UNITED STATES
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 February 10, 1999 the issuer had 6,069,160 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 December 31, 1998
(unaudited) and September 30, 1998 4-5
Statements of Operations for the three months
ended December 31, 1998 and 1997 (unaudited) 6
Statements of Cash Flows for the three months
ended December 31, 1998 and 1997 (unaudited) 7-8
Notes to Condensed Financial Statements (unaudited) 9-11
Item 2 Management's Discussion and Analysis or
Plan of Operation 12-14
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 2 Changes in the Securities and Use of Proceeds 15
Item 3 Defaults Upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6(a). Exhibits 15
Item 6(b). Reports on Form 8-K 15
Signatures 16
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 December 31, 1998 and audited
balance sheet as of September 30, 1998 (the Company's most recent fiscal
year), unaudited condensed statements of operations for the three months
ended December 31, 1998 and 1997, and unaudited condensed statements of
cash flows for the three months ended December 31, 1998 and 1997, 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 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/A 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/A for the year ended September
30, 1998. The results of operations for the three months ended December 31,
1998 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
December 31, September 30,
1998 1998
----------------- ------------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 316,292 $ 657,777
Trade accounts receivables, less allowance for
doubtful accounts of $117,002 and
$108,575 at December 31, 1998 and
September 30, 1998, respectively 3,469,338 3,350,970
Current maturities of notes receivable 35,675 35,675
Investments in common stock 242,739 242,739
Inventories 3,220,077 3,680,169
Prepaid expenses and other current assets 168,859 261,375
Deferred tax asset 41,324 41,324
----------------- ------------------
Total current assets 7,494,304 8,270,029
PROPERTY AND EQUIPMENT, AT COST
Production equipment 2,973,903 2,624,513
Furniture and fixtures 772,258 837,594
Transportation equipment 83,522 83,522
Leasehold improvements 323,566 613,248
----------------- ------------------
4,153,249 4,158,877
Less accumulated depreciation 1,751,694 1,680,266
----------------- ------------------
2,401,555 2,478,611
OTHER ASSETS
Notes receivable, less current maturities 2,067 3,989
Investments in common stock 482,220 482,220
Deferred income taxes 725,667 725,667
Goodwill and other intangibles, net 1,997,195 2,031,685
Other 98,455 98,455
----------------- ------------------
Total other assets 3,305,604 3,342,016
----------------- ------------------
$13,201,463 $14,090,656
================= ==================
The accompanying notes are an integral part of these
statements.
4
Pen Interconnect, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1998 1998
----------------- ------------------
(unaudited)
CURRENT LIABILITIES
Subordinated debentures $ 909,465 $ 1,401,429
Line of credit 3,569,254 4,064,361
Current maturities of long-term obligations 1,958,550 1,132,538
Current maturities of capital leases 69,621 69,621
Accounts payable 2,675,417 2,926,797
Accrued liabilities 476,818 389,889
----------------- -----------------
Total current liabilities 9,659,125 9,984,635
LONG TERM OBLIGATIONS, less current
maturities 51,965 51,965
CAPITAL LEASE OBLIGATIONS, less
current maturities 809 22,333
DEFERRED INCOME TAXES 165,755 165,755
----------------- -----------------
Total liabilities 9,877,654 10,224,688
STOCKHOLDERS' EQUITY
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 6,069,160 shares at December 31,
1998 and 5,018,437 at September 30, 1998 60,692 50,184
Additional paid-in capital 11,582,590 10,890,022
Accumulated deficit (8,319,473) (7,074,238)
----------------- -----------------
Total stockholders' equity 3,323,809 3,865,968
----------------- -----------------
$13,201,463 $14,090,656
================= =================
The accompanying notes are an integral part of these
statements.
5
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
December 31,
1998 1997
----------------- ----------------
Net sales $ 4,757,839 $ 3,904,717
Cost of sales 4,591,218 3,055,373
----------------- ----------------
Gross profit 166,621 849,344
Operating expenses
Sales and marketing 81,719 51,815
Research and development 167,697 88,387
General and administrative 768,733 602,029
Depreciation and amortization 126,617 114,275
----------------- ----------------
Total operating expenses 1,144,766 856,506
----------------- ----------------
Operating loss (978,145) (7,162)
Other income (expense)
Interest expense (192,872) (79,037)
Other income, net (74,218) 30,233
----------------- ----------------
Total other income (expense)
(267,090) (48,804)
----------------- ----------------
Loss before income taxes (1,245,235) (55,966)
Provision (benefit) for income taxes 0 (21,800)
----------------- ----------------
Net loss $(1,245,235) $ (34,166)
================= ================
Loss per common share
Basic and diluted (Note E) $ (0.22) $ (0.01)
================= ================
Weighted average common shares outstanding - basic and diluted
5,551,257 4,122,863
================= ================
The accompanying notes are an integral part of these
statements.
6
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
December 31,
1998 1997
------------ ------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $(1,245,235) $ (34,166)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 126,617 114,275
Bad debts 8,427 14,036
Contingent stock San Jose agreement 0 (40,000)
Loss on disposal of equipment 0 16,537
Changes in asset and liabilities
Trade accounts receivable (126,795) (857,006)
Inventories 460,092 (198,665)
Prepaid expenses and other assets 98,978 (161,412)
Accounts payable (251,380) (133,502)
Accrued liabilities 86,929 (149,424)
Income taxes 0 (19,843)
------------ ------------
Total adjustments 402,868 (1,415,004)
------------ ------------
Net cash used in
operating activities (842,367) (1,449,170)
------------ ------------
Cash flows from investing activities
Purchase of property and equipment (22,433) (81,605)
Issuance of notes receivable 0 (39,742)
Collections on notes receivable 1,922 0
------------ ------------
Net cash used in
investing activities (20,511) (121,347)
------------ ------------
(Continued)
7
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
Three months ended
December 31,
1998 1997
----------------- -----------------
Cash flows from financing activities
Principal payments on long-term obligations (69,988) (524,412)
Net change in line of credit (495,107) 402,653
Principal payments on bridge loans 0 (100,000)
Principal payments on capital lease obligations (21,524) (79,697)
Proceeds from issuance of long-term obligations 896,000 500,000
Proceeds from issuance of subordinated debentures 0 1,000,000
Proceeds from sale of common stock 212,012 150,000
----------------- -----------------
Net cash provided by
financing activities 521,393 1,348,544
----------------- -----------------
Net decrease in cash and cash equivalents (341,485) (221,973)
Cash and cash equivalents at beginning of period 657,777 272,148
----------------- -----------------
Cash and cash equivalents at end of period $ 316,292 $ 50,175
================= =================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 192,872 $ 63,188
Income taxes $ 0 $ 0
Noncash investing and financing activities
During the first quarter of FY 98, subordinated debentures totaling $491,064
were converted into 854,473 shares of common stock.
The accompanying notes are an integral part of these
statements.
8
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ACQUISITIONS/DISPOSITIONS
Laminating Technologies Inc.
On December 23, 1998, the Company signed a definitive agreement to merge
with Laminating Technologies Inc. (LTI). The merger calls for the
acquisition of all assets and liabilities of LTI by issuing shares of Pen
stock in exchange for shares of LTI stock. The definitive agreement calls
for Pen to exchange one share of its stock for a number of shares of LTI
stock calculated by taking the market price of Pen's stock and dividing
it by $0.50. The Company is currently in the process of filing an Form
S-4 with the SEC in completing this transaction. It is anticipated that
the merger will be brought before LTI's shareholders for a final vote in
May of this year. This merger is expected to bring approximately $1.8
million in cash to the Company to be used in funding operations.
Cables To Go Inc.
On January 29, 1999 the Company signed a purchase 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 and equipment and assumed capital lease liabilities
for $1,075,000. The CTG transaction yielded a gain of $68,988; however,
assets remaining with the Company after the transaction when written off
resulted in a charge of $1,039,863 to income yielding a net loss from the
transaction of $970,875. Although the net transaction yielded a
substantial loss, the Company is expected to save $62,000 per month in
cash and operating losses which management feels is necessary to return
the Company to profitable operations on a monthly basis. The agreement
with CTG also provides for royalty payments equal to 2 percent of sales
to be paid quarterly up to an amount of $600,000 of which $150,000 is
guaranteed.
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. The purchase price is $600,000 which will be supported by a
note for said amount to paid at a rate of $60,000 for ten years. Payments
against this note will be offset against obligations the Company has to
pay Jim Pendleton, principal owner of MTI and former CEO of the Company
for retirement benefits under an employment contract entered into with
the Company. The agreement requires the Company to maintain and/or
provide a $300,000 credit facility with the Company's major lender.
Inasmuch as MTI does not currently have the working capital to cash out
the Company from its obligation with its major lender, the Company will
retain ownership of MotoSat receivables and inventory which are being
used as collateral for advances to the Company. Future sales and
purchases of inventory will have to continue to be used as collateral to
raise the cash needed to sustain operations until independent financing
can be secured. There is no guarantee however that this financing will
ever be able to be secured.
9
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - ACQUISITIONS/DISPOSITIONS - CONTINUED
Transdigital Communications, Inc.
The Company signed a definitive agreement to merge with Transdigital
Communications, Inc. (TCC) in July of 1999. The agreement, which would
result in a reverse merger with TCC management becoming the management of
the new company, stipulated various closing conditions for both Pen and
TCC. As of this date, it is doubtful that the closing conditions
stipulated in the agreement will be met and both parties have mutually
agreed to terminate the agreement, although a writing to this effect has
not been completed.
NOTE B - INVENTORIES
Inventories consist of the following:
December 31, September 30,
1998 1999
-------------- ----------------
Raw materials (net of allowance) $ 2,276,309 $ 2,252,933
Work-in-process 903,433 1,391,664
Finished goods 40,335 35,572
-------------- ----------------
$ 3,220,077 $ 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 of 8
percent. If the merger with LTI is not consummated, the loans will be
repaid by the issue of warrants. One bridge loan was secured in November
for $500,000 and the other in December for $400,000 and are included in
long-term obligations.
10
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - WARRANTS TO PURCHASE COMMON STOCK
During the first quarter of FY 1999 the Company issued warrants to
purchase 490,000 shares of the Company's common stock. The following
table outlines the features of these warrants:
Number of Exercise Expiration
warrants price date
- ------------------ ---------------- ----------------------
150,000 $1.000 October 2002
125,000 $0.875 October 2002
215,000 $0.875 November 2001
11
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 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 months
ended December 31, 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, 1998.
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.
Potential merger. The Company signed a definitive agreement to merge with
Transdigital Communications, Inc. (TCC) in July of 1999. The agreement, which
would result in a reverse merger with TCC management becoming the management of
the new company, stipulated various closing conditions for both Pen and TCC. As
of this date, it is doubtful that the closing conditions stipulated in the
agreement will be met and both parties have mutually agreed to terminate the
agreement, although a writing to this effect has not been completed.
12
Results of Operations
Net sales. Net sales for the Company increased $853,122 or approximately 22
percent for the three month period ended December 31, 1998 as compared to the
same period in the prior year. This increase resulted from an increase in the
Alaris contract at the InCirt division. Sales for this division during the first
three months of FY 99 were $3,391,569 compared to $2,100,000 during the first
three months in FY 98. This increase is offset by a decline in sales of the
Cable division of $350,000.
Cost of sales. Cost of sales as a percentage of net sales have increased to
approximately 96 percent for the three months ended December 31, 1998, as
compared to 78 percent for the same period in the prior year. This increase is
due to declining sales in the cable division and no reduction in overhead costs
and a decrease in the margins on the Alaris contract at the InCirt division.
This decrease in prices raised the breakeven point beyond where this division
has sustained sales.
Operating expenses. Operating expenses increased during the first quarter of
fiscal 1999 by approximately $288,260. This increase resulted in the following
areas: (1) Research and development of $79,310 associated with new product
development costs in the PowerStream Division; (2) General and Administrative
costs increased by $166,704 primarily due to legal and audit fees to support the
merger and divestiture discussions and increased overhead expenses at the InCirt
division to support the increased level of sales with the Alaris contract; and
(3) Sales and marketing expenses increased by $29,904 primarily due to sales
efforts made to replace sales lost in the sale of the Cable division.
Other income and expenses. Other income and expenses increased $218,286 for the
three months ended December 31, 1998 as compared to the same period in the prior
year. This increase is the result of increased interest expense of $113,835 due
to an increase in the average line of credit outstanding during the quarter
resulting primarily from the Alaris contract expansion at the InCirt division
and the related increase in receivables and inventory associated with that
increase, $40,000 of non-operating income from the TMCI settlement booked in FY
1998 but not repeated in FY 1999 and $74,294 in expenses associated with
interest expense on the subordinated debentures and with the Finova line of
credit.
Net earnings (loss) and earnings (loss) per share. Net loss for the first fiscal
quarter ended December 31, 1999 totaled ($1,245,235) or ($0.22) per share,
compared with losses of ($34,166) or ($0.01) per share for the first fiscal
quarter of 1998. The increase in the loss per share of ($0.21) is primarily
caused by ($0.12) due to decreased margins on sales, ($0.01) from an increase in
research and development costs, ($0.03) from an increase in interest expense and
($0.02) from an increase in other expenses.
Liquidity and Capital Resources
During the first three months of FY 99 the Company sustained losses of
$1,245,235 which continued the trend of FY 98. Management has taken steps to
correct this trend by signing a purchase agreement with Cables To Go as of the
date of this filing to sell the Cable division and by signing a definitive
agreement with Jim Pendleton to sell the MotoSat division. With the selling of
the two aforementioned divisions, the Company expects to save approximately
$170,000 per month in operating costs and interest. The Company has also signed
a definitive agreement with Laminating Technologies Inc. (LTI) to merge with Pen
being the surviving company. This merger will bring additional funds of
approximately $1.8 million to the Company.
13
As a result of these losses, the Company has had to raise cash through two
bridge loans and the exercise of warrants from a re-strike of the purchase price
of the stock. The bridge loans, based on the cash to be received from the merger
with LTI, raised a total of $896,000 while the exercise of warrants yielded an
additional $212,012.
The Company anticipates increases in sales and a return to profitability
beginning in the third quarter of FY 99. Until such time, it is estimated that
between $1 million and $2 million will have to be raised to sustain operations.
These funds are expected to be raised from the sale of Preferred Convertible
stock for approximately $1 million and additional loans on the expected cash
from the LTI merger.
Management believes that these additional sources of funds will be sufficient to
sustain operations through the second quarter and into the third quarter when
sales increases are expected. Management also believes that sales increases from
new contracts with better margins is necessary to return the Company to
achieving positive earnings. Management cannot guarantee however that these
efforts to raise funds nor the expected increases in sales will materialize.
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.
14
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 been subpoenaed to
answer why an obligation of $79,000 to YC Intl. has not been paid. The Company
does not dispute the debt and currently does not have the funds to pay this
obligation but intends to use funds from the issuance of Convertible Preferred
stock or additional bridge loans to satisfy this debt.
Item 2. Changes in the Securities and Use of Proceeds.
Warrants to purchase 490,000 shares of Common Stock were issued during the
quarter. The terms of these warrants and the exercise price are as follows:
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
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.
Exhibits
11 Calculation of earnings (loss) per share.
27 Financial Data Schedule.
B. Reports on Form 8-K. None
15
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.
PEN INTERCONNECT, INC.
September 14, 1999 By: /s/ Stephen J. Fryer
-----------------------------
Stephen J. Fryer,
President and CEO
September 14, 1999 By: /s/ Robert J. Albrecht
-----------------------------
Robert J. Albrecht,
CFO, Principal Accounting
Officer and Vice President
16
Exhibit 11
Pen Interconnect, Inc.
CALCULATION OF EARNINGS (LOSS) PER SHARE
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 AND 1997
1998 1997
--------------- ---------------
Loss available to common shareholders $ (1,245,235) $ (34,166)
=============== ===============
Basic EPS
Common shares outstanding entire period 5,018,437 4,072,863
Weighted averabe common shares issued during period 532,820 93,089
--------------- ---------------
Weighted average common shares outstanding during period 5,551,257 4,122,863
=============== ===============
Loss per common share - basic $ (0.22) $ (0.01)
=============== ===============
Diluted EPS
Weighted average common shares outstanding during period - basic 5,551,257 4,122,863
Dilutive effect of stock operions and warrants 0 0
--------------- ---------------
Weighted average common shares outstanding during period - diluted 5,551,257 4,122,863
=============== ===============
Loss per common share - diluted $ (0.22) $ (0.01)
=============== ===============
17