UNITED STATES
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 1999
[] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from to
Commission file number 1-14072
PEN INTERCONNECT, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0430260
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
1601 Alton Parkway Irvine, Ca. 92606
(Address of Principal Executive Offices) (Zip Code)
(949) 798-5800
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 3, 1999 the issuer had 7,976,089 shares of its common
stock, par value $0.01 per share, issued and outstanding. Transitional
Small Business Disclosure Format (check one):
Yes No X
FORM 10-QSB
PEN INTERCONNECT, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Financial Information 3
Balance Sheets at June 30, 1999
(unaudited) and September 30, 1998 4-5
Statements of Operations for the three months
ended June 30, 1999 and 1998 (unaudited) and 6
nine month periods ended June 30, 1999 and
1998 (unaudited)
Statements of Cash Flows for the nine months
ended June 30, 1999 and 1998 (unaudited) 7-9
Notes to Condensed Financial Statements (unaudited) 10-13
Item 2 Management's Discussion and Analysis or
Plan of Operation 14-18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in the Securities and Use of Proceeds 19
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
2
PEN INTERCONNECT, INC.
PART I
FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED FINANCIAL STATEMENTS
Pen Interconnect, Inc. (the "Company"), has included the unaudited condensed
balance sheet of the Company as of June 30, 1999 and the audited balance sheet
as of September 30, 1998 (the Company's most recent fiscal year), unaudited
condensed statements of operations for the three and nine months ended June 30,
1999 and 1998, and the unaudited condensed statements of cash flows for the nine
months ended June 30, 1999 and 1998, together with unaudited condensed notes
thereto. In the opinion of management of the Company, the financial statements
reflect all adjustments, all of which are normal recurring adjustments,
considered necessary to present fairly 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, 1998. The results of operations for the nine months ended
June 30, 1999 may not be indicative of the results that may be expected for the
year ending September 30, 1999.
3
Pen Interconnect, Inc.
BALANCE SHEETS
ASSETS
June 30, September 30,
1999 1998
------------------ -------------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 26,478 $ 657,777
Receivables
Trade accounts less allowance for
doubtful accounts of $67,434 at June 30, 1999
$108,575 at September 30, 1998, respectively 3,831,713 3,350,970
Current maturities of notes receivable 765,390 35,675
Investments in common stock - 242,739
Inventories 4,583,076 3,680,169
Prepaid expenses and other current assets 345,804 261,375
Deferred tax asset 41,324 41,324
------------------ -------------------
Total current assets 8,270,029 9,593,785
PROPERTY AND EQUIPMENT, AT COST
Production Equipment 1,288,623 2,624,513
Furniture and fixtures 165,596 837,594
Transportation equipment 22,149 83,522
Leasehold improvements 260,074 613,248
------------------ -------------------
1,736,443 4,158,877
Less accumulated depreciation 219,854 1,680,266
------------------ -------------------
1,516,589 2,478,611
OTHER ASSETS
Notes receivable, less current maturities 2,066 3,989
Investments in common stock - 482,220
Deferred income taxes 1,326,903 725,667
Goodwill and other intangibles, net 2,012,565 2,031,685
Assets transferred under contractual arrangement 454,742 0
Other 14,864 98,455
------------------ -------------------
Total other assets 3,811,140 3,342,016
------------------ -------------------
$ 14,921,514 $ 14,090,656
================== ===================
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,
1999 1998
------------------ -------------------
(unaudited)
CURRENT LIABILITIES
Subordinated debentures $ - $ 1,401,429
Line of credit 3,531,814 4,064,361
Current maturities of long-term obligations 1,527,499 1,132,538
Current maturities of capital leases 109,054 69,621
Dividends payable 146,148 -
Accounts payable 3,029,974 2,926,797
Accrued liabilities 174,853 389,889
------------------ -------------------
Total current liabilities 8,519,342 9,984,635
LONG TERM OBLIGATIONS, less current
maturities 10,086 51,965
CAPITAL LEASE OBLIGATIONS, less
current maturities 286,594 22,333
LIABILITIES TRANSFERRED UNDER
CONTRACTUAL ARRANGEMENTS 514,813 -
DEFERRED INCOME TAXES 165,755 165,755
------------------ -------------------
Total liabilities 9,496,590 10,224,688
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value
authorized 5,000,000 shares, 1,800,000
issued and outstanding at March 31, 1999 28 -
Common stock, $0.01 par value,
authorized 50,000,000 shares, issued and
outstanding 6,864,838 shares at March 31,
1999 and 5,018,437 at September 30, 1998 79,761 50,184
Additional paid-in capital 16,324,193 10,890,022
Accumulated deficit (10,832,910) (7,074,238)
Dividends (146,148) -
------------------ -------------------
Total stockholders' equity 5,424,924 3,865,968
------------------ -------------------
$ 14,921,514 $ 14,090,656
================== ===================
The accompanying notes are an integral part of these
statements.
5
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
------------------------------------ ----------------------------------
-------------------------------------- -----------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------------ ----------------- ---------------- ----------------
Net Sales $ 5,098,525 $ 4,510,112 $12,684,444 $12,113,556
Cost of sales 4,253,409 3,534,452 11,221,585 9,431,973
------------------ ----------------- ---------------- ----------------
845,116 975,660 1,462,859 2,681,583
Gross profit
Operating expenses
Sales and marketing 22,002 192,071 139,414 89,538
Research and development (188,983) 49,675 303,650 243,044
General and administrative 509,943 477,792 2,564,985 1,647,358
Depreciation and amortization 110,592 122,288 301,898 364,225
------------------ ----------------- ---------------- ----------------
Total operating expenses
453,554 841,826 3,309,947 2,344,165
------------------ ----------------- ---------------- ----------------
Operating income, (loss) 391,562 133,834 (1,847,088) 337,418
Other income (expense)
Interest expense (96,947) (163,699) (485,437) (690,287)
Gain on sale of division - - 196,628 -
Other income (expense) net (849,284) 84,318 (2,224,011) 118,655
------------------ ----------------- ---------------- ----------------
Total other income (expense)
(946,231) (79,381) (2,512,820) (571,632)
------------------ ----------------- ---------------- ----------------
Earnings (loss) before income taxes (554,669) 54,453 (4,359,908) (234,214)
Income tax expense (benefit) (601,236) 21,781 (601,236) (19)
------------------ ----------------- ---------------- ----------------
Net earnings (loss) $ 46,567 $ 32,672 $(3,758,672) $ (234,195)
================== ================= ================ ================
Earnings (loss) per common share
Basic $ (0.09) $ 0.01 $ (0.69) $ (0.06)
Diluted $ (0.09) $ 0.01 $ (0.69) $ (0.06)
Weighted average common shares outstanding
Basic 7,693,650 4,234,009 6,538,820 4,165,952
Diluted 7,693,650 6,486,509 6,538,820 4,165,952
The accompanying notes are an integral part of these
statements.
6
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
----------------------------------
------------------------------------
June 30, June 30,
1999 1998
----------------- -----------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (3,758,672) $ (234,195)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 301,898 687,405
Bad debts 99,625 3,420
Stock issued in exchange for services 524,377 -
Interest on debenture conversion 104,861 -
Gain on sale of cable division (196,628) -
Provision for asset impairment 1,869,900 -
Deferred taxes (601,236) 27,112
Contingent stock San Jose agreement - (40,000)
Loss on disposal of equipment - 16,534
Changes in asset and liabilities
Trade accounts receivable (1,071,674) (1,632,294)
Inventories (1,471,476) (2,305,763)
Prepaid expenses and other assets 82,182 (306,138)
Accounts Payable 386,861 974,725
Accrued liabilities (175,886) (254,795)
----------------- -----------------
Total adjustments (147,196) (2,829,794)
----------------- -----------------
Net cash used in
operating activities (3,905,868) (3,063,989)
----------------- -----------------
Cash flows from investing activities
Purchase of property and equipment (751,860) (202,353)
Proceeds from sale of investments - 389,250
Issuance of notes receivable (611,169) (89,195)
Collections on notes receivable - 22,800
---------------- -----------------
----------------- -----------------
Net cash used in
operating activities (1,363,029) 120,502
----------------- -----------------
(Continued)
7
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINED
(Unaudited)
Nine months ended
----------------------------------
------------------------------------
June 30, June 30,
1999 1998
----------------- -----------------
Cash flows from financing activities
Principal payments on notes payable - (641,505)
Proceeds from issuance of notes payable 816,411 -
Net change in line of credit 215,954 1,557,851
Proceeds from bridge loan 900,000 -
Principal payments on bridge loan (900,000) (100,000)
Principal payments on long-term obligations 8,586 (265,668)
Proceeds from issuance of subordinated debentures - 1,910,000
Proceeds from issuance of long-term obligation 395,648 500,000
Proceeds from sale of common stock 400,999 705,058
Proceeds from issuance of preferred stock 2,800,000 -
----------------- -----------------
----------------- -----------------
Net cash provided by
financing activities 4,637,598 3,665,736
----------------- -----------------
----------------- -----------------
Net increase (decrease) in cash and cash equivalents (631,299) 722,249
Cash and cash equivalents at beginning of period 657,777 272,148
----------------- -----------------
Cash and cash equivalents at end of period 26,478 994,397
================= =================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest expense $ 380,576 $ 370,028
Income Tax expense $ - $ -
Noncash investing and financing activities
During the first nine months of FY 99 $1,401,429 of subordinated debentures were
converted into 1,942,914 shares of common stock. Along with the conversion on
the debentures, $104,861 of unamortized interest on the subordinated debentures
was charged to interest expense.
During the second and third quarters of FY 99, $1,800,000 of Series A Preferred
Stock and $1,000,000 of Series B Preferred Stock was issued. Of this amount,
$900,000 was used directly to pay off $900,000 of bridge loans made to the
Company during the first quarter of FY 99.
(Continued)
8
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINED
(Unaudited)
The letter of intent for the sale of the MotoSat division to James Pendleton,
Pen's former Chairman and CEO, states that all assets and liabilities of the
MotoSat division will be transferred to Mr. Pendleton in exchange for an
elimination of future obligations to pay retirement benefits under Mr.
Pendleton's employment contract. If the transaction had been closed as of June
30, 1999 it would have yielded a gain of $60,071, representing the excess of
liabilities over assets to be transferred. This gain is being deferred pending
the closing of this transaction, which is anticipated for summer 1999. As of
August 3, 1999 MotoSat has secured its own lending source which is expected to
be finalized in the month of August. When the credit agreement between MotoSat
and their lender is finalized, the risk of ownership will pass to MotoSats new
owners and the journal entry reflecting the sale will be recorded.
During the first nine months of FY 99, a determination was made that certain
assets and liabilities having a net book value of $1,869,900 had lost their
value and benefit to the corporation and were written off. At the same time, a
valuation allowance of $601,236 to reduce the value of deferred tax assets at
the end of FY 98 was adjusted based on current and projected earnings.
During the third quarter of FY 99 675,000 shares of common stock were issued to
outside consultants for services performed. At the date of issuance, the market
value of the stock issued was $756,487.
The accompanying notes are an integral part of these
statements.
9
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS/DISPOSITIONS
Laminating Technologies Inc.
On December 23, 1998, the Company signed a definitive agreement to
acquire Laminating Technologies Inc. (LTI). On April 2, 1999 the Company
and LTI mutually terminated this definitive agreement.
Cables To Go Inc.
On January 29, 1999 the Company signed an agreement to sell certain
assets and transfer certain liabilities of the Cable division to Cables
To Go Inc (CTG). CTG purchased certain of the receivables, inventory,
machinery equipment and assumed capital lease liabilities for $1,075,000
thus yielding the Company a gain on the sale of $196,628. Concurrently,
the Company determined that asset relating to the Cable division that
were not purchased by CTG had no future value and were therefore written
off. The book value of the assets written off was $1,147,807.
Mobile Technology Inc.
On February 1, 1999 the Company signed a letter of intent with Mobile
Technology Inc. (MTI) to sell all assets and liabilities of the MotoSat
division. MTI's principal owner is James Pendleton, Chairman and former
CEO of the Company. The letter of intent calls for MTI to assume all
assets and liabilities of the MotoSat division. If the transaction were
closed as of June 30, 1999, it would yield a gain to the Company on the
sale of $60,071. Pending the closing of the sale, the Company has agreed
to maintain and/or provide a $300,000 credit facility for MTI with the
Company's major lender. The Company anticipates closing the transaction
when MTI is able to secure independent sources of financing. In the
interim, MTI has assumed operational control of the MotoSat division but
the Company retains ownership of the MotoSat division's receivables and
inventory which are collateral for the Company's credit facility.
Inasmuch as the Company is still at risk for the credit facility made
available to MTI, on the receivables and inventory currently being
submitted to finance the current operations of MotoSat, the Company has
recorded the position of financial condition as of the date of the letter
of intent only (February 1, 1999). Assets and liabilities have been
reclassified as "Assets /Liabilities Transferred Under Contractual
Arrangements" on the balance sheet at June 30, 1999.
10
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS/DISPOSITIONS - CONTINUED
Transdigital Communications Corporation
In July 1999, the Company signed an agreement to merge with Transdigital
Communications Corporation (TCC). The agreement would result in a reverse
merger with TCC management becoming the management of the new company.
The Company's management is continuing to monitor the progress of TCC's
business before presenting the agreements for final director and
shareholder approval. The closing of the merger is conditioned upon such
approval as well as other terms and conditions.
NOTE B - INVENTORIES
Inventories consist of the following:
June 30, September 30,
1999 1998
--------------- ------------------
Raw materials (net of allowance) $ 2,558,829 $ 2,253,933
Work-in-process 1,944,591 1,391,664
Finished goods 79,656 35,572
--------------- ------------------
4,583,076 3,680,169
=============== ==================
NOTE C - BRIDGE LOANS
During the 1st quarter of FY 1999 the Company secured two bridge loans
both of which were to be repaid with funds to be received from the merger
with LTI. The term of each loan was 90 days and carried an interest rate
of 8 percent. One bridge loan was secured in November for $500,000 and
the other in December for $400,000. Both bridge loans were subsequently
repaid from proceeds received from the issuance of preferred stock. (See
Note E)
NOTE D - WARRANTS AND OPTIONS TO PURCHASE COMMON STOCK
During the first nine months of FY 1999 the Company issued warrants to
purchase 1,230,000 shares of the Company's common stock. All warrants
were issued at an exercise price which was equal to or above the market
price at the time of issuance. The following table outlines the features
of these warrants:
11
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE D - WARRANTS AND OPTIONS TO PURCHASE COMMON STOCK - CONTINUED
Number of Exercise Expiration
Warrants Price Date
- --------------- ---------------- ----------------------
150,000 $1.000 October 2002
125,000 $0.875 October 2002
215,000 $0.875 November 2001
100,000 $1.3700 February 2002
125,000 $0.0875 October 2003
160,000 $1.2800 February 2002
160,000 $0.8600 April 2002
25,000 $0.8000 May 2001
20,000 $1.0000 June 2003
25,000 $1.0000 June 2002
125,000 $0.8000 August 2004
During the first nine months of FY 1999 the Company issued non qualified
options to employees to purchase 335,000 shares of common stock. All
options granted were at an exercise price which was equal to or above the
market price at the time of grant. The following table outlines the
features of these options:
Number of Exercise Expiration
Options Price Date
- ---------------- ---------------- ----------------------
60,000 $0.8000 March 2004
250,000 $0.8000 April 2004
25,000 $1.0000 June 2004
NOTE E - PREFERRED STOCK
The Company has issued two series of Preferred Stock. Series A was issued
in February 1999 consisting of 1,800 shares, par value $0.01 per share,
for $1,000 per share. Series B was issued in April 1999 at the same price
but only 1,000 shares were issued. As mentioned in Note 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 $234,500 in fees and expenses, the net cash
raised by the Company was $1,665,500. Both series of Preferred Stock
carry a 16 percent dividend rate which is paid quarterly. If and when the
Company's stock is listed again on NASDAQ the dividend rate will drop to
8 percent.
12
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE E - PREFERRED STOCK - CONTINUED
Both issuances of Preferred Stock are convertible into shares of the
Company's Common Stock. Each share of Series A Preferred Stock is
convertible into an amount of shares of Pen Common Stock equal to $1,000
divided by the average of the two lowest closing bid prices for Pen
Common Stock during the period of 22 consecutive trading days ending with
the last trading day before the date of conversion, after discounting
that market price by 15 percent for the Series A shares and 20 percent
for the Series B shares (the Conversion Price). The maximum Conversion
Price for the Series A Preferred Stock is $1.17 per share and for the
Series B Preferred stock is $0.79 per share. Warrants to acquire 320,000
shares of Common Stock at prices ranging from $0.86 to $1.28 per share
were also issued to the purchasers of the Series A and Series B Preferred
Stock. The Warrants expire three years from date the Preferred Stock and
warrants were initially issued.
NOTE F - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing net
earnings (loss) available to common shareholders by the weighted average
number of common shares outstanding during each period. Diluted earnings
(loss) per common share are similarly calculated, except that the
weighted average number of common shares outstanding includes common
shares that may be issued subject to existing rights with dilutive
potential except for periods when such calculations would be anti
dilutive.
For the three and nine months ended June 30, 1999, net income (loss)
attributable to common shareholders includes a non-cash imputed dividend
to the preferred shareholders related to the beneficial conversion
feature on the 1999 Series A and B Preferred Stock and related warrants.
(See Note E). The beneficial conversion feature is computed as the
difference between the market value of the common stock into which the
Series A and B Preferred Stock can be converted and the value assigned to
the Series A and B Preferred Stock in the private placement. The imputed
dividend is a one-time non-cash charge against the loss per common share.
The calculation of earnings per share is included in exhibit 11.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 as amended, and section 21E of the
Securities Exchange Act of 1934, as amended, that involve risks and
uncertainties. In addition, the Company may from time to time make oral
forward-looking statements. Actual results are uncertain and may be impacted by
the following factors. In particular, certain risks and uncertainties that may
impact the accuracy of the forward-looking statements with respect to revenues,
expenses and operating results include without limitation, cycles of customer
orders, general economic and competitive conditions and changing consumer
trends, technological advances and the number and timing of new product
introductions, shipments of products and components from foreign suppliers, and
changes in the mix of products ordered by customers. As a result, the actual
results may differ materially from those projected in the forward-looking
statements.
Because of these 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 months ended June 30, 1999 and 1998. 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, 1998.
General
Pen Interconnect, Inc. is a provider of contract manufacturing services for
original equipment manufacturers. It builds electronic systems and subsystems
for customers in a range of industries including computers, consumer
electronics, industrial and medical instrumentation, avionics, communications,
and semiconductor applications. Pen Interconnect's services include product
design and prototyping, systems assembly, software duplication, packaging, and
warehousing.
Pen Interconnect, Inc. provides the total manufacturing solution including
circuit design, board design from schematic, mechanical and product design,
prototype assembly, volume board assembly, system services and end-user
distribution. The Company was incorporated under the laws of the State of Utah
on September 30, 1985. Pen Interconnect, Inc. has support manufacturing
facilities in California, Utah and China.
14
During the three months ending June 30, 1999 the Company's InCirt division
secured contracts with two new customers. One contract is with Imaging
Technologies Corp. (Itec) and the other is with Xtend Micro Products (Xtend).
Itec manufactures and sells printers to national and international companies.
The Company's contract with Itec is to assemble the controller board which
operates the printer, install the controller board and then provide packaging
and shipping services. Xtend provides the distribution of battery charges and
adapter modules for laptop PC's. At present, the Company would assemble the
circuit boards for the chargers and adapter modules and then provide packaging
and shipping services. The packaging and shipping services are new to the
Company's InCirt division but is part of the overall contract of being the sole
manufacturer for both of these new contracts.
Merger and Acquisitions
In July 1999, the Company signed an agreement to merge with Transdigital
Communications Corporation (TCC). The agreement would result in a reverse merger
with TCC management becoming the management of the new company. The Company's
management is continuing to monitor the progress of TCC's business before
presenting the agreements for final director and shareholder approval. The
closing of the merger is conditioned upon such approval as well as other terms
and conditions.
Results of Operations
Net sales. Net sales for the Company increased $588,413 or approximately 13
percent for the three month period ended June 30, 1999 as compared to the same
period in the prior year. This increase resulted primarily from sales related to
two new contracts acquired by the InCirt division during the third quarter of FY
99 of approximately $1,851,000. These sales more than offset the decline in
sales of $1,174,411 related to the sale of the Cable and MotoSat divisions
during the third quarter of the prior year. Sales for the nine months ended June
30, 1999 were $570,888 or 5 percent more than during the same period from the
prior fiscal year. This increase was also primarily due to sales related to the
acquisition of two new contracts by the InCirt division during the third quarter
of FY 99 of $1,851,000 and increases in sales on existing contracts of
approximately $800,000 which were in excess of the decline in sales of
$2,041,630 due to the sale of the Cable and MotoSat divisions.
Cost of sales. Cost of sales as a percentage of net sales have increased to
approximately 83 percent for the three months ended June 30, 1999 as compared to
78 percent for the same period in the prior year. This increase is due primarily
to an increase in fixed manufacturing costs in support of the new contracts
acquired by the InCirt division. As sales for these contracts reach their
projected levels in the fourth quarter of FY 99 the Company expects to see a
drop in the percent of cost of sales to sales ratio inasmuch as these new
contracts have more favorable margins than the existing customer base. The
increase is also attributable to a decline in margins on an existing contract at
the InCirt division which were necessary to accept in order to remain
competitive and retain the contract. Cost of sales as a percentage of sales was
88 percent for the nine months ended June 30, 1999 compared to 78 percent for
the same period from the prior fiscal year. This increase is also attributable
to the increase in fixed manufacturing costs associated with the new contracts
acquired by the InCirt division and the decrease in margins on existing
contracts mentioned previously.
15
Operating expenses. Operating expenses decreased $27,060 or 3 percent for the
three months ending June 30, 1999 compared to the same period of time in the
prior fiscal year. This decrease is net of a positive adjustment of $361,212
related to the recording of development costs associated with the PowerStream
division. For the nine months ended June 31, 1999, operating expenses increased
$965,782 or 41 percent compared to the same period in FY 98. This increase was
mostly associated with an increase in general and administrative expenses of
$917,627. The increases in general and administrative expenses occurred mostly
during the second quarter and include (1) $208,599 in professional fees
associated with the issuance of the Company's Series A and B preferred stock,
the negotiation of proposed merger agreements and agreements for the sale of the
Cable and Motosat divisions, and Nasdaq compliance hearings, (2) $567,365 for
financial representation services, and (3) $97,000 in supplemental payroll
expenses associated with the termination of employees with the sale of the Cable
division. Operating expenses also increased due to additional research and
development costs at the PowerStream division.
Other income and expenses. Other expenses increased $866,850 or 1,092 percent
for the three months ended June 30, 1999 compared to the same three month period
for the prior fiscal year. This increase is mostly due to a write off of the
Company's investment in the stock of Touche Manufacturing Inc. (TMCI) totaling
$724,959. Other expenses also increased due to interest income in FY 98 which
does not exist in FY 99 and $124,325 in expenses associated with the issuance of
Series B Preferred Stock. These increased expenses are offset by higher interest
expense related to a favorable conversion feature associated with subordinated
debentures which was recorded in FY 98 which does not exist in FY 99. Other
expenses increased $1,941,188 or 340 percent for the nine months ended June 30,
1999 compared to the same period for the prior fiscal year. In addition to the
items discussed for the third quarter, the Company also recorded a loss on the
impairment of assets pertaining to the sale of the Cable division totaling
$1,144,941 and incurred expenses associated with the issuing of the Series A
preferred stock totaling $150,000 in the second quarter.
Net earnings (loss) and earnings (loss) per share. Net earnings for the third
fiscal quarter ended June 30, 1999 totaled $46,567 or $0.01 per basic share
before accrued dividends on preferred stock, compared with a gain of $32,672 or
$0.01 per basic share for the third quarter of fiscal 1998. Included in the
earnings per share for the third quarter is a loss per share of $0.09 for the
write off of the investment of stock in TMCI stock and an increase per share of
$0.08 for the elimination on the valuation allowance for the deferred tax asset.
For the nine months ended June 30, 1999 the net loss of $3,758,672 resulted in a
loss per share of ($0.57) before the accrual for dividends on preferred stock
compared to a loss per share of ($0.06) on a loss of $234,195. The decrease in
the loss per share of ($0.51) includes ($0.29) related to the write down of
impaired assets, (0.14) related to the increase in general and administrative
expenses, ($0.19) related to the decline in margins on sales, $0.03 related to
the gain on the sale of the Cable division and $0.09 related to the adjustment
of the valuation allowance for deferred tax assets.
16
Liquidity and Capital Resources
The Company has positive working capital of $1,074,443 at June 30, 1999 compared
to a working capital deficit of ($668,388), ($2,263,049) and ($1,714,606) at
March 31, 1999, December 31, 1998 and at September 30, 1998 respectively. The
increase in working capital has resulted from increased sales and inventory
related to two new contracts secured and issuance of the Series B Preferred
Stock by the Company during the third quarter of FY 99.
During the third quarter of FY99, the Company achieved earnings from operations
of $391,562. These earnings were then impacted by a write off of an investment
in the stock of Touche Manufacturing Inc. (TMCI) of $724,959. During the first
quarter of FY 99 TMCI was forced into receivership by its lender for non
compliance with loan covenants The Company made an unsuccessful attempt to use
its shares as a means of acquiring all or part of the business of TMCI. After
this unsuccessful bid, it was determined that the investment in TMCI stock was
of no value and was therefore written off. Earnings from operations were also
impacted by the elimination of the valuation allowance on the deferred tax asset
of $601,236 established at the end of FY 98. With the acquisition of the new
sales contacts at the InCirt division, the profits from operations earned during
the third quarter and the backlog of orders for sales, the Company believes that
the asset will begin to be utilized in FY 00.
The Company issued its A series and B series of Preferred Stock in February and
April 1999 respectively. The issuance of the Series A Preferred Stock was for
$1,800,000 and consisted of 1,800 shares at $1,000 per share. The Series B
Preferred Stock was for $1,000,000 and consisted of 1,000 shares also at $1,000
per share. Both issuances raised, net of expenses associated with the issuance
and repayment of bridge loans, $1,665,500 to the Company which was used to fund
ongoing operations.
Management believes that the new contracts secured at the InCirt division along
with new contracts expected in the near future should result in continued
profitable operations; however, there can be no assurance that additional
contracts can be secured or that the new contracts which have been secured will
continue to perform as anticipated.
Despite the improvement in earnings from operations for the current fiscal year
the Company still faces tight cash constraints due to vendors' requiring
advanced payments or low credit limits. The Company is looking to raise
additional funds in the capital markets to assist with the working capital
requirements to fund this growth. Pen's management estimates that approximately
$1 million may have to be raised to sustain the growth in operations. With the
raising of this additional capital, management believes that the cash supplied
from operations in the future will be sufficient to sustain operations and
reduce the dependency the Company has had on raising cash in the capital markets
to sustain operations. If the Company cannot raise the additional capital,
growth will be limited and the Company may again incur losses from its
operations.
17
Inflation and Seasonality
The Company does not believe that it is significantly impacted by inflation. The
Company has been marginally influenced with seasonality of sales in the past.
With the sale of the Cable and MotoSat divisions, the Company is even less
impacted by seasonality than before.
Year 2000 Readiness
In general, the Year 2000 issue relates to computers and other systems being
unable to distinguish between the years 1900 and 2000 because they use two
digits, rather than four, to define the applicable year. Systems that fail to
properly recognize such information will likely generate erroneous data or cause
a system to fail possibly resulting in a disruption of operations. The Company's
products do not incorporate such date coding so the Company's efforts to address
the Year 2000 issue fall in the following three areas: (i) the Company's
information technology ("IT") systems; (ii) the Company's non-IT systems (i.e.,
machinery, equipment and devices which utilize technology which is "built in"
such as embedded microcontrollers); and (iii) third-party suppliers. The Company
has completed its evaluation of its IT systems and believes that these systems
are Year 2000 compliant. The Company's non-IT systems are not date sensitive and
therefor pose no risk in relation to Year 2000 issues.
Third party suppliers and customers present a different problem in that the
Company cannot control the efforts of such third parties to be Year 2000
compliant.. The Company is currently requesting confirmations from critical
third party suppliers that they are year 2000 compliant to avoid disruptions of
services and supplies. At present the Company has received responses from
approximately 40% of its critical vendors and is continuing to solicit responses
from the rest. However, any failure on the part of such companies to be year
2000 compliant on a timely basis may adversely affect the operations of the
Company.
18
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 has had a judgement made
against it pertaining to an obligation of $79,000 to YC Intl. which has not been
paid. Agreements made with the legal counsel of YC Intl. call for monthly
payments of $10,000 to be made. To date the Company has made payments of $50,000
towards this obligation.
Item 2. Changes in the Securities and Use of Proceeds.
1. In April 1999, Pen Interconnect Inc. issued 153,000 shares of its common
stock to Richard S. Carpenter as payment for services.
2. In April 1999, Pen Interconnect Inc. issued 147,000 shares of its common
stock to Jeffery M. Lamberson as payment for services.
3. In April 1999, Pen Interconnect Inc. issued 281,250 shares of its common
stock to Liviakis Financial Communications, Inc. as payment for services.
4. In April 1999, Pen Interconnect Inc. issued 93,750 shares of its common
stock to Robert B. Prag as payment for services.
5. In May 1999, Pen Interconnect Inc. issued 15,000 shares of its common
stock to James Pendleton as compensation.
6. In May 1999, Pen Interconnect Inc. issued 20,000 shares of its common
stock to Dave Livingston as payment for services.
7. In May 1999, Pen Interconnect Inc. issued 10,000 shares of its common
stock to Corporate Development Group as payment for services.
8. In May 1999, Pen Interconnect Inc. issued 7.000 shares of its common
stock to Network Investor Communications as payment for services.
9. In May 1999, Pen Interconnect Inc. issued 1,500 shares of its common
stock to Robert Albrecht as compensation.
10. In May 1999, Pen Interconnect Inc. issued 2,167 shares of its common
stock to Stephen Fryer as compensation.
11. In May 1999, Pen Interconnect Inc. issued 2,500 shares of its common
stock to Mehrdad Mobasseri as compensation.
12. In May 1999, Pen Interconnect Inc. issued 1,000 shares of its common
stock to Owen Marsh as compensation.
13. In May 1999, Pen Interconnect Inc. issued 1,000 shares of its common
stock to Bill Day as compensation.
19
14. In May 1999, Pen Interconnect Inc. issued 1,000 shares of its common
stock to Steve Ngo as compensation.
15. In May 1999, Pen Interconnect Inc. issued 1,000 shares of its common
stock to Rafael Batista as compensation.
16. In May 1999, Pen Interconnect Inc. issued 400 shares of its common stock
to Ronda Barboa as compensation.
17. In May 1999, Pen Interconnect Inc. issued 400 shares of its common stock
to Heather Hungate as compensation.
18. In May 1999, Pen Interconnect Inc. issued 400 shares of its common stock
to Irene Tafulu as compensation.
19. In May 1999, Pen Interconnect Inc. issued 400 shares of its common stock
to Lien Hoang as compensation.
20. In May 1999, Pen Interconnect Inc. issued 400 shares of its common stock
to Waldemar Dziurzynski as compensation.
21. In May 1999, Pen Interconnect Inc. issued 171,195 of its shares of common
stock to BNC Bach related to the conversion of $100,000 of subordinated
debentures.
22. In June 1999, Pen Interconnect Inc. issued 200,889 shares of its common
stock to BNC Bach related to the conversion of $125,000 of subordinated
debentures.
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
11 Calculation of earnings per share
27 Financial Data Schedule.
B. Reports on Form 8-K None
20
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date_ August 18, 1999_
PEN INTERCONNECT, INC.
By: /s/ Stephen J Fryer
Stephen J. Fryer
President and CEO
By: /s/ Robert J. Albrecht
Robert J. Albrecht
CFO, Principal Accounting
Officer and Vice-President
21
Exhibit 11
Pen Interconnect, Inc.
CALCULATION OF EARNINGS PER SHARE
(Unaudited)
Three months ended Nine months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------------- ----------------- ------------------- ----------------
Earnings (loss) available to common shareholders
$ (688,758) $ 32,672 $ (4,531,082) $ (234,195)
=================== ================= =================== ================
Basic EPS
Common shares outstanding entire period
6,865,517 4,384,987 5,018,437 4,072,863
Weighted average common shares issued 828,133 201,975 1,520,383 379,449
------------------- ----------------- ------------------- ----------------
Weighted average commons shares outstanding
during period 7,693,650 4,586,962 6,538,820 4,452,312
=================== ================= =================== ================
Earnings (loss) per common share - basic (0.09) 0.01 (0.69) (0.05)
Diluted EPS
Weighted average common shares outstanding
during period - baxic 7,693,650 4,586,962 6,538,820 4,452,312
Dilutive effect of stock options and warrants
- 534,191 - -
------------------- ----------------- ------------------- ----------------
Weighted average commons shares outstanding
during period - diluted 7,693,650 5,121,153 6,538,820 4,452,312
=================== ================= =================== ================
Earnings (loss) per common share - diluted
$ (0.09) $ 0.01 $ (0.69) $ (0.05)