of $-0-
Powerstream - 963,027
InCirT - (186,643)
------------------------------------
Total loss from disposal of discontinued operations - 776,384
Total (gain) loss from discontinued operations (65,851) 1,274,211
------------------------------------
Net loss before extraordinary item 1,444,426 3,909,746
------------------------------------
Extinguishment of debt (149,642) (2,018,547)
Net loss $ 1,294,784 $ 1,891,199
====================================
Earnings per share, basic and fully diluted:
Loss before discontinued items and extraordinary item $ (0.03) $ (0.14)
Loss from discontinued items - (0.07)
------------------------------------
Loss before extraordinary item (0.03) (0.21)
------------------------------------
Extinguishment of debt - 0.11
------------------------------------
Net loss per share $ (0.03) $ (0.10)
====================================
Shares used in per share calculation - basic and fully diluted 37,701,171 18,556,461
====================================
The accompanying notes are an integral part of these financial statements.
-4-
Pen Interconnect, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
Retained
Common Preferred Additional earnings
Stock Stock paid-in (accumulated
Shares Amount Shares Amount Capital deficit) Total
------------- ------------------------------- -------------------------------------
Balance September 30, 1999 9,638,114 $ 96,381 2,800 $ 28 $17,447,876$ (19,354,413)$(1,810,128)
------------- ---------------------------------------------------------------------
Conversion of Preferred Stock -
Series B 411,112 4,111 (74) (1) (4,111) (1)
Conversion of Preferred Stock -
Series A 9,057,654 90,577 (1,670) (17) (90,577) (17)
Common stock issued in lieu of
preferred stock dividend payable 349,323 3,493 61,088 64,581
Compensation expense recognized
on repricing of options and
warrants 339,822 339,822
Conversion of warrants - Preferred
Stock Series A into common stock 315,000 3,150 83,792 86,942
Exercise of stock options 1,150,000 11,500 254,941 266,441
Exercise of warrants 2,766,668 27,667 273,451 301,118
Common stock issued for services 1,760,193 17,602 416,372 433,974
Conversion of trade payables and debt
into common stock 1,061,747 10,617 250,655 261,272
Sale of common stock 1,087,135 10,871 206,843 217,714
Dividends on Preferred Stock (289,809) (289,809)
Stock options granted as compensation 42,250 42,250
Net loss (1,891,199) (1,891,199)
------------- ---------------------------------------------------------------------
Balance September 30, 2000 27,596,946 $275,969 1,056 $ 10 $19,282,402$ (21,535,421)$(1,977,040)
============= =====================================================================
The accompanying notes are an integral part of these financial statements.
-5-
Pen Interconnect, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
Retained
Common Preferred Additional earnings
Stock Stock paid-in (accumulated
Shares Amount Shares Amount Capital deficit) Total
--------------------------------------- ---------------------------------------
Balance September 30, 2000 27,596,946$ 275,969 1,056 $ 10 $ 19,282,402 $(21,535,421)$ (1,977,040)
-------------------------------------------------------------------------------
Conversion of Preferred Stock - Series B 1,617,648 16,177 (40) - (16,177) -
Conversion of Preferred Stock - Series A 1,667,039 16,670 (39) - (16,670) -
Exercise of options 346,000 3,460 40,882 44,342
Exercise of warrants 16,102,251 161,023 483,162 644,185
Common stock issued for services 683,950 6,840 21,920 28,760
Conversion of trade payables and debt
into common stock 760,178 7,602 15,776 23,378
Stock granted as compensation 1,100,000 11,000 33,000 44,000
Compensation expense granted on options and
warrants 163,765 163,765
Preferred dividend adjustment 10,289 10,289
Other (409) (4) (4)
Net loss (1,294,784) (1,294,784)
-------------------------------------------------------------------------------
Balance September 30, 2001 49,873,603$ 498,736 977 $ 10 $ 20,008,060 $(22,819,916)$ (2,313,110)
===============================================================================
The accompanying notes are an integral part of these financial statements.
-6-
Pen Interconnect, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
AS OF SEPTEMBER 30, 2001 AND 2000
2001 2000
----------------------------------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (1,294,784) $ (1,891,199)
Adjustments to reconcile net loss to net cash used .
in operating activities
Depreciation and amortization 874 90,514
Allowance for note receivable - 320,500
Common stock issued for services 28,760 433,974
Compensation expense granted on options and warrants 163,765 -
Extinguishment of debt - (2,018,547)
Conversion of warrants - 86,941
Debt conversion to common stock 23,378 261,272
Common stock issued for dividends payable - 64,581
Common stock issued in lieu of compensation 44,000 -
Stock options issued for services at below the fair market value
of the stock on the date of the grant and repricing of options - 382,071
Discontinued operations
Loss on sale of divisions - (186,643)
Loss on foreclosure of division - 963,027
Changes in assets and liabilities
Trade accounts receivable - 790,429
Inventories - 1,300,987
Prepaid expenses and other current assets 9,605 9,171
Accounts payable (234,303) 1,861,945
Accrued liabilities (132,586) (141,401)
----------------------------------------
Cash flow generated by (used in) operating activities (1,391,292) 2,327,622
----------------------------------------
Cash flow from investing activities:
Advances to perFORMplace - 320,500
Collections of notes receivable - (374,567)
Proceeds from sale of divisions - 75,689
----------------------------------------
Net cash generated by investing activities - 21,622
----------------------------------------
(continued)
The accompanying notes are an integral part of these financial statemens.
-7-
Pen Interconnect, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
AS OF SEPTEMBER 30, 2001 AND 2000
Cash flow from financing activities:
Issuance of preferred stock - (18)
Proceeds from issuance of common stock - 217,714
Proceeds from convertible debenture 650,000 150,000
Proceed from advances 40,000
Net change in line of credit - (1,840,467)
Net change in long-term debt obligations - (1,611,010)
Preferred dividends adjustment 10,285 -
Exercise of warrants 644,185 301,117
Exercise of stock options 44,342 266,440
------------------------------------
Net cash provided (consumed) in financing activities 1,388,812 (2,516,224)
------------------------------------
Net (decrease) in cash and cash equivalents (2,480) (166,980)
------------------------------------
Cash and cash equivalents at beginning of year 9,319 176,299
------------------------------------
Cash and cash equivalents at end of year $ 6,839 $ 9,319
====================================
Supplementary disclosures of cash flow information
Cash paid during the year for
Interest $ - $ 360,296
Income taxes $ 800 $ 900
Sale of Division
On January 21, 2000, the Company sold substantially all of the assets
and certain liabilities of its Powerstream division (Note 3, 9) noted as
follows:
Cash $ -
Accounts receivable, net 142,017
Inventories 74,262
Note Receivable 9,017
Property, equipment and leaseholds, net 69,229
Accounts Payable (166,661)
Unearned revenue (216,000)
Note payable (14,820)
Capital leases (7,998)
------------------
Net gain on sale of Division (110,954)
Less consideration received
Note receivable $ -
Cash 75,689
------------------
(Gain) on sale of division $ (186,643)
==================
The accompanying notes are an integral part of these financial statements.
-8-
Pen Interconnect, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
AS OF SEPTEMBER 30, 2001 AND 2000
Foreclosure of Division
On March 3, 2000, the Company's InCirT Division was foreclosed and
substantially all of the assets and liabilities were turned over to a
secured lender (Note 3, 9). The value of the assets and liabilities
transferred were as follows:
Accounts receivable, net $ 2,038,322
Inventories 2,875,412
Notes receivable 299,662
Property, equipment and leaseholds, net 959,758
Accounts payable (2,614,032)
Other debt obligations (2,596,095)
-----------------------
Loss on foreclosure of division $ (963,027)
=======================
Conversion of debt and trade payables
During 2001, debt and trade payables in the amount of $23,378 were
converted in to 760,178 shares of common stock. During fiscal year 2000,
debt and trade payables in the amount of $261,272 were converted into
1,061,747 shares of common stock.
2001 2000
------------------- -------------------
The following are the other non-cash charges to common stock:
Conversion of preferred stock into common stock $ $ (18)
Common stock issued in lieu of dividends payable 64,581
Conversion of warrants-preferred stock into common stock 86,941
Common stock issued and warrants converted for services 151,395 433,974
Common stock issued for compensation 44,000 -
Compensation expense on stock options 163,765 -
Compensation expense on repricing of options and warrants - 339,822
The accompanying notes are an integral part of these financial statements.
-9-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
1. Organization and Summary of Significant Accounting Principles
Organization
Pen Interconnect, Inc. ("the Company" or "Pen") was incorporated on September
30, 1985, in the State of Utah. Through March 3, 2000, the date of foreclosure
of its last operating division, the Company was a total interconnection solution
provider offering custom design and manufacturing of circuit boards, battery
chargers, power supplies and uninterrupted power supply systems for original
equipment manufacturers. Most of the Company's sales, before the closure of its
operating divisions, consisted of printed circuit boards.
The Company experienced severe cash flow problems for several years and in an
attempt to satisfy the demands of its creditors, sold three of its operating
divisions, noted as follows:
Division Name Date Sold
--------------------------- -------------------------
Cable Davison January 31, 1999
MOTO-SAT September 30, 1999
Powerstream January 21, 2000
On March 3, 2000 the Company and its secured asset based lender, Finova Capital,
entered into a voluntary foreclosure in which all the assets in the Company's
last remaining division, InCirt, was transferred to Finova to satisfy the
revolving credit and term loans held by the bank In a subsequent agreement,
dated May 31, 2001 Finova Capital and Pen Interconnect agreed to a final
settlement of all claims between them.
During the second quarter of FY2000, the Company announced a change in its
strategic direction and began seeking merger candidates with new technologies.
On March 29, 2000, the Company announced the signing of a letter of intent to
acquire perFORMplace.com, a privately held Internet provider of electronic
business-to-business services to the entertainment industry. On November 11,
2000, perFORMplace.com informed the Company that it had decided not to pursue
the merger.
The Company subsequently signed a merger agreement with the The Automatic
Answer, Inc. ("tAA"). tAA, a distributor of voice mail systems, has developed a
client service based software products that are used in a Microsoft Window's
environment. The Company's products include voice mail, automated attendant,
call control, messaging and voice over Internet. The merger with tAA was
effective October 1, 2001.
Basis of Presentation
The financial statements include the corporate operations of Pen Interconnect as
continuing operations. All the remaining activity from the Company's prior
operating divisions, including Cable, MOTO SAT, Powerstream and InCirt have been
disclosed as discontinued operations in the financial statements for the years
ended September 30, 2000 and 2001. During 2001, activity from discontinued
operations was limited to the settlement of accounts payable.
-10-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
1. Organization and Summary of Significant Accounting Principles (continued)
Basis of Presentation (continued)
Transactions related to the October 1, 2001 merger with tAA consist solely of
advances from the Company to tAA to cover tAA's operating expenses during the
pre-merger period. These advances have been expensed as acquisition expense.
Cash, Cash Equivalents and Short-Term Investments
The Company considers cash on hand, cash in banks, certificates of deposits and
time deposits with original maturities of three months or less when purchased as
cash equivalents. Short-term investments are investments with original maturity
greater than ninety days and less than one year.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for additions and
major improvements are capitalized. Expenditures for repairs and maintenance and
minor improvements are charged to expense as incurred. Gains or losses from
retirements and disposals are recorded as other income or expense.
Property and equipment are depreciated over their estimated useful lives.
Leasehold improvements and assets financed under capital leases are amortized
over their estimated useful lives or the lease term, whichever is shorter.
Depreciation and amortization are calculated using straight-line and accelerated
methods over the following estimated useful lives:
Years
-------------
Production equipment 5-6
Furniture and fixtures 10
Transportation equipment 10
Leasehold improvements 5
-11-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
1. Organization and Summary of Significant Accounting Principles (continued)
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. An allowance against
deferred tax assets is recorded when it is more likely than not that such tax
benefits will not be realized.
Financial Instruments
Cash and cash equivalents, trade accounts payable, and accrued liabilities are
reflected in the financial statements at cost that approximates fair value.
Stock-Based Compensation
The Company accounts for its stock-based compensation plan based on Accounting
Principles Board ("APB") Opinion No. 25. In October 1995, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for
Stock-Based Compensation." The Company has determined that it will not change to
the fair value method and will continue to use APB Opinion No. 25 for
measurement and recognition of any expense related to employee stock based
transactions.
In March 2000, the FASB released Interpretation No.44, " Accounting for Certain
Transactions Involving Stock Compensation." This Interpretation addresses
certain practice issues related to APE Opinion No.25. The provisions of this
Interpretation are effective July 1, 2000, and except for specific transactions
noted in paragraphs 94-96 of this Interpretation, shall be applied prospectively
to new awards, exchanges of awards in business combinations, modifications to an
outstanding award, and exchanges in grantee status that occur on or after that
date.
Certain events and practices covered in this Interpretation have different
application dates, and events that occur after an application date but prior to
July 1, 2000, shall be recognized only on a prospective basis. Accordingly, no
adjustment shall be made upon initial application of the Interpretation to
financial statements for periods prior to July 1, 2000. Thus, any compensation
cost measured upon initial application of this Interpretation that is attributed
to periods prior to July 1, 2000 shall not be recognized. The Company has
adopted the provisions of this Interpretation starting July 1,2000.
-12-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
1. Organization and Summary of Significant Accounting Principles (continued)
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") which establishes standards for
reporting and display of changes in equity from non-owner sources in the
financial statements. The Company does not have any components of comprehensive
income in 2001 or 2000.
Valuation of Long-lived Assets
The Company periodically evaluates the carrying value of long-lived assets to be
held and used, including intangible assets, when events and circumstances
warrant such a review. The carrying value of a long-lived asset is considered
impaired when the anticipated discounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset. Fair market value is determined primarily
using the anticipated cash flows discounted at a rate commensurate with the risk
involved. Losses on long-lived assets to be disposed of are determined in a
similar manner, except that fair market values are reduced for the cost to
dispose.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. Cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
are reflected in the financial statements at fair value because of the
short-term maturity of these instruments. Because of the unique aspects of the
subordinated debentures and long-term debt, fair values cannot readily be
determined.
Revenue Recognition
Sales are generally recorded when products are shipped or when services are
rendered.
Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America necessarily
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Significant estimates include
allowance for doubtful accounts, inventory obsolescence, estimated lives for
fixed assets, goodwill and intangibles, the liabilities posed by lawsuits and
collection of contingent assets. Actual results could differ from these
estimates.
-13-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
1. Organization and Summary of Significant Accounting Principles (continued)
Advertising
The Company did not incur any significant amount of advertising expenses.
Earnings per share
Basic earnings per common share are computed using the weighted average number
of common shares outstanding during the period.
Diluted earnings per common share incorporate the incremental shares issuable
upon the assumed exercise of stock options and warrants.
Certain of The Company's stock options were excluded from the calculation of
diluted earnings per share because they were antidilutive, but these options
could be dilutive in the future.
Segment and geographic information
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 requires enterprises to report
information about operating segments in annual financial statements and selected
information about reportable segments in interim financial reports issued to
shareholders, on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. It also
established standards for related disclosures about products and services,
geographic areas and major customers. Segment disclosures have been provided for
discontinued operations.
Recent pronouncements
In June 1998, the Financial Accounting Standard Board (FASB) issued Statement
No. 133, "Accounting for the Derivative Instruments and Hedging Activities". The
Statement will require The Company to recognize all derivatives on the balance
sheet at fair value. This statement is effective for fiscal years beginning
after June 15, 2000, and has been adopted by The Company for the years ending
September 30, 2001 and 2000. The management does not anticipate that the
adoption of the new Statement will have a significant effect on The Company's
revenues and earnings, as The Company currently does not have any derivative
instruments.
The FASB issued SFAS No. 131 on "Disclosures about Segments of an Enterprise and
Related Information" effective in 1998. The Company evaluated SFAS No. 131 and
determined that the Company operates in only one segment.
-14-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
1. Organization and Summary of Significant Accounting Principles (continued)
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("FAS 141") and
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). SFAS No. 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized but instead tested for
impairment at least annually in accordance with the provisions of FAS No. 142.
FAS No. 142 will also require that intangible assets with definite lives be
amortized over their respective useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The provisions of this Statement are required to be applied starting with fiscal
years beginning after December 15, 2001. The Company will continue to amortize
goodwill existing at September 30, 2001 until the new standard is adopted and
test goodwill for impairment in accordance with SFAS No. 121. The Company is
currently evaluating the effect that adoption of the provisions of FAS No. 142
will have on its results of operations and financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires liability recognition for obligations
associated with the retirement of tangible long-lived asset and the associated
asset retirement costs. The Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002 with earlier application
encouraged. The implementation of SFAS No. 143 will not have a material affect
on the Company's results of operations or financial position.
In August 2001, the FASB issued SFAFS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of", in that it removes goodwill from its impairment scope and
allows for different approaches in cash flow estimation. However, SFAS No. 144
retains the fundamental provisions of SFAS No. 121 for (a) recognition and
measurement of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of. SFAS No. 144 also supersedes the business
segment concept in APB opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," in
that it permits presentation of a component of an entity, whether classified as
held for sale or disposed of, as a discontinued operation. However, SFAS No. 144
retains the requirement of APB Opinion No. 30 to report discontinued operations
separately from continuing operations. The provisions of this Statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001 with earlier application encouraged. Implementation of SFAS
No. 144 will not have a material effect on the Company's results of operations
or financial position.
Reclassifications
Certain reclassifications have been made to the 2000 financial statements to
conform to the 2001 presentation. Such reclassifications had no effect on net
income as previously reported.
-15-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
2. Financial Results and Liquidity
The Company has incurred net losses of $1,294,784, $1,891,199, in 2001 and 2000,
respectively. In addition, the Company has a stockholders' deficit of $2,313,110
and $1,977,041 and a working capital deficit of $817,888 and $972,729 as of
September 30, 2001 and 2000, respectively. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's operations, including its combined operations with tAA once the
merger becomes effective, continue to generate operating losses and to use
rather than provide cash flow. The Company has issued common stock, preferred
stock, debentures and convertible debt in exchange for cash and services to
provide the necessary resources and working capital to help meet its strategic
goals and to meet its current obligations.
While the Company continues to seek additional equity capital, there can be no
assurance that The Company will be successful. Without an infusion of sufficient
additional capital, the Company will not be able to continue as a going concern.
The financial statements do not include any adjustments that might be necessary
should The Company be unable to continue as a going concern.
3. Disposition of Operating Divisions
Cable Division
Effective January 31, 1999, the Company sold substantially all of the assets and
certain of the liabilities of its Cable Division to Cables To Go, Inc (CTG). Net
assets of $2,732,059 were sold for $1,075,000 in cash and a royalty payment
contingent upon the future revenues of the Cable Division. $150,000 of the
royalty payment was guaranteed and has been recorded by the Company as a note
receivable from CTG. CTG agreed to use and compensate the Company for an
additional $558,747 of the net assets contingent upon certain of its future
operating needs. The Company originally recorded a loss of $948,312 upon
disposition of the Cable Division but has adjusted the loss to $1,507,059 based
on its determination that CTG will not use nor compensate the Company for the
additional $558,747 of net assets.
MOTO-SAT Division
Effective September 30, 1999, the Company sold substantially all of the assets
and liabilities of its MOTO-SAT Division to James Pendleton, the Company's
former CEO and Chairman. The net assets of $68,438 were sold in exchange for Mr.
Pendleton's agreement to waive any claim to post-employment, deferred
compensation, or retirement benefits. The Company recognized a loss of $68,438
upon disposition of the MOTO-SAT Division.
-16-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
3. Disposition of Operating Divisions (continued)
Powerstream Division
Effective January 21, 2000, the Company sold substantially all of the assets and
liabilities of its Powerstream Division to Lund Instrument Engineering, Inc. The
net assets of $ (110,954) were sold for cash of $75,689 plus a royalties ranging
from 8% to 16% of the gross profits generated by the sale of certain products
for a period of three years subsequent to the sale subject to certain
adjustments. The Company recognized a gain of $186,643 upon the disposition of
the PowerStream division. Cash proceeds were used to pay down a note due to a
secured lender.
InCirt Division
The Company had been operating under a default notice with its asset-based
lender, Finova Capital, since September 1999, when the Company began seeking
buyers for its two remaining divisions PowerStream and InCirT. In February of
2000, a Letter of Intent to sell the InCirT division to another contract
manufacturer was terminated. The Company then solicited a competitor to purchase
most of the assets and to negotiate a supplier agreement with the Company's
largest account as part of a voluntary foreclosure of all the remaining assets
of the Company, for which Finova had a perfected security interest. The Company
recognized a loss of $963,027 during 2000 resulting from the foreclosure of the
InCirT division.
4. Concentrations
Financial instruments that potentially subject The Company to concentration of
credit risk include cash deposits in excess of FDIC limits and short-term
investments. The Company restricts investment of cash balances to financial
institutions with high credit standing.
5. Investment in tAA
The Company concluded a merger agreement with The Automatic Answer, Inc. (tAA),
a distributor of voice mail systems and other telephone products, on April 13,
2001. Under the agreement, the Company will give up sixty-seven percent (67%) of
its shares to acquire tAA subject to the adjustment, noted below. Certain of
tAA's debt holders are to convert their outstanding notes to a new class of
preferred shares within 120 days after the close of the transaction.
The number of shares that the Company will give to tAA will be adjusted if the
average closing price of the Company's stock, in the aggregate, for the 60 days
after the close of the transaction, falls below $10,000,000.
-17-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
5. Investment in tAA (continued)
As part of the transaction, the Company made several loans to tAA totaling
$461,200. The loans were used to fund tAA's pre-merger cash flow.
The merger was effective October 1, 2001 and these loans are eliminated upon the
consolidation of the two companies. These financial statements classify the
$461,200 as acquisition expenses. The transaction will be accounted for as a
reverse merger with tAA as the surviving entity. Pen shareholders will retain
approximately 7% of the merged company.
6. Foreclosure
The Company entered into a financing agreement with a bank for $6,300,000. The
agreement consisted of a $5,000,000 revolving credit line and two term loans for
$800,000 and $500,000. Under the loan agreements for these loans, the Company
was required to meet certain financial ratios and specific minimum levels of
earnings and net worth. The loan agreements also restricted employee advances,
capital expenditures, compensation, and additional indebtedness; and restricted
the payment of dividends. The Company had borrowed $4,436,562 under the line of
credit at September 30, 1999. At times, including at September 30, 1999, the
Company had been in violation of certain of the covenants of this credit
facility. The Company operated under a forbearance agreement during all of
fiscal 1999.
As of September 30, 1999, the Company had not received a waiver from the lender
and all obligations under this credit facility were payable on demand of the
lender and were classified as current liabilities in the balance sheet.
Subsequent to September 30, 1999, the lender declared the loan agreement in
default.
The Company continued operating under a default notice with its Lender as it
disposed of its remaining operating divisions. Finova and the Company agreed to
a voluntary foreclosure of all the remaining assets of the Company, for which
Finova had a perfected security interest. The Company's September 30, 2000
balance sheet reflects the transfer of all collateral assets to Finova and the
Company recognized an equal offset of the bank's line of credit balance and term
loans owed by the Company. The Company recorded a loss on transfer of assets of
$900,000.
During 2001, the Company negotiated an agreement with the Lender, which resulted
in the complete satisfaction of all the debt with the Lender in exchange for
$150,000, of which $40,000 remains unpaid as of September 30, 2001. The
agreement also includes the issuance of 250,000 additional share of common
stock, the repricing of 350,000 warrants from $1.00 to $.001, and the issuance
of an additional 150,000 warrants at $.001.
Finova also transferred back to the Company rights to recover certain assets
owned by the Company prior to the foreclosure. These assets, which have an
estimated original book value of $800,000, have been fully reserved as of
September 30, 2001.
-18-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
7. Long Lived Assets
On an ongoing basis, management reviews the valuation of long-lived assets,
including intangible assets, to determine possible impairment by comparing the
carrying value to the undiscounted estimated future cash flows of the related
assets and necessary adjustments, if any, are recorded. Based upon operating
losses from certain divisions, continued cash flow problems and managements
decision to negotiate the sale of other divisions, the Company reduced the
carrying costs of certain of its long-lived assets by $320,500 in 2000 to better
reflect management's current expectations for the realization of these assets.
The adjustments relate to assets of the Company's various discontinued divisions
and to assets from continuing operations.
During 2001, the Company decided to fully reserve the balance of amounts due
from perFORMplace.com. The Company had signed a Letter of Intent with
perFormplace.com during April 2000 providing for a reverse merger of the two
companies. On November 8, 2000, perFormplace.com terminated the agreement.
The following is a summary of the assets charged-off to impairment for the years
ended December 31:
2001 2000
----------------- -------------------
Goodwill $ - $ -
Investments 63,000 320,500
----------------- -------------------
$ 63,000 $ 320,500
================= ===================
8. Operating Leases
The Company rents office space on a monthly basis. There are no long-term lease
commitments.
-19-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
9. Discontinued Operations
With the sale of its Cable and MOTO SAT operations during 1999 and the sale of
Powerstream operation and the foreclosure of its InCirt division in 2000 (See
Footnote 3), all of the operating divisions of the Company have been classified
as discontinued operations.
Following is a summary of the operating activity and the discontinued assets and
liabilities of these operations:
2001 2000
--------------------- ---------------------
Revenues:
InCirT Division $ - $ 6,674,890
Cable Division - -
Other Divisions - 50,489
--------------------- ---------------------
$ - $ 6,725,379
Gross Profit:
InCirT Division $ - $ 1,160,301
Cable Division - -
Other Divisions - 17,818
--------------------- ---------------------
$ - $ 1,178,119
Indentifiable Assets:
InCirT Division $ - $ 9,605
Cable Division - -
Other Divisions - -
--------------------- ---------------------
$ - $ 9,605
Identifiable Liabilities:
InCirT Division $ (655,222) $ (864,791)
Cable Division - -
Other Divisions - -
--------------------- ---------------------
$ (655,222) $ (864,791)
===================== =====================
-20-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
9. Discontinued Operations (continued)
2001 2000
---------------- -------------------
Assets from Discontinued Operations
Prepaid Expenses $ - $ 9,605
---------------- -------------------
$ - $ 9,605
================ ===================
Liabilities from Discontinued Operations
Accounts Payable $ 655,222 $ 864,791
---------------- -------------------
$ 655,222 $ 864,791
================ ===================
During 2001, activity from discontinued operations was limited to the settlement
of accounts payable.
10. Related Party Transactions
Stephen J. Fryer, former Chairman, CEO, President and Chief Accounting Officer,
received options for 4,700,000 shares in 2001.
Brian Bonar and Milton Haber, Directors of Pen, received 500,000 shares of
common stock for their continued service as Board Members. Additionally, Mr.
Bonar received options for 500,000 shares of the Company's common stock.
Brian Bonar has been a Director with Pen since January 2000 and is also Chairman
of the Board at Itec. As of the foreclosure date, Itec owed InCirT/Pen $850,000
for services performed by InCirT. During the year, the Company received payments
of $93,000 from Itek.
11. Convertible Debentures
During 2001, the Company issued $800,000 in new one-year convertible debentures
with interest rates ranging from 7% to 8%, payable quarterly. These debentures
are convertible in the Company's common stock at the lower of $.04 or 70% of the
average of the three lowest closing prices during the 30 days prior to the
conversion. All these debentures are redeemable in cash due one year from the
date of issuance.
In August 2000, the Company entered into a convertible debenture agreement for
$600,000 in exchange for 4,000,000 shares of the Company's common stock. The
convertible debenture has an interest rate of 7% per annum. The debenture is
convertible into common stock at the lesser of $0.15 per share or 70% of market
price on the conversion date.
-21-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
12. Stock Holders' Equity
Preferred Stock Dividends in Arrears Deferred
Payments of annual dividends for 2001 and 2000 were deferred by the Company's
board of directors on the outstanding preferred stocks because of losses
sustained by the Company. As of September 30, 2001, preferred dividends in
arrears amounted to $480,323 on the Preferred Stock Series A and B.
Conversion of Convertible Preferred Stock - Series A
In 2000, the Company converted 1,670 shares of Preferred Stock Series A into
9,057,654 shares of common stock, and the Company converted $64,581 of dividends
payable on these share shares of Preferred Stock into 349,323 shares of common
stock. During 2001, the Company redeemed 39 shares of Preferred Stock Series A
for 1,667,039 shares of common stock.
Conversion of Convertible Preferred Stock - Series B
In 2000, the Company converted 74 shares of Preferred Stock Series B into
411,112 shares of common stock. During 2001, the Company redeemed 40 shares of
Preferred Stock Series B stock for 1,617,648 shares of common stock.
Conversion of Preferred Stock - Series A Warrants
In 2000, the Company converted warrants to purchase shares of Preferred Stock
Series A into 315,000 shares of common stock in a cashless exercise, and the
Company recorded an expense of $86,941 based on the fair value of the common
stock on the date of conversion. During 2001, an additional 13,121,201 shares
were issued in exchange of warrants at prices that ranged from $0.02 to $0.063.
An additional 3,327,050 warrants were converted in lieu of payments for services
rendered.
Repricing of Stock Options
In order to continue to attract and retain employees, the Board of Directors
authorized the repricing of options and warrants to purchase shares of common
stock effective March 2000, to the then fair market value of $0.30 per share.
All repriced options maintained the same expiration terms. Approximately
1,240,000 options and warrants were repriced under this program. The repricing
included members of the Board of Directors and executive officers.
-22-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
12. Stock Holders' Equity (continued)
Warrants Activity for the Period
During the year ended September 30, 2001, the Board of Directors approved the
issuance of warrants to purchase an aggregate of 21,754,251 shares of the
Company's common stock. Such warrants are exercisable at prices ranging from
$0.02 to $0.10 per share, vest immediately, and expire at various times through
December 2004.
In order to continue to meet operating cash flow requirements, and to attract
and retain employees and consultants, the Board of Directors authorized the
repricing of options and/or warrants to purchase shares of common stock in
November 2000, February, 2001, March 2001 and June 2001, to the then fair market
value, which ranged from $0.25 to $0.06 per share. Approximately 14 million
options/warrants were repriced under this program. The repricing included
approximately 2.6 million options and warrants granted to members of the Board
of Directors and executive officers. The repricing of options/warrants resulted
in warrants/options being exercised for approximately 11.7 million shares of
common stock.
In September 2001, the Board of Directors authorized the repricing and the
extended the expiration date of the public warrants to purchase shares of common
stock to be effective November 2001. The price per share was repriced to $0.20,
(the per share price has to be at a minimum of $0.24 for 15 days prior to
conversion), from $6.50 per share and the expiration date was extended by one
year (warrants will expire in November 2002. Approximately 2.8 million warrants
were repriced under this program.
Included in the issuance of warrants to purchase 14 million aggregate shares of
the Company's common stock are warrants that were issued to individuals under
terms of a consulting agreement during the years ended September 30, 2001 and
2000. Such issuances were accounted for under Financial Accounting Standards
Board Statement No. 123 using primarily the Black-Scholes option pricing model,
which resulted in the recording of compensation cost during the years ended
September 30, 2001 and 2000 (see note 14).
Grant of Equity Interest in Full Settlement of Trade Payable and Troubled Debt
Due to significant cash flow problems, in April 2000 the Company commenced on a
program to reach agreements with its vendors to grant shares of its common stock
to the vendors in full settlement of the amounts due the vendors. At the date of
issuance of the shares, the amounts due vendors exceeded the fair market value
of the common stock issued by $1,988,218, which is classified in the statement
of operations as an extraordinary gain due to the extingushment of debt. As of
September 30, 2000, the Company has issued 1,061,747 shares of its common stock
under this program. An additional 760,178 shares were issued as settlement of
debt during 2001.
-23-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
13. Preferred Stock
The Company issued two series of Preferred Stock. Series A was issued in
February 1999 consisting of 1,800 shares, par value $0.01 per share, for $1,000
per share. Series B was issued in April 1999 at the same price but only 1,000
shares were issued. As mentioned in Note C, part of the funds raised from the
issuance of this stock were used to repay the bridge loans made earlier in the
fiscal year. After repayment of the bridge loans and paying $238,500 in fees and
expenses, the net cash raised by the Company for operations was $1,665,500. Both
series of Preferred Stock carry a 16 percent dividend rate, which is paid
quarterly.
Both issuances of Preferred Stock are convertible into shares of the Company's
Common Stock. Each share of Series A Preferred Stock is convertible into an
amount of shares of Pen Common Stock equal to $1,000 divided by the average of
the two lowest closing bid prices for Pen Common Stock during the period of 22
consecutive trading days ending with the last trading day before the date of
conversion, after discounting that market price by 15 percent (the "Conversion
Price"). During the first six months, the Board of Directors approved a
reduction of the maximum Conversion Price for the Series A Preferred Stock and
Series B Preferred Stock to $.53 from $1.17 and $.79 per share respectively. The
reduction was granted to obtain a waiver in relation to the sale of a major
asset - InCirT Technologies Division. The shares of Series B Preferred Stock are
convertible into Common Stock at the same Conversion Price as the Series A
Preferred Stock. Warrants to acquire 335,453 shares of Common Stock at
conversion prices ranging from $0.86 to $1.434 per share were also issued to the
purchasers of the Series A and Series B Preferred Stock. The warrants expire
three years from date the Preferred Stock and warrants were initially issued.
Convertible Debentures
On October 22, 1997, the Board of Directors of the Company approved the issuance
of up to $1,500,000 of 3 percent convertible Debentures with a maximum term of
24 months. On June 16, 1998, the Board of Directors of the Company approved the
issuance of up to $1,000,000 of additional three percent convertible debentures
with a maximum term of 24 months. The convertible debentures (the "Debentures")
mature, unless earlier converted by the holders, into shares of common stock of
the Company. The Company filed a registration statement with the United States
Securities and Exchange Commission with respect to the common stock of the
Company into which the Debentures may be converted.
The Debentures were convertible by the holders thereof into the number of shares
of common stock equal to the face amount of the Debentures being converted
divided by the lesser of (i) eighty percent (80 percent) of the closing bid
price of the Company's common stock as reported on the NASDAQ Small Cap market
on the day of conversion, or (ii) $2.75. The Debentures could be converted in
three equal installments beginning on the earlier of (i) the 75th day of their
issuance, and continuing through the 135th day of their issuance, or (ii) the
day following the effective date of the Registration Statement, through the 60th
day following the effective date of the Registration Statement. The Company
could cause the Debentures to be converted into shares of common stock after the
110th day following the effective date of the Registration Statement, if the
common stock traded at or above $5.50 per share for 20 consecutive days.
As of September 30, 1998, the Company had issued all $2,500,000 of these
convertible Debentures and $1,000,000 had been converted to 689,332 shares of
common stock. As of September 30, 1999, the remaining $1,500,000 of convertible
Debentures had been converted into 2,092,671 shares of common stock.
-24-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
13. Preferred Stock (continued)
Convertible Debentures (continued)
Because of the favorable conversion feature of the Debentures, the Company has
recognized interest expense relating to the price below market at which the
Debentures can be converted into common shares of stock. The interest is
initially set up as a deferred charge against the subordinated debenture balance
with an offset to additional paid-in capital. The deferred interest is amortized
over a period corresponding to time restrictions as to when the Debentures can
be converted into stock. The resulting charge to interest expense increases the
effective interest rate of the Debentures. Deferred interest expense of $250,032
was recorded on the $1,000,000 in Debenture issue relative to the favorable
conversion feature and was amortized over four months and charged to interest
expense. Amortization of the $250,032 deferred charge totaled $98,571 in fiscal
1999 ($151,461 in fiscal 1998). This interest along with the stated 3 percent
interest rate in the Debentures results in an inherent interest rate of 31
percent.
In connection with the $1,500,000 Debenture issue, the Company recorded $389,591
of deferred interest expense related to the beneficial conversion feature. The
entire deferred charge was amortized and charged to interest expense as of
September 30, 1998. This interest when added to the stated 3 percent interest
rate of the Debenture results in an inherent interest rate of 28 percent.
14. Stock Options and Warrants
The Company has a Stock Option Plan (the Plan). The Plan provides for the
granting of both Incentive Stock Options (ISOs) and Non-qualified Stock Options
(NSOs) to purchase shares of common stock. ISOs are granted at not less than
market value on the date of grant, whereas NSOs may be granted at not less than
85 percent of the market value on the date of the grant. Options may be granted
under the Plan to all officers, directors, and employees of the Company. In
addition, NSOs may be granted to other parties who perform services for the
Company. The Board of Directors has granted management the authority to issue
non-statutory stock options and/or warrants to employees and consultants of the
Company.
As of September 30, 2001 and 2000, the Company granted to its employees and
other eligible participants options and warrants exercisable for the Company's
common stock and preferred stock. Options and warrants to purchase shares of its
common stock are usually granted at the prices equal to the current fair value
of the Company's common stock at the date of grant.
Under the Plan, no option may be exercised after the expiration date of ten
years from the date of grant. As of September 30, 2000, there are two types of
convertible securities (NSOs and Warrants) outstanding.
NSOs may be granted to any eligible participant as determined by the management
of the Company.
-25-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
14. Stock Options and Warrants (continued)
Stock options and warrants issued as of September 30, 2001 and 2000 are
summarized as follows:
2001 2000
-------------------------------- ------------------------------
Average Average
Exercise Exercise
Shares Price Shares Price
---------------- --- -------- -------------- --- --------
Outstanding at beginning of year 11,036,654 $ 2.34 11,086,667 $ 2.45
Granted 21,754,251 0.05 4,304,655 0.34
Exercised (16,448,251) 0.04 (4,231,668) 0.16
Forfeited/Cancelled (1,150,000) 0.06 (123,000) 2.45
---------------- ------------- -------------- -------------
Outstanding at end of year 15,192,654 0.34 11,036,654 $ 1.23
================ ============= ============== =============
Exercisable at end of year 15,187,654 $ 1.32 11,029,154 $ 2.34
================ ============= ============== ==============
The non-statutory stock options and warrants are for periods of two to five
years.
Under APB-25, the cost of compensation is measured by the excess of the fair
market price of the stock over the option exercise price on the measurement
date. This is referred to as the intrinsic value method. Accordingly, the
Company recorded compensation expense of $163,765 and $339,822 for options and
warrants granted for the years ended September 30, 2001 and 2000.
The following table summarizes information about options and warrants
outstanding at September 30, 2001:
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------------
Number Weighted Weighted Number
Outstanding Average Exercisable Weighted
as of Remaining Average as of Average
Range of September 30, Contractual Exercise September 30, Exercise
Exercise Prices 2001 Life Price 2001 Price
------------------- --------------- --------------- -------------- ----------------- --------------
$0.01 - $0.06 11,049,701 0.65 $ 0.08 11,049,701 $ 0.08
$0.07 -$0.10 510,000 4.27 $ 0.10 510,000 $ 0.10
$0.11 - $0.50 315,000 3.69 $ 0.31 310,000 $ 0.31
$0.51 - $1.00 326,953 4.96 $ 0.73 326,953 $ 0.73
$1.01 - $2.00 140,000 1.13 $ 1.72 140,000 $ 1.72
$2.01 - $6.50 2,851,000 0.09 $ 6.49 2,851,000 $ 6.49
--------------- --------------- -------------- ----------------- --------------
15,192,654 0.83 $ 0.34 15,187,654 $ 1.32
=============== =============== ============== ================= ==============
-26-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
14. Stock Options and Warrants (continued)
The following table summarizes information about options and warrants
outstanding at September 30, 2000:
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------------
Number Weighted Weighted Number
Outstanding Average Exercisable Weighted
as of Remaining Average as of Average
Range of eptember 30, Contractual Exercise September 30, Exercise
Exercise Prices S 2000 Life Price 2000 Price
------------------- --------------- --------------- -------------- ----------------- --------------
0.01 -0.20 2,074,201 0.65 $ 0.06 2,074,201 $ 0.65
0.21 -0.30 2,067,500 4.27 $ 0.30 2,060,000 $ 4.27
0.31 - 1.00 921,953 3.69 $ 0.86 921,953 $ 3.69
1.01 - 2.00 3,112,000 4.96 $ 1.85 3,112,000 $ 4.96
2.01 - 3.00 11,000 1.13 $ 2.71 11,000 $ 1.13
3.01 - 6.50 2,850,000 0.09 $ 6.50 2,850,000 $ 0.09
--------------- --------------- -------------- ----------------- --------------
11,036,654 2.65 $ 1.23 11,029,154 $ 2.34
=============== =============== ============== ================= ==============
The exercises period for the options ranges from immediate to four years from
the date of the grant and have various vesting requirements.
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB Opinion No. 25 and related interpretations in accounting for its
stock options and warrants granted to employees or to members of the Company's
Board of Directors. Pursuant to FASB Interpretation No. 44, the Company applies
provisions of SFAS No. 123 for options and warrants granted to third parties.
Accordingly, in 2000, compensation cost has been recognized for its stock
options and warrants granted to outside third parties subsequent to June 30,
2000. This information is required to be determined as if the Company had
accounted for its employee stock options/warrants granted subsequent to December
31, 1994, under the fair value method of that statement. If the Company had
elected to recognize compensation expense based upon the fair value at the grant
date for awards under this plan consistent with the methodology prescribed by
SFAS No. 123, the Company's net loss and loss per share would be reduced to the
pro forma amounts indicated below for the years ended September 30:
2001 2000
------------------- -------------------
Net Loss:
As reported $ (1,294,784) $ (1,891,199)
Pro forma $ (1,388,495) $ (1,966,130)
Basic and diluted loss per common share:
As reported:
Basic $ (0.035) $ (0.10)
Diluted $ (0.035) $ (0.10)
Pro forma:
Basic $ (0.037) $ (0.11)
Diluted $ (0.037) $ (0.11)
-27-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
14. Stock Options and Warrants (continued)
Options/warrants are granted at prices equal to the current fair value of the
Company's common stock at the date of grant. All options and warrants granted
during fiscal year 2000 vest immediately.
The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 2000: dividend yield of 0%; expected volatility of 200%; risk-free
interest rate of 5.6%, and expected life of 2 to 5 years; 2001: dividend yield
of 0%; expected volatility of 300%; risk-free interest rate of 5.8%, and
expected life equal to the actual life for the period. The weighted-average fair
value of options and warrants granted were $0.02 and $0.06 for 2001, and $0.25
and $0.33 for 2000.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
15. Earnings Per Share
The number of weighted common shares outstanding used in the loss per share
calculation is 37,701,171 in 2001 and 18,556,461 in 2000.
2001 2000
------------------- -------------------
Net loss $ (1,294,784) $ (1,891,199)
Dividends on preferred stock 10,289 (289,809)
Imputed dividends from beneficial
conversion feature - -
------------------- -------------------
Loss applicable to common stock $ (1,284,495) $ (2,181,008)
=================== ===================
For the years ended September 30, 2001 and 2000, all of the options and warrants
that were outstanding were not included in the computation of diluted EPS
because to do so would have been anti-dilutive.
-28-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
16. Income Taxes
Income tax expense from continuing operations consists of the following:
2001 2000
------------ ------------
Federal $ - $ -
State 800 900
------------ ------------
$ 800 $ 900
============ ============
Reconciliation of income taxes (benefit) computed at the federal statutory rate
of 34 percent is as follows:
2001 2000
------------------ ------------------
Federal income taxes (benefit) at statutory rate $ (258,957) $ (568,743)
State income taxes (benefit), net of federal tax benefit (129,478) (147,873)
Permanent differences - -
Increase in valuation allowance 387,635 717,516
------------------ ------------------
Income taxes $ 800 $ 900
================== ==================
Deferred tax assets and liabilities consisted of the following:
2001 2000
------------------- ------------------
Deferred tax assets (liabilities)
Net operating loss $ 8,295,665 $ 7,954,332
Impairment of note receivable 157,057 137,302
Other 26,547 -
------------------- ------------------
Deferred tax asset 8,479,269 8,091,634
Valuation allowance (8,479,269) (8,091,634)
------------------- ------------------
Net deferred tax asset $ - $ -
=================== ==================
The Company sustained net operating losses in each of the periods presented. For
2001 and 2000, there were no deferred tax assets or income tax benefits recorded
in the financial statements for net deductible temporary differences or net
operating loss carryforwards because the likelihood of realization of the
related tax benefits cannot be fully established. A valuation allowance of
$8,479,269 has been recorded in 2001 ($8,091,634 in 2000) to reduce the net
deferred tax assets to their estimated net realizable value.
-29-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
16. Income Taxes (continued)
As of September 30, 2001, the Company as net operating loss carryforwards for
tax reporting purposes of approximately $17,315,000 expiring in various years
through 2020. The merger with tAA results in a greater than 50% change in
ownership and represents a different line of business. This severely restricts
the use of these loss carryforwards.
17. Commitments and Contingencies
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.
Following are the matters pending as of September 31, 2001:
1) On October 28, 1999 Color Savvy Systems, Ltd. filed suit to recover $165,750
in past due uncontested vendor obligations. On February 16, 2000, Color Savvy
obtained a judgment against the Company for $165,783.
2) Sony Recording Media Products obtained a judgment against the Company for
$35,086 plus interest during 2001. The Company has been making monthly payments
of $5,000 per month against the outstanding balance.
3) On November 15, 2000 Alan L. Weaver, former CEO of Pen Interconnect, Inc.,
obtained a judgment against the Company in the amount of $118,500 plus interest
for breach of a settlement agreement relative to Mr. Weaver's employment
agreement with the Company. The Company is currently negotiating a payment plan
with the former CEO.
4) The Company is in discussion with Wayne Wright, the prior CFO of the Company,
regarding a claim the CFO has regarding the value of certain stock given to him
as part a settlement of his employment agreement. The resolution of amounts due
under this potential claim is not currently determinable.
Capitalized Leases
Subsequent to the cessation of manufacturing operations in March 2000, various
lessors foreclosed upon capitalized lease equipment and the equipment was
returned to the lessors. At the beginning of the fiscal year, October 1999
future lease payments were $558,492. The Company had made certain payments prior
to default. The lessors have not made additional claims after repossession of
the equipment.
-30-
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
18. Subsequent Events
The merger with tAA was effective October 1, 2001. The name of the Company and
its trading symbol was changed to The Amanda Company, Inc (trading symbol
AMND.OB), effective with the merger.
In accordance with the merger agreement with tAA, the Company issued 408,163,265
shares of the Company stock to the tAA shareholders and will issue an estimated
additional 200,000,000 shares to the tAA shareholders to complete the merger. An
additional 50,000,000 shares are to be issued to Bi-Coastal, Inc., a company
that helped orchestrate the merger.
The Company anticipates that the 10-1 reverse split approved by the shareholders
at the annual meeting on August 30, 2001 will be effective in January 2002.
The Company leased 5000-sq.ft. new office space Irvine, CA over a 60-month term
at $ 5056 per month.
The Company issued $100,000 in one year convertible debentures with interest at
8%, payable quarterly. These debentures are convertible in the Company's common
stock at the lower of $.04 or 70% of the average of the three lowest closing
prices during the 30 days prior to the conversion. These debentures are due one
year from the date of issuance.
The Company issued convertible promissory notes totaling $450,000 in October
2001. These notes are convertible into the company's common stock at $.01 per
share and have a 8,055,853 warrant exercisable for common stock at $.02 per
share and 1,500,000 warrants at $.01 per share.
-31-