UNITED STATES
SECURITIES AND EXCHANGE COMMISION
WASHINGTION, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from _____________ to ______________
Commission file number 1-14072
PEN INTERCONNECT, INC.
----------------------
(Exact name of small business issuer as specified in its charter)
UTAH 87-0430260
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Employer Identification No)
2351 South 2300 West, Salt Lake City, UT 84119
(Address of Principal Executive Offices) (Zip Code)
(801) 973-6090
(Issuer's telephone number)
N/A
-----------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ___X___ No ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to
be filed by Section 12, 13, or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court.
Yes _______ No _______
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 12, 1996, the issuer had 3,033,407 shares of its common
stock, par value $0.01 per share, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes _____ No __X__
FORM 10-QSB
PEN INTERCONNECT, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Financial Information 3
Condensed Balance Sheets at
June 30, 1996 and September 30, 1995 4-5
Condensed Statements of Earnings for the
Quarters Ended June 30, 1996 and 1995 and
Nine months ended June 30, 1996 and 1995 6
Condensed Statements of Cash Flows for the
Nine months Ended June 30, 1996 and 1995 7-10
Notes to Condensed Financial Statements 11-13
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-17
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 2 Changes in the Securities 18
Item 3 Defaults Upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6(a).Exhibits 18-19
Item 6(b).Reports on Form 8-K 18-19
Signatures 20
PEN INTERCONNECT, INC.
PART I
FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED FINANCIAL STATEMENTS
Pen Interconnect, Inc. (the "Issuer"), has included the unaudited
condensed balance sheet of the Issuer as of June 30, 1996 and audited
balance sheet as of September 30, 1995 (the Issuer's most recent
fiscal year), unaudited condensed statements of earnings for the three
and nine months ended June 30, 1996 and 1995, and unaudited condensed
statements of cash flows for the nine months ended June 30, 1996 and
1995, together with unaudited condensed notes thereto. In the opinion
of management of the Issuer, the financial statements reflect all
adjustments, all of which are normal recurring adjustments, considered
necessary to fairly present the financial condition, results of
operations and cash flows of the Issuer for the interim periods
presented. The financial statements included in this report on Form
10-QSB should be read in conjunction with the audited financial
statements of the Issuer and the notes thereto included in the annual
report of the Issuer on Form 10-KSB for the year ended September 30,
1995. The results of operations for the three and nine months ended
June 30, 1996 may not be indicative of the results that may be
expected for the year ending September 30, 1996.
3
PEN INTERCONNECT, INC.
CONDENSED BALANCE SHEETS
ASSETS
June 30, September 30,
1996 1995
CURRENT ASSETS (Unaudited)
Cash and cash equivalents $ 82,810 $ 376,488
Receivables (Note D)
Trade accounts, less allowance for
doubtful accounts of $279,394 and $12,500
at June 30, 1996 and September 30, 1995
respectively. 5,954,976 2,192,368
Current maturities of notes receivable 27,327 27,327
Inventories (Note B and D) 7,398,622 3,362,394
Prepaid expenses and other assets 339,206 135,789
Deferred tax asset 328,089 33,000
Total current assets 14,131,030 6,127,366
PROPERTY AND EQUIPMENT, AT COST (NoteD)
Production equipment 2,833,473 1,825,867
Furniture and fixtures 853,105 419,144
Transportation equipment 64,373 36,008
Leasehold improvements 354,150 340,429
Total property and equipment 4,105,101 2,621,448
Less accumulated depreciation 1,048,386 815,614
Net property and equipment 3,056,715 1,805,834
OTHER ASSETS
Notes receivable, less current maturities 72,245 73,322
Deferred offering costs (Note E) - 294,158
Goodwill (net) 1,435,800 -
Other 225,407 50,143
Total other assets 1,733,452 417,623
TOTAL ASSETS $ 18,921,197 $ 8,350,823
The accompanying notes are an integral part of these statements.
4
PEN INTERCONNECT, INC.
CONDENSED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, September 30,
1996 1995
(Unaudited)
CURRENT LIABILITIES
Notes payable (Note C) $ - $ 1,600,000
Line of credit (Note D) 4,378,941 2,082,897
Current maturities of long-term obligations 65,524 199,200
Current maturities of capital leases 60,232 54,556
Accounts payable 4,023,428 1,443,395
Accrued liabilities 1,120,260 332,608
Income taxes payable 129,733 288,000
Total current liabilities 9,778,118 6,000,656
LONG-TERM OBLIGATIONS, less current
maturities 102,021 151,000
CAPITAL LEASE OBLIGATIONS, less current
maturities 164,548 208,594
DEFERRED INCOME TAXES 274,000 194,000
Total liabilities 10,318,687 6,554,250
STOCKHOLDERS' EQUITY (Notes A,D and E)
Preferred stock, $0.01 par value, authorized
5,000,000 shares, none issued - -
Common stock, $0.01 par value, authorized
50,000,000 shares, issued and outstanding
3,033,407 shares at June 30, 1996 and
1,700,000 shares at September 30, 1995 30,334 17,000
Additional paid-in capital 7,458,403 963,935
Retained earnings 1,113,773 815,638
Total stockholders' equity 8,602,510 1,796,573
Total liabilities and stockholders'
equity $ 18,921,197 $ 8,350,823
The accompanying notes are an integral part of these statements.
5
PEN INTERCONNECT, INC.
CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
Three months ended June 30, Nine months ended June 30,
1996 1995 1996 1995
Net sales $ 8,582,794 $ 4,744,904 $ 18,595,250 $ 10,887,891
Cost of sales 7,446,724 3,750,034 15,606,248 8,518,500
Gross profit 1,136,070 994,870 2,989,002 2,369,391
Operating expenses
Sales and marketing 322,570 252,314 914,173 570,475
General and administrative 582,661 290,087 1,127,700 661,967
Depreciation and amortization 80,667 30,385 166,329 85,544
Total operating expenses 985,898 572,786 2,208,202 1,317,986
Operating income 150,172 422,084 780,800 1,051,405
Other income (expense)
Interest expense (92,354) (111,941) (296,803) (202,860)
Other, net 23,759 3,940 6,781 10,108
Total other income (expense) (68,595) (108,001) (289,803) (192,752)
Earnings before income taxes 81,577 314,083 490,997 858,653
Income taxes 35,422 130,996 192,862 346,000
NET EARNINGS $ 46,155 $ 183,087 $ 298,135 $ 512,653
Earnings per common - Primary $ 0.02 $ 0.11 $ 0.12 $ 0.30
share - Fully dilutive $ 0.02 $ 0.11 $ 0.12 $ 0.30
Weighted average common shares
outstanding - Primary 2,811,136 1,700,000 2,570,379 1,700,000
- Fully dilutive 2,829,658 1,700,000 2,576,553 1,700,000
The accompanying notes are an integral part of these statements.
6
PEN INTERCONNECT, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED JUNE 30,
(Unaudited)
1996 1995
Increase(decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings $ 298,135 $ 512,653
Adjustments to reconcile net earnings to net
cash used in operating activities
Depreciation and amortization 166,329 85,544
Allowance for bad debts 649 7,500
Deferred income taxes (215,089) 42,000
Changes in assets and liabilities:
Trade accounts receivable (119,440) (562,523)
Inventories (418,506) (544,318)
Prepaid expenses and other assets (337,023) (25,571)
Deferred offering costs 294,158 (94,295)
Accounts payable (1,239,585) (137,029)
Accrued liabilities 707,537 174,090
Income taxes payable (158,267) 293,000
Total adjustments (1,319,237) (761,602)
Net cash used in operating activities (1,021,102) (248,949)
Cash flows from investing activities
Purchase of propery and equipment (649,776) (139,890)
Acquisition of net assets (3,500,000) (2,107,457)
Collections on notes receivable 15,331 25,392
Increase in notes receivable (14,254) (6,274)
Net cash used in investing activities (4,148,699) (2,228,229)
(Continued)
7
PEN INTERCONNECT, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Continued)
FOR NINE MONTHS ENDED JUNE 30,
(Unaudited)
1996 1995
Cash flows from financing activities
Proceeds from notes payable $ - $ 1,600,000
Principal payments on notes payable (1,600,000) -
Proceeds from line of credit 13,547,585 11,592,618
Principal payments on line of credit (11,251,541) (10,844,526)
Increase in long-term obligations - 145,000
Principal payments on long-term obligations (527,723) (69,163)
Proceeds from sale of common stock
and warrants 4,707,802 250,000
Net cash provided by financing activities 4,876,123 2,673,929
Net increase (decrease) in cash
and cash equivalents (293,678) 196,751
Cash and cash equivalents at beginning of period 376,488 109,520
Cash and cash equivalents at end of period $ 82,810 $ 306,271
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 351,294 $ 130,830
Income taxes $ 521,038 $ 11,000
Noncash investing and financing activities
During the nine months ended June 30, 1995, capital lease obligations of
$120,049 were incurred when the Company entered into leases for equipment.
(Continued)
8
PEN INTERCONNECT, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Continued)
FOR NINE MONTHS ENDED JUNE 30, 1996 AND 1995
Acquisition of businesses
During May 1996, the Company acquired substantially all assets and assumed
certain liabilities and the operations of InCirT Technology, a division of
the Cerplex Group, Inc. for $3.5 million in cash and 333,407 shares of stock.
Assets aquired and liabilities assumed in conjunction with this acquisition
were as follows:
Accounts receivable (net) $ 3,463,186
Inventories 3,311,416
Prepaid expenses 5,436
Property and equipment 705,899
Other assets 30,424
Accounts payable (3,563,436)
Accrued liabilities (33,906)
Net assets acquired $ 3,919,019
Excess purchase price over net assets acquired
allocated to goodwill 1,380,981
Purchase price $ 5,300,000
Less Stock issued 1,800,000
Total cash paid $ 3,500,000
On March 5, 1996, the Company acquired selected net assets of Overland
Communications (MOTO-SAT). Assets acquired and liabilities assumed in
conjunction with this acquisition were as follows:
Accounts receivable (net) $ 180,631
Inventories 306,306
Prepaid and other assets 5,798
Furniture and equipment 43,755
Accounts payable (256,182)
Accrured liabilities (46,209)
Long-Term obligations (306,698)
Net assets acquired $ (72,599)
Excess purchase price over net assets acquired
resulted in recoginition of goodwill
(Continued)
9
PEN INTERCONNECT, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Continued)
FOR NINE MONTHS ENDED JUNE 30, 1996 AND 1995
During March 1995, the Company acquired selected net assets of Quintec
Interconnect Systems for $2,000,000. Assets acquired and liabilities assumed
in conjunction with this aquisition were as follows:
Accounts receivable $ 705,010
Inventories 1,209,983
Prepaid expenses 6,400
Deposits 5,300
Property and equipment 294,645
Notes payable (32,322)
Accounts payable (636,951)
Net assets acquired 1,552,065
Excess purchase price over net assets acquired allocated
to inventory, property and equipment 555,392
Total cash paid $ 2,107,457
The accompanying notes are an integral part of these statements.
10
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS
On May 2, 1996, the Company entered into an agreement to acquire
substantially all assets and assumed certain liabilities and the operations
of InCirT Technology, a division of the Cerplex Group, Inc. for $5.3
million comprised of $3.5 million in cash and 333,407 shares of common
stock. The cash portion of the purchase price consisted of $2.5 million
in additional borrowing and $1 million in excess IPO funds. In addition,
the Company will deliver to Cerplex .09261 shares of its common stock for
every dollar of past due over 90 days accounts receivable of ICT collected
by the Company during the first 180 days after the date of the acquisition
closing up to a maximum of 55,568 shares of common stock. This transaction
was accounted for using the purchase method of accounting and was effective
as of April 1, 1996. The results of operations of the aquired business
have been included in the financial statements since the effective date of
acquisition.
On March 5, 1996 the Company acquired the assets of Overland Communication,
Inc. dba MOTO-SAT by assuming that company's debt and offering future stock
distributions contingent upon achievement of performance milestones. The
acquisition was effective as of January 1, 1996. MOTO-SAT is a leading
manufacturer of high-end satellite television systems for recreational
vehicles. This transaction was accounted for using the purchase method of
accounting; accordingly the purchased assets and liabilities have been
recorded at their fair value at the date of acquisition. The results of
operations of the acquired business have been included in the financial
statements since the effective date of acquisition.
Effective March 24, 1995, the Company acquired substantially all assets and
assumed certain liabilities and the operations of Quintec Interconnect
Systems (QIS) for $2,107,457 including acquisition costs for $107,457.
This transaction was accounted for using the purchase method of accounting;
accordingly the purchased assets and liabilities have been recorded at
their estimated fair value at the date of acquisition. The results of
operations of the acquired business have been included in the financial
statements since the date of acquisition.
Pro forma data. The following unaudited pro forma summary represents the
combined results of operations as if the acquisitions of InCirT and Quintec
had occured on October 1, 1994, and do not purport to be indicative of what
would have occurred had the acquisitions been made as of October 1, 1994,
or of results which may occur in the future. The pro forma weighted
shares is reported as if outstanding at the beginning of the period.
(amounts in thousands, except share data)
Three months ended June 30, Nine months ended June 30,
1996 1995 1996 1995
Net sales $8,583 $8,139 $26,405 $19,546
Operating income 150 724 935 2,024
Net earnings 46 318 299 978
Earnings per share 0.02 0.16 0.10 0.48
Weighted shares outstanding 3,033,407 2,033,407 2,866,740 2,033,407
11
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE B - INVENTORIES
Inventories consist of the following:
June 30, September 30,
1996 1995
Raw materials $ 4,356,772 $ 1,788,640
Work-in-process 2,567,235 1,395,241
Finished goods 474,615 178,513
$ 7,398,622 $ 3,362,394
NOTE C - NOTES PAYABLE
During March 1995, certain investors, in connection with a private
placement, loaned the Company $1,600,000 at 8% per annum. These notes and
related interest were paid in full upon successful completion of the
initial public offering in November, 1995 (Note E).
NOTE D - CREDIT FACILITY
The Company has a credit facility with a financing company which consists
of a line of credit and a long-term note.
At September 30, 1995, the Company had a $3,000,000 revolving line of
credit with interest at a base rate plus 3.25% (12.00% at September 1995),
payable monthly. The Company had borrowed $2,082,897 under the line of
credit at September 30, 1995. Advances on the line of credit were limited
to 80% of qualified accounts receivable and 35% of eligible inventory. The
line of credit was collateralized by accounts receivable, inventory,
property and equipment. The line of credit agreement was to expire in
August 1997 and provided for automatic renewals for successive periods of
one year each, but allowed for termination of the agreement at the end of
any term. The line of credit prohibited the payment of cash dividends
without the lender's consent and required the Company to comply with
certain financial ratios, minimum net worth levels, and limited capital
expenditures. The Company was in compliance with these requirements at
September 30, 1995.
12
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE D - CREDIT FACILITY - CONTINUED
On April 8, 1996, the Company completed a new 3 year financing agreement
with National Bank of Canada for a $6 million revolving line of credit with
interest at one-half (.5) percent over the prime rate (8.75 % at June 30,
1996). This new line of credit replaced the $3,000,000 revolving line of
credit. The Company has borrowed $4,378,941 under the new line of credit
at June 30, 1996 (the Company still has $ 1,621,059 available under the
line). The line of credit is collateralized by accounts receivable,
inventory, property and equipment.
NOTE E - STOCK TRANSACTIONS
Initial public offering
On November 17, 1995, the Company successfully completed an initial
public offering of 1,000,000 shares of its Common Stock and warrants to
purchase 1,000,000 shares of Common Stock. The initial public offering
price was $6.00 per share of Common Stock and $0.10 per Warrant. Each
Warrant was immediately exercisable and entitled the registered holder to
purchase one share of Common Stock at a price of $6.50 and expires on
November 17, 2000. The outstanding Warrants may be redeemed by the Company
upon 30 days' written notice at $0.05 per Warrant, provided that the
closing bid quotations of the Common Stock have averaged at least $9.00 per
share for a period of any 20 trading days ending on the third day prior to
the day on which the Company gives notice.
In connection with the offering, the Company granted the underwriter
the right to purchase up to 100,000 shares of common stock and 100,000
warrants. The underwriter was also granted an over-allotment option of
150,000 shares of common stock and/or warrants to purchase an additional
150,000 shares of common stock. In December 1995, the underwriter exercised
its option and purchased the 150,000 warrants. The option to purchase the
150,000 shares of common stock has expired.
Shares issued in Acquisition
As discussed in Note A, the Company issued 333,407 shares of common
stock in connection with an acquisition in May 1996. In addition, the
Company has agreed to issue a maximum of 55,568 shares of common stock
("Contingent Stock") to The Cerplex Group, Inc. based on collections of
amounts over 90 days in the accounts receivable .
13
PART I
FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides certain information
which the Company's management believes is relevant to an assessment and
understanding of the Company's results of operations and financial
condition for the three and nine month periods ended June 30, 1996 and
1995. This discussion should be read in conjunction with the audited
financial statements of the Issuer and notes thereto included in the Annual
Report of the Issuer on Form 10-KSB for the year ended September 30, 1995.
General
The Company develops and produces on a turnkey basis interconnections
solutions for original equipment manufacturers ("OEMs") in the computer,
computer peripheral and other computer related industries such as the
telecommunications, instrumentation and testing equipment industries. The
Company's products connect electronic equipment, such as computers, to
various external devices (such as video screens, printers, external disk
drives, modems, telephone jacks, peripheral interfaces and networks) and
connect devices within the equipment (such as power supplies, computer hard
drives and PC cards). Most of the Company's sales consist of custom cable
interconnections developed in close collaboration with its customers. The
Company's customers include OEMs of computers including mainframes,
desktops, portables, laptops, notebooks, pens and palmtops as well as OEMs
of computer peripheral equipment such as modems, memory cards, LAN
adapters, cellular phones, faxes and printers. Other customers include
OEMs of telecommunications, instrumentation and testing equipment. The
InCirT Division is engaged in the electronic manufacturing services
industry (EMSI), and provides sophisticated ISO 9002-certified assembly and
testing services for complex printed circuit boards and subsystems. In
addition, the Company's MOTO-SAT Division is a leading manufacturer of
high-end satellite television systems for recreational vehicles.
14
Results of Operations
The acquisition of the net assets InCirT Technology (InCirT), which
was effective as of April 1, 1996 has been accounted for as a purchase.
The statement of earnings data for the three and nine months ended June 30,
1996 includes the results of operations of InCirT for the period from April
1, 1996.
The acquisition of the net assets MOTO-SAT in 1996, which was
effective as of January 1, 1996 has been accounted for as a purchase. The
statement of earnings data for the three and nine months ended June 30,
1996 includes the results of operations of MOTO-SAT for the period from
January 1, 1996.
The acquisition of the net assets of QIS on March 24, 1995 has been
accounted for as a purchase. The statement of earnings data for the three
and nine months ended June 30, 1996 includes the results of operations of
QIS for the period from March 24, 1995.
Net sales. Net sales for the Company increased approximately 81% and 71%
for the three and nine month periods in fiscal 1996 as compared to the same
periods in the prior year, respectively. These significant increases
principally resulted from the inclusion of the recent acquisitions of the
InCirT Division (since April '96), San Jose Division (QIS) (since March
'95) and the MOTO-SAT Division (since January '96). There have been no
material increases in prices of any of the Company's products between the
two periods and the Company anticipates that prices will remain subject to
competitive pressures in the foreseeable future which may prohibit a
significant price increase.
Cost of sales. Cost of sales as a percentage of net sales have increased to
approximately 86.8% and 83.9% for the three and nine month periods in 1996,
respectively, as compared to 79.0 and 78.2% for the three and nine month
periods in 1995, respectively. This increase in costs resulted primarily
from the following factors: 1) the recording of a series of unusual and
non-standard production expenses; 2) the Salt Lake City Division has
increased its per hour wages due to an increased demand for skilled workers
and a very low unemployment rate; 3) the InCirT Division has experienced
a temporary shift in its product mix resulting in an increase in low margin
orders from several customers; and 4) the San Jose Division has seen a
temporary decease in its standard cable and harness orders due to a recent
softening in the market. However, as the decrease is temporary the
Division has not reduced its indirect support personnel in anticipation of
a market rebound. This decision has effected the quarter and year to date
margins in 1996. The unusual and non-standard production expenses are
estimated by management to be about $395,000 (or about $236,000 after tax)
and consist of labor inefficiencies, inventory costs, excessive materials
rework costs, severance, finders fees, reorganization costs, etc. The
increases in sales coupled with the low unemployment rate has forced the
Salt Lake City Division to hire unskilled labor and thus incur increased
training costs
15
and the resulting inefficiencies in production. The Company continues to
take steps to improve its gross profit margin by reorganizing its
production facilities (this reorganization has allowed a reduction in
workforce of about 60 workers through June 30, 1996), improving training,
and also is currently implementing a new manufacturing software package to
allow for more timely information to management.
Operating expenses. Operating expenses in total as a percent of net sales
have remained relatively constant at about 12% for all periods presented.
On a dollar for dollar basis the Company has proactively increased its
Sales and Marketing expenses to support the ever changing customer base
resulting from the recent acquisitions. Due to the additional costs in
absorbing its recent acquisitions the Company has not currently experienced
its anticipated saving in General and Administrative Expenses.
Other income and expenses. Other income and expenses have decreased as
a percent of sales from 2.3% to 1.8% for the three and nine months ended
June 30, 1995, respectively to 0.8% and 1.6% for the three and nine months
ended June 30, 1996, respectively.. This percentage decrease in interest
expense is due to an improved interest rate from an average of 3.25% over
prime in 1995 to 0.5% over prime since April of 1996. In addition, 1995
amounts included interest expenses associated with the bridge loan used to
fund the QIS acquisition which was repaid in November 1995 with some to the
proceeds received from the initial public offering.
Net Earnings and Earnings Per Share. The Company recorded $46,155 ($0.02
per share), for the third quarter of fiscal year 1996, compared to $183,087
($0.11 per share), for the third quarter of fiscal year 1995. For the
entire nine months, net earnings for fiscal year 1996 were $298,135 ($0.12
per share), versus $512,653 ($0.30 per share) for the first nine months of
fiscal year 1995. The reasons for the 75 percent and 42 percent decline in
earnings for the three and nine month periods in 1996 as compared to 1995
are as follows: first, the Company recorded a series of unusual and non-
standard production expenses, which represented a decrease of approximately
$0.09 per weighted share for the nine months ended June 30, 1996; second,
the Company has incurred additional costs in absorbing its recent
acquisitions - InCirT Technology Division in April '96 and MOTO-SAT
Division in January '96; and third, the Company has also experienced
higher labor, support and training costs due to increased production
requirements. In addition the per share earnings are further reduced
because the Company has issued an additional 1,333,407 shares since
September 1995 in connection with its initial public offering and the
recent InCirT acquisition, resulting in additional weighted shares
outstanding.
16
Liquidity and Capital Resources
The Company has historically financed its operations through operating
cash flow and lines of credit. However, on November 17, 1995, the Company
completed an initial public offering which produced net proceeds of
approximately $4.8 million . This offering significantly increased the
cash and equity balances. It also allowed the Company to retire the
$1,600,000 debt associated with the QIS acquisition, and to purchase
additional inventory and equipment to support the increased production
levels.
Working capital increased from $126,710 at September 30, 1995 to
$4,352,912 at June 30, 1996. The increase is principally due to earnings
in the period, acquisitions and the net proceeds received from the initial
public offering.
The current ratio has increased from 1.0 to 1.0 at September 1995 to
1.4 to 1.0 at June 1996. This significant improvement is primarily the
result of the IPO and acquisitions.
Management believes that existing cash balances, borrowings available
under the line of credit, and cash generated from operations will be
adequate to meet the Company's anticipated cash requirements during the
next twelve months. However, in the event the Company experiences adverse
operating performance or above anticipated capital expenditure
requirements, additional financing may be required. There can be no
assurance that such additional financing, if required, would be available
on favorable terms.
Inflation and Seasonality
The Company does not believe that it is significantly impacted by
inflation. Historically, the industry sales tend to decline in January,
February, July and August when activity in the personal computer industry
as a whole is reduced. During the last quarter, the Computer Industry has
experienced a general softening in the market which management believes is
seasonal in nature and therefore anticipates a resurgence in the future.
17
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time the Company has been a party to various legal
proceedings arising in the ordinary course of business. The Company
is not currently a party to any material litigation and is not aware
of any litigation threatened against it that could have a materially
adverse effect on its business.
Item 2. Changes in the Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None during
the quarter.
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
A: Reports on Form 8-K
During the quarter ended June 30, 1996, the Issuer filed a report
on form 8-K dated May 1, 1996 associated with the acquisition of
InCirT Technology (a division of the Cerplex Group, Inc.). Also
on July 16, 1996 an amended 8-K/A was filed with the required
audited financial statements and the Pro Forma Statements
related to the acquisition.
B. Exhibits
10 Material contracts -
Asset Purchase Agreement for the purchase
of InCirT Technology form the Cerplex Group, Inc. The
Schedules to this agreement are in standard form and are
omitted. Registrant will on request of the Securities and
Exchange Commission supplementally file all omitted schedules.
Employment Agreement between James S. Pendleton and the Company
Employment Agreement between Wayne R. Wright and the Company
Employment Agreement between Robert D. Deforest Sr. and the Company
18
Employment Agreement between Lewis Carl Rasmussen and the Company
Employment Agreement between Allan L. Weaver and the Company
The Employment agreement schedules to these agreements are in
standard form and are omitted. Registrant will on request of the
Securities and Exchange Commission supplementally file all omitted
schedules.
11 Calculation of earnings per share.
27 Financial Data Schedule.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PEN INTERCONNECT, INC.
By: /s/ James S. Pendleton
-------------------------
James S. Pendleton,
CEO and Director
By: /s/ Wayne R. Wright
-------------------------
Wayne R. Wright,
CFO, Principal Accounting
Officer and Director
20