UNITED STATES
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM 10-QSB/A-2
(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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from to
Commission file number 1-14072
PEN INTERCONNECT, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0430260
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
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 a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 14, 1998, the issuer had 4,773,910 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 3
Item 1 Financial Statements
Balance Sheets at June 30, 1998
(unaudited) and September 30, 1997 4-5
Statements of Operations for the
Quarters Ended June 30, 1998 and 1997 and the
nine month periods ended June 30, 1998 and 1997
(unaudited) 6
Statements of Cash Flows for the ninth month
periods ended June 30, 1998 and 1997 (unaudited) 7-9
Notes to Condensed Financial Statements (unaudited) 10-16
Item 2 Management's Discussion and Analysis or
Plan of Operation 17-19
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 2 Changes in the Securities and Use of Proceeds 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6(a). Exhibits
Item 6(b). Reports on Form 8-K 20
Signatures 21
PEN INTERCONNECT, INC.
PART I
FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED FINANCIAL STATEMENTS
Pen Interconnect, Inc. (the "Company"), has included the unaudited
condensed balance sheet of the Company as of June 30, 1998 and audited
balance sheet as of September 30, 1997 (the Company's most recent fiscal
year), unaudited condensed statements of operations for the quarters ended
June 30, 1998 and 1997, and nine month periods ended June 30, 1998 and
1997, and unaudited condensed statements of cash flows for the nine month
periods ended June 30, 1998 and 1997, together with unaudited condensed
notes thereto. In the opinion of management of the Company, the interim
condensed financial statements reflect all adjustments, all of which are
normal recurring adjustments, considered necessary to fairly present the
financial condition, results of operations and cash flows of the Company
for the interim periods presented. The financial statements included in
this report on Form 10-QSB should be read in conjunction with the audited
financial statements of the Company and the notes thereto included in the
annual report of the Company on Form 10-KSB for the year ended September
30, 1997. The results of operations for the three and nine months ended
June 30, 1998 may not be indicative of the results that may be expected for
the year ending September 30, 1998.
3
Pen Interconnect, Inc.
BALANCE SHEETS
ASSETS
June 30, September 30,
1998 1997
------------- -------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 994,397 $ 272,148
Receivables
Trade accounts, less allowance for doubtful accounts
of $105,089 and $137,058 at June 30, 1998 and
September 30, 1997, respectively. 3,721,930 2,093,056
Current maturities of notes receivable (Note A) 27,820 357,006
Investments in common stock (Note A) 350,750 400,000
Inventories (Notes B) 5,661,634 3,355,871
Prepaid expenses and other current assets 425,446 289,991
Deferred income taxes 180,693 141,324
------------- -------------
Total current assets 11,362,670 6,909,396
PROPERTY AND EQUIPMENT, AT COST
Production equipment 2,568,776 2,418,368
Furniture and fixtures 852,770 834,971
Transportation equipment 83,522 69,217
Leasehold improvements 368,137 368,137
----------- --------------
3,873,205 3,690,693
Less accumulated depreciation 1,523,349 1,303,063
----------- ------------
2,349,856 2,387,630
OTHER ASSETS
Notes receivable, less current maturities (Note A) 103,105 607,524
Investments in common stock (Note A) 684,000 -
Deferred income taxes 1,347,720 1,392,658
Goodwill and other intangibles (net) 2,164,298 2,287,146
Other 665,529 322,630
------------ -------------
4,964,652 4,609,958
----------- ------------
$18,677,178 $13,906,984
=========== ===========
The accompanying notes are an integral part of these statements.
4
Pen Interconnect, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, September 30,
1998 1997
------------- -------------
(Unaudited)
CURRENT LIABILITIES
Notes payable $ - $ 641,505
Bridge loan - 100,000
Line of credit 3,795,541 2,237,690
Current maturities of long-term obligations 314,643 263,255
Current maturities of capital leases 66,464 66,464
Accounts payable 3,028,073 2,053,348
Accrued liabilities 310,561 481,356
------------ -------
Total current liabilities 7,515,282 5,843,618
LONG-TERM OBLIGATIONS, less current
maturities (Note C) 927,178 681,722
CAPITAL LEASE OBLIGATIONS, less current
maturities 8,377 70,889
SUBORDINATED DEBENTURES less deferred
interest on favorable conversion feature (Note D) 1,091,458 -
DEFERRED INCOME TAXES 165,755 165,755
------------ -----------
Total liabilities 9,708,050 6,761,984
STOCKHOLDERS' EQUITY (Notes A 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
4,773,910 shares at June 30, 1998 and
4,072,863 shares at September 30, 1997 47,739 40,729
Additional paid-in capital 10,776,222 8,733,126
Accumulated deficit (1,854,833) (1,628,855)
-------------- ---------------
Total stockholders' equity 8,969,128 7,145,000
------------- -----------
$18,677,178 $13,906,984
=========== ===========
The accompanying notes are an integral part of these statements.
5
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
Three months ended June 30, Nine months ended June 30
1998 1997 1998 1997
------------- ------------- ------------- -------------
Net sales $ 4,510,112 $ 4,479,882 $ 12,113,556 $ 15,220,519
Cost of sales 3,534,452 4,083,240 9,431,973 12,912,356
------------- ------------- ------------- -------------
Gross profit 975,660 396,642 2,681,583 2,308,163
Operating expenses
Sales and marketing 192,071 230,040 619,562 695,152
Research and development 49,675 60,914 243,044 101,283
General and administrative 477,792 390,479 1,117,334 1,115,630
Depreciation and amortization 122,288 96,347 364,225 285,025
------------- ------------- ------------- -------------
Total operating expenses 841,826 777,780 2,344,165 2,197,090
------------- ------------- ------------- -------------
Operating income (loss) 133,834 (381,138) 337,418 111,073
Other income (expense)
Interest expense (Note D) (217,556) (134,763) (703,613) (403,539)
Gain on sale of division (Note A) - - - 611,912
Other income (expense), net 84,318 19,522 118,655 77,194
------------- ------------- ------------- -------------
Total other income (expense) (133,238) (115,241) (584,958) 285,567
------------- ------------- ------------- -------------
Earning (loss) before income taxes 596 (496,379) (247,540) 396,640
Income taxes (benefit) expense 238 (198,500) (21,562) 163,100
------------- ------------- ------------- -------------
Net earnings (loss) $ 358 $ (297,879) $ (225,978) $ 233,540
============= ============= ============= =============
Earnings (loss) per common share:
Basic $ 0.00 $ (0.09) $ (0.05) $ 0.08
============= ============= ============= =============
Diluted $ 0.00 $ (0.09) $ (0.05) $ 0.07
============= ============= ============= =============
Weighted average common and dilutive
common equivalent shares outstanding
Basic 4,586,962 3,238,975 4,452,312 3,101,930
============= ============= ============= =============
Diluted 5,121,153 3,238,975 4,452,312 3,518,097
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
6
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
For nine months ended June 30,
(Unaudited)
1998 1997
---------------- ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings (loss) $ (225,978) $ 233,540
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities
Depreciation and amortization 364,225 285,025
Amortization of deferred interest 336,506 -
Bad debts 3,420 (19,314)
Gain on sale of division - (611,912)
Contingent stock San Jose agreement (40,000) -
Loss on disposal of equipment 16,534 -
Deferred taxes 27,112 131,000
Changes in assets and liabilities
Trade accounts receivable (1,632,294) 615,329
Inventories (2,305,763) (15,587)
Prepaid expenses and other assets (306,138) (369,942)
Accounts payable 974,725 (703,410)
Accrued liabilities (254,795) (627,103)
Income taxes ( 21,543) 33,192
---------------- ---------------
Total adjustments (2,838,011) (1,282,722)
---------------- ---------------
Net cash used in
operating activities (3,063,989) (1,049,182)
---------------- ---------------
Cash flows from investing activities
Purchase of property and equipment (202,353) (207,994)
Proceeds from sale of division - 2,000,000
Proceeds from sale of investments 389,250 -
Issuance of notes receivable (89,195) (35,435)
Collections on notes receivable 22,800 -
---------------- ---------------
Net cash provided
by investing activities 120,502 1,756,571
---------------- ---------------
(Continued)
7
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the nine months ended June 30,
1998 1997
---------------- ---------------
Cash flows from financing activities
Principal payments on notes payable $ (641,505) $ -
Net change in line of credit 1,557,851 (2,009,864)
Proceeds from bridge loan - 1,000,000
Principal payments on bridge loan (100,000) -
Principal payments on long-term obligations (265,668) (76,842)
Proceeds from issuance of subordinated debentures 1,910,000 -
Proceeds from issuance of long-term obligation 500,000 -
Proceeds from sale of common stock 705,058 225,000
---------------- ---------------
Net cash (used in) or provided
by financing activities 3,665,736 (861,706)
---------------- ---------------
Net (decrease) increase in cash
and cash equivalents 722,249 (154,317)
Cash and cash equivalents at beginning of period 272,148 169,445
---------------- ---------------
Cash and cash equivalents at end of period $ 994,397 $ 15,128
================ ===============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 370,028 $ 390,157
Income taxes - -
(Continued)
8
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the nine months ended June 30, 1998 and 1997
Non-cash investing and financing activities
During the third quarter of fiscal year 1998, subordinated debentures totaling
$480,000 were converted to 248,122 shares of common stock.
During the second quarter of fiscal year 1998, subordinated debentures totaling
$320,000 were converted to 147,092 shares of common stock.
During the first quarter of fiscal year 1998, notes receivable totaling $900,000
plus accrued interest of $84,000 were converted to investments in common stock.
Effective November 1, 1996, the Company sold substantially all assets and
certain liabilities of the San Jose Division for $2 million cash and other
consideration. Assets and liabilities sold were as follows:
Accounts receivable $ 680,420
Inventories 1,644,336
Prepaid expenses 34,177
Other assets 26,099
Property and equipment 638,373
Accounts payable (277,429)
Accrued liabilities (35,373)
Capital leases (22,515)
------------
Net assets sold 2,688,088
Less non cash consideration received
Notes $ 900,000
Stock 400,000
-----------
1,300,000
Cash consideration 2,000,000
------------
Gain on sale of division $ 611,912
===========
The accompanying notes are an integral part of these statements.
9
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - ACQUISITIONS/DISPOSITIONS
POWER STREAM TECHNOLOGY
Effective April 1, 1997, the Company acquired substantially all of the
assets, and assumed certain liabilities and the operations, of
PowerStream Technology, Inc. ("PowerStream") by issuing 150,000 shares of
common stock valued at $1.50 per share. PowerStream is a research and
development company specializing in power recharging devices and power
supply products. In addition the Company entered into a 5 year Employment
Agreement with Daniele Reni, the President of PowerStream. The Company
believes that Mr. Reni is an expert in the area of power recharging
devices and power supply products. This transaction was accounted for
using the purchase method of accounting. Accordingly the purchased assets
and liabilities have been recorded at their fair value at the date of
acquisition and the excess purchase price over fair value of net tangible
assets acquired of $749,114 is being amortized over 15 years. The results
of operations of the acquired business have been included in the
financial statements since the effective date of acquisition.
SALE OF SAN JOSE DIVISION
Effective November 1, 1996, the Company sold substantially all of the
net assets used by the San Jose Division ("Division") to Touche
Electronics, Inc. ("Touche"), a subsidiary of TMCI Electronics, Inc.
("TMCI"). The sales price for the net assets of the Division was
$3,300,000; consisting of $2,000,000 in cash, $900,000 in promissory
notes, and 53,669 shares of TMCI common stock with an agreed upon
guaranteed value of $400,000. In addition, the Company had the right to
receive up to $700,000 in contingent earnouts for a potential total sale
price of $4,000,000. The Company originally purchased the Division in
March 1995 for approximately $2,100,000. As part of the transaction,
Touche and TMCI also assumed certain liabilities associated with the
operations of the Division.
In February 1997, TMCI filed a notice of demand for
rescission of the purchase and sale of the Division. The Company filed a
counterclaim against TMCI in May, 1997, alleging that TMCI had defaulted
in its obligations under the promissory notes. The disputes were
subsequently submitted to arbitration in August, 1997.
(Continued)
10
Pen Interconnect, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS/DISPOSALS - CONTINUED
In December 1997, the Company and TMCI entered into a Settlement and
Release Agreement (the "Settlement Agreement"), releasing each other of
any and all respective claims the parties may have had against each
other. The Settlement Agreement provided, in part, that TMCI issue to the
Company, 137,390 shares of TMCI's common stock to replace the $900,000 of
promissory notes and related accrued interest payable by TMCI to the
Company. The Settlement Stock is guaranteed to have a minimum value of
$7.4532 per share. In the event the Settlement Stock is sold by the
Company at less than that amount, TMCI is obligated to pay the Company
the difference between the sales price and the guaranteed value. The
conclusion of the disputes, will allow the Company and TMCI to continue
their joint sales and marketing arrangements.
The results of operations include one month of operations for the
nine month period ended June 30, 1997. The balance sheet excludes the
Division as of June 30, 1998 and September 30, 1997.
Pro forma data. The following unaudited pro forma summary represents
the combined results of operations as if the disposition of the San Jose
Division had occurred on October 1, 1996, and do not purport to be
indicative of what would have occurred had the transactions been made as
of October 1, 1996, 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.
Nine months ended June 30,
(amounts in thousands, except
share data)
1998 1997
----------- -----------
Net sales $ 12,114 $ 14,935
Operating income 337 94
Net earnings (loss) (226) (378)
Earnings (loss) per common share:
Basic (0.05) (0.12)
Diluted (0.05) (0.12)
Weighted average common and
dilutive common equivalent
shares outstanding:
Basic 4,452,312 3,101,930
Diluted 4,452,312 3,101,930
11
Pen Interconnect, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE B - INVENTORIES
Inventories consist of the following:
June 30, September 30,
1998 1997
Raw materials (net of allowance) $ 3,466,407 $ 2,531,235
Work-in-process 2,123,110 736,928
Finished goods 72,117 87,708
-------------- -------------
$ 5,661,634 $ 3,355,871
-------------- -------------
NOTE C - LOAN FROM CREDIT FACILITY
On December 8, 1997, the Company obtained the second term under its
credit facility with a bank in the principal amount of $500,000, which
bears interest at a fixed rate of 10.32% per annum. The loan is payable
in 36 monthly installments of $10,417, including interest, with payments
to begin in September 1998.
NOTE D - SUBORDINATED DEBENTURES
On June 16, 1998, the Board of Directors of the Company approved the
issuance of up to $1,000,000 of 3% convertible debentures (the
"Debentures") with a maximum term of 24 months. The Debentures will
mature, unless earlier converted by the holders, into shares of common
stock of the Company. The Company has agreed to file a registration
statement with the United States Securities and Exchange Commission with
respect to the Common Stock of the Company into which the Debentures may
be converted.
The Debentures are convertible by the holders thereof into the number of
shares of common stock equal to the face amount of the Debentures being
converted divided by the lesser of (i) eighty percent (80%) of the
closing bid price of the Company's common stock as reported on the NASDAQ
Small Cap market on the day of conversion, or (ii) $2.75. The Debentures
may be converted in three equal installments beginning on the earlier of
(i) the 75th day of their issuance, and continuing through the 135th day
of their issuance, or (ii) the day following the effective date of the
Registration Statement, through the 60th day following the effective date
of the Registration Statement. The Company may cause the Debentures to be
converted into shares of common stock after the 110th day following the
effective date of the Registration Statement, if the common stock has
traded at or above $5.50 per share for twenty consecutive days.
12
Pen Interconnect, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE D - SUBORDINATED 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 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. As of June 30, 1998 the Company had issued all
$1,000,000 of the convertible debentures and none were converted. Deferred
interest expense of $250,159 was recorded on the $1,000,000 in debentures
relative to the favorable conversion feature and will be amortized over
four months. This interest along with the stated 3% interest rate in the
debentures results in an inherent interest rate of 31%.
On October 22, 1997, the Board of Directors of the Company approved the
issuance of up to $1,500,000 of 3% convertible debentures (the
"Debentures") with a maximum term of 24 months. The Debentures will
mature, unless earlier converted by the holders, into shares of common
stock of the Company. The Company has agreed to file a registration
statement with the United States Securities and Exchange Commission with
respect to the Common Stock of the Company into which the Debentures may
be converted.
As of June 30, 1998 the Company had issued all $1,500,000 of the
$1,500,000 convertible debentures and $800,000 had been converted to
common stock at an average price of approximately $2.03 per share.
In connection with the $1,500,000 in debentures, the Company recorded
$374,948 of deferred interest expense related to the beneficial
conversion feature. This interest when added to the stated 3% interest
rate of the debenture results in an inherent interest rate of 28% over
the debentures life of two years. The Company has amortized $336,506 of
this deferred interest through the third quarter.
13
Pen Interconnect, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE E - STOCK TRANSACTIONS
1. Stock issued
In the second and third quarters of fiscal year 1998, the Company issued
89,990 shares of common stock associated with the exercise of certain
warrants and 395,214 shares of common stock associated with the
conversion of subordinated debentures.
In the first quarter of fiscal year 1998, the Company issued 75,000
shares of common stock associated with the exercise of certain warrants.
2. Earnings (loss) per share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 is effective for financial statements for periods
ending after December 15, 1997, and requires companies to report both
"basic" and "diluted" earnings per share. A "Basic" earnings per share
does not include the addition of common stock equivalents to the shares
outstanding. "Diluted" earnings per share requires the addition of common
stock equivalents to the shares outstanding. Average shares outstanding is
the denominator used in "basic" earnings per share calculations.
Accordingly, "basic" earnings per share will be higher than "diluted"
earnings per share. This statement replaces Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share." The effect of adopting SFAS
128 did not materially effect the Company's earnings per share. The
following tables show the amounts used in computing earnings (loss) per
common share, including the weighted average number of shares and dilutive
potential common shares
Three months Ended June 30, 1998
Earnings Shares Per-Share
---------- ---------- ----------
Basic EPS: Earnings available
to common shareholders $ 358 4,586,962 $ 0.00
==========
Effect of Dilutive Securites
Stock options and warrants - 534,191
---------- ----------
Diluted EPS: Earnings available
to common shareholders $ 358 5,121,153 $ 0.00
========== ========== ==========
(Continued)
14
Pen Interconnect, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE E - STOCK TRANSACTIONS -Continued
Three months Ended June 30, 1997
(Loss) Shares Per-Share
---------- ---------- ----------
Basic EPS: Loss available
to common shareholders $ (297,879) 3,238,975 $ ( 0.09)
=========
Effect of Dilutive Securites
Stock options and warrants - n/a
---------- ----------
Diluted EPS: Loss available
to common shareholders $ (297,879) 3,238,975 $ (0.09)
========== ========== =========
2. Earnings (loss) per share - Continued
Nine months Ended June 30, 1998
(Loss) Shares Per-Share
---------- ---------- ----------
Basic EPS: Earnings available
to common shareholders $ (225,978) 4,452,312 $ (0.05)
=========
Effect of Dilutive Securites
Stock options and warrants - n/a
---------- ----------
Diluted EPS: Loss available
to common shareholders $ (225,978) 4,452,312 $ (0.05)
========== ========== ==========
Options and warrants to purchase 3,030,000 shares were not included in
the computation of EPS because the exercise price was greater than the
average market price of the common shares for the period.
15
Nine months Ended June 30, 1997
Earnings Shares Per-Share
---------- ---------- ----------
Basic EPS: Earnings available
to common shareholders $ 233,540 3,101,930 $ 0.08
==========
Effect of Dilutive Securites
Stock options and warrants - 416,167
---------- ----------
Diluted EPS: Earnings available
to common shareholders $ 233,540 3,518,097 $ 0.07
========== ========== ==========
Options and warrants to purchase 3,527,000 shares were not included in
the computation of EPS because the exercise price was greater than the
average market price of the common shares for the period.
16
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD-LOOKING STATEMENTS. This report contains certain forward-looking
statements within the meaning of section 27A of the Securities Act of 1933 as
amended, and section 21E of the Securities Exchange Act of 1934, as amended,
that involve risks and uncertainties. In addition, the Company may from time to
time make oral forward-looking statements. Actual results are uncertain and may
be impacted by the following factors. In particular, certain risks and
uncertainties that may impact the accuracy of the forward-looking statements
with respect to revenues, expenses and operating results include without
limitation, cycles of customer orders, general economic and competitive
conditions and changing consumer trends, technological advances and the number
and timing of new product introductions, shipments of products and components
from foreign suppliers, and the timing of operating and changes in the mix of
products ordered by customers. As a result, the actual results may differ
materially from those projected in the forward-looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
The following discussion and analysis provides certain information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition for the three and
nine month periods ending June 30, 1998 and 1997. This discussion should be read
in conjunction with the audited financial statements of the Company and notes
thereto included in the Annual Report of the Company on Form 10-KSB for the year
ended September 30, 1997.
General
Pen Interconnect, Inc. (the "Company" or "Pen") is a total interconnection
solution provider offering internal and external custom cable and harness
interconnections, mobile satellite equipment, EMSI (Electronic Manufacturing
Service Industry) manufacturing (circuit board assembly) and custom design and
manufacturing of battery chargers, power supplies and Uninterruptible Power
Supply UPS systems for original equipment manufactures ("OEMs") in the computer,
peripheral, telecommunications, instrumentation, medical and testing equipment
industries. The Company was incorporated under the laws of the State of Utah on
September 30, 1985. The Company maintains divisions located in Salt Lake City,
and Orem, Utah and Irvine, California.
17
Results of Operations
Effective March 24, 1995, the Company acquired the net assets of the San Jose
Division which has been accounted for as a purchase. This division was sold on
November 1, 1996 (Note A). Therefore, the statement of operations data include
the results of operations for only one month in the nine months ended June 30,
1997.
Net sales. Net sales for the Company remained flat for the three month period
ended June 30, 1998 as compared to the same period in the prior year. Net sales
have decreased approximately 20% for the nine month period ending June 30, 1998
as compared to the same period in the prior year. The flat sales for the three
month period is the direct result of the start of a significant contract for our
InCirT Division which started during this most recent quarter. The decrease for
the nine month period principally resulted from the loss of a large customer,
the move out of several orders into future quarters of the year and decreased
orders by several other significant customers. Such move out and loss of orders
were not able to be replaced within the short-term.
Cost of sales. Cost of sales as a percentage of net sales have decreased to
approximately 78% for the three months ended June 30, 1998, as compared to 91%
for the same period in the prior year. Cost of sales as a percentage of net
sales have decreased to approximately 78% for the nine months ended June 30,
1998, as compared to 85% for the same period in the prior year. These decreases
in costs resulted from reduced materials costs due to discounts obtained from
vendors on several new contracts. In addition, the Company has reduced support
costs in cost of goods sold during the most recent nine month period to
correspond with the reduced sales levels.
Operating expenses. Operating expenses have increased as a percentage of net
sales to approximately 19% for the three and nine month periods at June 30,
1998, respectively as compared to approximately 17% and 14% for the same periods
in the prior year. These cost increases have resulted from the following two
areas: 1) Research and Development expenditures in an effort to develop new
products with improved margins and 2) depreciation and amortization due to
amortization of goodwill and other intangible assets associated with past
acquisitions. Sales and marketing actually decreased when compared to the prior
year but reflect an increase in relation to sales due to the decrease in sales.
General and Administrative expenses increased in the three month period due to
increased costs in public relations and the legal and accounting fees associated
with the merger negotiations with TMCI. Due to the fixed components included in
the other operating costs they could not be significantly reduced in the
short-term and due to the expected rebound in sales in future quarters such
reductions were not considered necessary.
18
Other income and expenses. Excluding extraordinary items consisting of $611,912
or $0.20 per share from the gain on the sale of the San Jose Division and
$336,506, or $0.08 per share from interest expense related to the favorable
conversion feature of issued debentures, other income and expenses as a
percentage of net sales of approximately 1% and 2% respectively for the three
and nine months ended June 30, 1998 are basically unchanged as compared to
approximately 2% for both the three and nine months ended in the prior year.
Net earnings(loss) and earnings(loss) per share. Net earnings (net of the
$105,156 (before taxes), or $0.02 per share, interest recorded on the favorable
conversion feature of debentures issued) for the three months ended June 30,
1998 totaled $63,451 or $0.01 basic per share, compared with a loss of
($297,879) or ($0.09) basic per share loss for the same period in the prior
year. For the nine months ended June 30, 1998 the net earnings (net of the
$336,506 (before taxes), or $0.08 per share, interest incurred on the favorable
conversion feature of debentures issued) were $53,400 or $0.01 basic per share
earnings, compared with a loss (before the gain on sale of division) of
($215,272) or ($0.07) basic per share loss for the same period in the prior
year. Net earnings were significantly reduced from those previously reported due
to a non-cash interest expense on the favorable conversion feature of debentures
issued in the fiscal year. See Note D to the Financial Statements.
The increase in earnings and earnings per share as compared to the prior periods
(excluding the gain on the sale of the division) is due in large part to
improved pricing from several vendors and cost cutting efforts implemented by
management.
Liquidity and Capital Resources
Working capital increased to $3,847,388 on June 30, 1998 from $1,065,778 on
September 30, 1997. The increase is principally due to the proceeds received
from the sale of the debentures and from the additional term loan.
Management believes that existing cash balances, borrowings available under the
line of credit together with cash generated from projected operations should be
adequate to meet the Company's anticipated cash requirements during the next
twelve months. However; in the event the Company's operating performance is less
than projected the Company may be forced to seek additional financing. There can
be no assurance that such additional financing, if required, would be available;
and if available would be available on favorable terms.
Inflation and Seasonality
The Company does not believe that it is significantly impacted by inflation.
Historically, the computer industry sales tend to decline in December, January,
July and August when activity in the personal computer industry as a whole is
reduced. However, the Company has recently diversified into the medical and
telecommunications products in an effort to offset the seasonality in the
computer industry.
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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 and Use of Proceeds. 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. Exhibits
27 Financial Data Schedule.
B. Reports on Form 8-K.. None
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PEN INTERCONNECT, INC.
By: /s/ James S. Pendleton Date: September 30, 1998
------------------------- -------------------
James S. Pendleton,
CEO and Chairman
By: /s/ Wayne R. Wright Date: September 30, 1998
------------------------- -------------------
Wayne R. Wright,
CFO, Principal Accounting
Officer and Vice-Chairman
21