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 March 31, 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 Irvice, 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 May 15, 1999 the issuer had 7,539,838 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/A
PEN INTERCONNECT, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Financial Information 3
Balance Sheets at March 31, 1999
(unaudited) and September 30, 1998 4-5
Statements of Operations for the three months
ended March 31, 1999 and 1998 (unaudited) and 6
six month periods ended March 31, 1999 and
1998 (unaudited)
Statements of Cash Flows for the six months
ended March 31, 1999 and 1998 (unaudited) 7-10
Notes to Condensed Financial Statements (unaudited) 11-15
Item 2 Management's Discussion and Analysis or
Plan of Operation 16-19
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 20
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 March 31, 1999 and audited balance sheet as
of September 30, 1998 (the Company's most recent fiscal year), unaudited
condensed statements of operations for the three and six months ended March 31,
1999 and 1998, and unaudited condensed statements of cash flows for the six
months ended March 31, 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 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 six months
ended March 31, 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
March 31, September 30,
1999 1998
------------------ -------------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 258,681 $ 657,777
Receivables
Trade accounts less allowance for
doubtful accounts of $67,434 at March 31, 1999 and 1,804,583 3,350,970
$108,575 at September 30, 1998, respectively
Current maturities of notes receivable 762,409 35,675
Investments in common stock 242,739 242,739
Inventories 2,777,230 3,680,169
Prepaid expenses and other current assets 389,638 261,375
Deferred tax asset 41,324 41,324
------------------ -------------------
Total current assets 6,276,604 8,270,029
PROPERTY AND EQUIPMENT, AT COST
Production equipment 655,423 2,624,513
Furniture and fixtures 243,178 837,594
Transportation equipment 22,149 83,522
Leasehold improvements 242,274 613,248
------------------ -------------------
1,163,024 4,158,877
Less accumulated depreciation 305,207 1,680,266
------------------ -------------------
857,817 2,478,611
OTHER ASSETS
Notes receivable, less current maturities 8,798 3,989
Investments in common stock 482,220 482,220
Deferred income taxes 725,667 725,667
Goodwill and other intangibles, net 1,994,018 2,031,685
Assets transferred under contractual arrangement 454,742 0
Other 4,325 98,455
------------------ -------------------
Total other assets 3,669,770 3,342,016
------------------ -------------------
$ 10,804,191 $ 14,090,656
================== ===================
The accompanying notes are an integral part of these
statements.
4
Pen Interconnect, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, September 30,
1999 1998
------------------ -------------------
(unaudited)
CURRENT LIABILITIES
Subordinated debentures $ 325,000 $ 1,401,429
Line of credit 2,605,379 4,064,361
Current maturities of long-term obligations 677,265 1,132,538
Current maturities of capital leases 0 69,621
Accounts payable 2,142,030 2,926,797
Accrued liabilities 956,353 389,889
------------------ -------------------
Total current liabilities 6,706,027 9,984,635
LONG TERM OBLIGATIONS, less current
maturities 7,314 51,965
CAPITAL LEASE OBLIGATIONS, less
current maturities 0 22,333
LIABILITIES TRANSFERRED UNDER
CONTRACTUAL ARRANGEMENTS 514,813 0
DEFERRED INCOME TAXES 165,755 165,755
------------------ -------------------
Total liabilities 7,393,909 10,224,688
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value
Authorized 5,000,000 shares, 1,800
issued and outstanding at March 31, 1999 18 0
Common stock, $0.01 par value,
authorized 50,000,000 shares, issued and 68,648 50,184
outstanding 6,864,838 shares at March 31,
1999 and 5,018,437 at September 30, 1998
Additional paid-in capital 14,059,616 10,890,022
Accumulated deficit (10,718,000) (7,074,238)
------------------ -------------------
Total stockholders' equity 3,410,282 3,865,968
------------------ -------------------
$ 10,804,191 $ 14,090,656
================== ===================
The accompanying notes are an integral part of these
statements.
5
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
-------------------------------------- -----------------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
------------------ ----------------- ---------------- ----------------
Net sales $ 2,828,078 $ 3,698,727 $ 7,585,917 $ 7,603,444
Cost of sales 2,424,444 2,842,148 7,015,662 5,897,521
------------------ ----------------- ---------------- ----------------
Gross profit 403,634 856,579 570,255 1,705,923
Operating expenses
Sales and marketing 55,692 17,590 137,411 69,405
Research and development 94,806 104,982 262,503 193,369
General and administrative 1,257,576 395,599 2,026,309 997,628
Depreciation and amortization 94,590 127,662 221,207 241,937
------------------ ----------------- ---------------- ----------------
Total operating expenses
1,502,664 645,833 2,647,430 1,502,339
------------------ ----------------- ---------------- ----------------
Operating income (loss) (1,099,030) 210,746 (2,077,175) 203,584
Other income (expense)
Interest expense (192,903) (407,020) (385,775) (486,057)
Loss on disposal of division (948,312) 0 (948,312) 0
Other income (expense), net (158,281) 4,104 (232,499) 34,337
------------------ ----------------- ---------------- ----------------
Total other income (expense)
(1,299,496) (402,916) (1,566,586) (451,720)
------------------ ----------------- ---------------- ----------------
Loss before income taxes (2,398,526) (192,170) (3,643,761) (248,136)
Income tax expense (benefit) 0 0 0 (21,800)
------------------ ----------------- ---------------- ----------------
Net loss $ (2,398,526) $ (192,170) $ (3,643,761) $ (226,336)
================== ================= ================ ================
Loss per common share
Basic $ (0.46) $ (0.05) $ (0.70) $ (0.05)
Diluted $ (0.46) $ (0.05) $ (0.70) $ (0.05)
Weighted average common shares outstanding
Basic 6,321,553 4,234,009 5,932,173 4,165,952
Diluted 6,321,553 4,234,009 5,932,173 4,165,952
The accompanying notes are an integral part of these
statements.
6
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
------------------------------------
March 31, March 31,
1999 1998
----------------- -----------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net loss $ (3,643,761) $ (226,336)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 221,207 241,937
Bad debts 13,247 14,527
Interest on debenture conversion 98,571 231,350
Loss on disposal of division 948,312 0
Contingent stock San Jose agreement 0 (40,000)
Loss on disposal of equipment 0 16,534
Changes in asset and liabilities
Trade accounts receivable 1,047,510 (779,795)
Inventories 334,370 (963,648)
Prepaid expenses and other assets (84,031) (164,054)
Accounts payable (728,260) 489,269
Accrued liabilities 599,881 (263,156)
Income taxes 0 5,331
----------------- -----------------
Total adjustments 2,450,807 (1,211,705)
----------------- -----------------
Net cash used in
operating activities (1,192,954) (1,438,041)
----------------- -----------------
Cash flows from investing activities
Purchase of property and equipment (92,985) (158,967)
Issuance of notes receivable (614,920) (72,760)
Collections on notes receivable 0 22,800
Proceeds from disposal of division 1,075,000 0
----------------- -----------------
Net cash provided by (used in)
investing activities 367,095 (208,927)
----------------- -----------------
(Continued)
7
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
Six months ended
----------------------------------
March 31, March 31,
1999 1998
----------------- -----------------
Cash flows from financing activities
Principal payments on notes payable 0 (574,902)
Net change in line of credit (1,087,426) 653,801
Principal payments on long-term obligations (1,349,459) (274,767)
Principal payments on capital lease obligations (49,428) -
Proceeds from issuance of subordinated debentures 0 1,000,000
Proceeds from issuance of long-term obligations 900,000 500,000
Proceeds from sale of common stock 213,076 181,999
Proceeds from issuance of preferred stock 1,800,000 0
----------------- -----------------
Net cash provided by financing activities 426,763 1,486,131
----------------- -----------------
Net decrease in cash and cash equivalents (399,096) (160,837)
Cash and cash equivalents at beginning of period 657,777 272,148
----------------- -----------------
Cash and cash equivalents at end of period $ 258,681 $ 111,311
================= =================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest expense $ 287,204 $ 243,728
Income tax expense $ 0 $ 0
Noncash investing and financing activities
During the first and second quarters of FY 99, $1,175,000 of subordinated
debentures were converted into 1,566,741 shares of common stock. Along with the
conversion on the debentures, $98,571 of unamortized interest on the
subordinated debentures was charged to interest expense.
During the second quarter of FY 99, $1,800,000 of Series A Preferred Stock was
issued. Of this amount, $800,000 was used directly to pay off $800,000 of bridge
loans made to the Company during the first quarter of FY 99.
(Continued)
8
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
Disposal of Divisions
The letter of intent for the sale of the MotoSat division to James Pendleton,
Pen's Chairman and former CEO, states that all assets and liabilities of the
MotoSat division will be transferred to Mr. Pendleton in exchange for the
elimination of any 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 (see Note A).
Assets acquired and liabilities assumed by Mr. Pendleton's purchase of MTI are
as follows:
Trade accounts receivables $ 180,896
Notes receivable 33,377
Inventories 206,689
Property and equipment 33,780
-----------------
Assets transferred under contractual arrangements 454,742
Accounts payable 56,507
Accrued liabilities 36,285
Line of credit 371,556
Long-term obligations 50,465
-----------------
Liabilities transferred under contractual arrangements 514,813
-----------------
Potential gain to Company $ 60,071
=================
(Continued)
9
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
During the second quarter of FY 99 the Company disposed of the Cable division by
selling certain assets and liabilities to Cables To Go Inc. (CTG). The Company
then determined the remaining Cable division assets, not sold to CTG, to be
impaired as they had no market value and could no longer be utilized in current
operations. The impairment resulted in the write off of the remaining Cable
division assets with a net book value totaling $1,144,940. The combined sale to
CTG and write off of assets resulted in a net loss on the disposal of the Cable
division of $948,312. Assets sold and liabilities assumed by CTG were as
follows:
Accounts receivable (net of allowance) $ 310,467
Inventories 361,880
Property and equipment 398,551
Capital leases (42,526)
-----------------
Net assets sold 1,028,372
Proceeds received 1,075,000
Note receivable 150,000
-----------------
Gain on assets sold to CTG 196,628
Write off of remaining Cable division net assets (1,144,940)
-----------------
Total loss on disposal of Cable division $ (948,312)
=================
The accompanying notes are an integral part of these
statements.
10
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). On April 2, 1999 the Company and
LTI mutually terminated this definitive agreement to merge.
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 and equipment and assumed capital lease liabilities for a
purchase price of $1,075,000 thus yielding the Company a net loss on the
disposition of ($948,312).
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, a former Chairman and
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 March 31, 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 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 (February 1, 1999). Assets and liabilities have been
reclassified as "Assets /Liabilities Transferred Under Contractual
Arrangements" on the balance sheet at March 31, 1999. In addition, the
Company has advanced $96,367 to MTI at 11.75 percent interest which is
included in notes receivable. The note will be repaid when MTI secures
its own lender and source of funding.
11
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:
March 31, September 30,
1999 1999
--------------- -------------------
Raw materials (net of allowance) $ 1,942,174 $ 2,252,933
Work-in-process 835,056 1,391,664
Finished goods - 35,572
--------------- -------------------
$ 2,777,230 $ 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 F).
12
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE D - CREDIT FACILITY
As of March 31, 1999, the Company has been in violation of certain of the
covenants of their credit facility. At March 31, 1999, the Company has
notified the lender of the violations and is negotiating modifications to
the loan agreement with the lender. As of March 31, 1999, the Company has
not received a waiver from the lender and all obligations under this
credit facility are payable on demand of the lender and are classified as
current liabilities in the balance sheet.
NOTE E - 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
During the second quarter of FY 1999, the Company issued warrants to
purchase 160,000 shares of common stock in conjunction with the issuing
of Series A Preferred Stock. The terms of the conversion of the warrants
to shares of common stock are discussed in Note F.
NOTE F - 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 $238,500 in fees and expenses, the net cash
raised by the Company for operations was $1,665,500. Both series of
Preferred Stock carry a 16 percent dividend rate which is paid quarterly.
13
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE F - 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 (the "Conversion Price"). The maximum
Conversion Price for the Series A Preferred Stock is $1.17 per share. The
shares of Series B Preferred Stock are convertible into Common Stock at
the same Conversion Price as the Series A Preferred Stock with a maximum
Conversion Price of $0.79 per share. Warrants to acquire 335,453 shares
of Common Stock at conversion prices ranging from $0.86 to $1.434 per
share were also issued to the purchasers of the Series A and Series B
Preferred Stock. The Warrants expire three years from date the Preferred
Stock and warrants were initially issued.
NOTE G - 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
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.
Outstanding options and warrants are not included in the calculation in
the loss periods because to do so would be anti-dilutive.
For the three and six months ended March 31, 1999, net 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 Preferred Stock and related warrants. The beneficial
conversion feature is computed as the difference between the market value
of the common stock into which the Series A Preferred Stock can be
converted and the value assigned to the Series A Preferred Stock in the
private placement. The imputed dividend is a one-time non-cash charge
against the loss per common share.
14
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE G - (LOSS) PER SHARE - CONTINUED
Basic and diluted earnings (loss) per common share are calculated as
follows:
Three months ended Six months ended
-------------------------------------- ----------------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
------------------- ----------------- ---------------- ---------------
Net loss $ (2,398,526) $ (192,170) $ (3,643,761) $ (226,336)
Preferred dividends (30,773) - (30,773) -
Imputed dividend from beneficial
conversion feature (449,438) - (449,438) -
------------------- ----------------- ---------------- ---------------
Net loss attributable to
common stockholders $ (2,878,737) $ (192,170) $ (4,123,972) $ (226,336)
=================== ================= ================ ===============
Basic EPS
Common shares outstanding entire period 6,069,160 4,147,863 5,018,437 4,072,863
Weighted average common shares issued 252,393 86,146 913,736 93,089
------------------- ----------------- ---------------- ---------------
Weighted average common shares
outstanding during period 6,321,553 4,234,009 5,932,173 4,165,952
=================== ================= ================ ===============
Loss per common share - basic $ (0.46) $ (0.05) $ (0.70) $ (0.05)
Diluted EPS
Weighted average common shares
outstanding during period - basic 6,321,553 4,234,009 5,932,173 4,165,952
Dilutive effect of stock options and warrants 0 2,252,500 0 0
------------------- ----------------- ---------------- ---------------
Weighted average common shares
outstanding during period - diluted 6,321,553 6,486,509 5,932,173 4,165,952
=================== ================= ================ ===============
Loss per common share - diluted $ (0.46) $ (0.05) $ (0.70) $ (0.05)
15
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
six months ended March 31, 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/A 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. In addition, the Company provides custom design
and manufacturing of battery chargers, power supplies and uninterrupted power
supply systems. 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.
16
Sale of Division
Effective January 29, 1999 the Company sold the Cable division in order to
reduce the losses being incurred each month and focus on more strategically
promising operations. The sale of the Cable division resulted in a loss to the
Company of ($948,312). Although the transaction yielded a substantial loss, the
Company anticipates reducing losses by approximately $170,000 per month. 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.
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.
Results of Operations
Net sales. Net sales for the Company decreased $870,649 or approximately 24
percent for the three month period ended March 31, 1999 as compared to the same
period in the prior year. This decrease resulted primarily from the sale of the
Cable division in January 1999 and a decline in the sales at the InCirT division
as the contract expansion for a major customer was completed and sales returned
to regular levels. Net sales for the six months ending March 31, 1999 decreased
$17,527 or 0.2 percent from the same period during the prior fiscal year. The
contract expansion in the InCirT division was still ongoing the first fiscal
quarter which offset the decline of sales following the sale of the Cable
division in the second quarter.
Cost of sales. Cost of sales as a percentage of net sales have increased to
approximately 86 percent for the three months ended March 31, 1999 as compared
to 77 percent for the same period in the prior year. This increase is due to a
decline in sales at the InCirT division and the impact of fixed manufacturing
costs on a lower sales base. Cost of sales as a percentage of net sales for the
first six months of fiscal 1999 increased to 92 percent compared to 78 percent
for the same period last year. This increase was further worsened by declining
sales in the Cable division during the first quarter with no corresponding
reduction in overhead costs. The increase was also due to a decrease in the
margins on a major contract at the InCirT division.
Operating expenses. Operating expenses increased $856,831 or 133 percent for the
three months ended March 31, 1999 over the same three month period during the
prior fiscal year. For the first six months of fiscal 1999, operating expenses
increased $1,145,091 or 76 percent compared to the same period from the prior
fiscal year. The increases for both the second quarter and for the six months
were mostly associated with an increase in general and administrative expenses
of $861,977 and $1,028,681, respectively. The increases in general and
administrative expenses during the second quarter are primarily responsible for
the increase. These included (1) $208,599 in professional fees associated with
the issuance of the Company's Series A Preferred Stock, the negotiation of
proposed merger agreements and agreements for the sale of the Cable and Motosat
divisions, and Nasdaq compliance hearings, (2) $429,259 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. Research and development expenses decreased slightly for the quarter
by $10,176 but increased for the six months by $69,134 primarily related to
ongoing product development at the PowerStream division.
17
Other income and expenses. Excluding the loss on the disposal of the Cable
division of ($948,312) in the three months ended March 31, 1999 other expenses
decreased $51,732 or 13 percent for the three months ended March 31, 1999 as
compared to the same period in the prior year. These expenses also increased
$166,554 or 37 percent for the first six months of fiscal 1999 as compared to
the same period in the prior fiscal year. The increases in other expenses for
the second quarter of fiscal 1999 primarily include brokerage fees and other
expenses in connection with the issue of the Series A Preferred Stock in the
second quarter and of subordinated debentures during the prior fiscal year.
Interest expense for both the second quarter and for the first six months of
fiscal 1999 are higher than corresponding amounts from the prior year because of
interest expense associated with the favorable conversion feature of the
subordinated debentures issued during the prior fiscal year.
Net earnings (loss) and earnings (loss) per share. Net loss for the second
fiscal quarter ended March 31, 1999 totaled ($2,398,526) or ($0.38) per basic
share, compared with a loss of $192,170 or ($0.05) per basic share for the
second quarter of fiscal year 1998. The change in the loss per basic share of
($0.33) is mostly comprised of ($0.13) related to the increase in general and
administrative expenses, ($0.01) related to the decrease in other expenses,
($0.07) related to the decline in sales and the decline in profit margins on
sales, and ($0.15) related to the loss on the sale of the Cable division. The
loss for the first six months of fiscal year 1999 of $3,643,761 or ($0.62) per
basic share before provision for dividends on the Preferred Stock of $0.08 was
($0.57) per share more than that of the first six months of the prior fiscal
year. The change in loss per basic share for this period was mostly comprised of
($0.16) related to the increase in general and administrative expenses, ($0.01)
related to the increase in development costs, ($0.01) related to the decrease in
other expenses, ($0.18) related to the decline in margins on sales, and ($0.16)
related to the loss on the sale of the Cable division.
Liquidity and Capital Resources
The working capital deficit at March 31, 1999 is ($429,423) compared to
($2,263,049) at December 31, 1998 and ($1,714,606) at September 30, 1998. The
decrease in negative working capital is primarily due to 1) the decrease in
accounts payable and the Company's line of credit from the proceeds of the sale
of the Cable division, and 2) the issuance during the second quarter of the
Series A Preferred Stock.
During the second quarter of fiscal 1999 the Company sustained losses from
operations of ($1,099,030) compared to a loss incurred during the first fiscal
quarter of ($978,146). The Company's management believes that a significant
portion of the losses in the second quarter were due to nonrecurring items.
These include increases in general and administrative expenses related to merger
and divisional sale transactions. If these nonrecurring items were excluded, the
Company's management believes that the loss from operations in the second
quarter would have been only $600,000, or roughly half of that incurred during
the first quarter.
Cash from operations has not been sufficient during the recent quarter or during
the current fiscal year to cover expenses. The Company anticipates an increase
in sales and new contracts with more profitable margins generating a return to
profitability beginning in the third quarter of fiscal 1999. The Company's
management has also taken steps to reduce losses by selling the Cable division
to CTG Inc. and by signing a letter of intent to sell the MotoSat division. With
the sale of the these two divisions, the Company expects to save approximately
$170,000 per month in operating costs and interest. The sale of the Cable
division yielded proceeds of $1,075,000.
18
Liquidity and Capital Resources - Continued
The Company's management estimates that approximately $1 million may have to be
raised to sustain operations. Funds have been realized from the issuance of
Series A Preferred Stock and Series B Preferred Stock in the second and third
fiscal quarters of fiscal 1999. The issuance of the Series A Preferred Stock
raised $850,000 after payment of $150,000 in fees and applying $800,000 towards
the repayment of two bridge loans made to the Company during the first quarter
of fiscal 1999. The sale of the Cable and Moto-Sat divisions, the anticipated
increases in sales from the remaining divisions and the anticipated return to
profitability should generate sufficient cash to fund operations for the rest of
calendar year 1999. However, the Company may be unable to raise funds and the
anticipated increases in sales may not occur.
In conjunction with the Company's definitive agreement to merge with TCC, the
Company advanced approximately $516,000 to assist TCC in funding its operations
until completion of the merger. TCC has signed a promissory note with the
Company to repay all funds advanced with interest at eight percent. The note is
to be repaid from future funding sources acquired by TCC.
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. Management
has initiated a program to prepare for compliance in these three areas and
expects such program to be implemented and completed by June 1999. Costs will be
expensed as incurred and currently are not expected to be material.
The Company believes its current IT systems are year 2000 compliant. The Company
is currently conducting an inventory of non-IT systems which may have inadequate
date coding and will commence efforts to remedy any non-compliant systems by the
end of the first quarter of 1999. Third party suppliers and customers present a
different problem in that the Company cannot control the efforts of such third
parties. The Company anticipates requesting confirmations from third party
suppliers that they are year 2000 compliant to avoid disruptions of services and
supplies. However, any failure on the part of such companies with whom the
Company transacts business to be year 2000 compliant on a timely basis may
adversely affect the operations of the Company.
19
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 $20,000
towards this obligation.
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.
Exhibits
27 Financial Data Schedule
B. Reports on Form 8-K
On February 17, 1999, the Company filed a report on Form 8-K reporting the sale
of the Cable division, the execution of the merger agreement with LTI, and the
issuance of the Series A Preferred Stock. It consisted of: Item 2. Acquisition
or Disposition of Assets, Item 5. Other Events, and Item 7. Financial
Statements, Pro Forma Financial Information and Exhibits.
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.
PEN INTERCONNECT, INC.
By: /s/ Stephen J Fryer
September 14, 1999 Stephen J. Fryer
President and CEO
By: /s/ Robert J. Albrecht
September 14, 1999 Robert J. Albrecht
CFO, Principal Accounting
Officer and Vice President
21