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 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/A
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) 7-10
Notes to Condensed Financial Statements (unaudited) 11-15
Item 2 Management's Discussion and Analysis or
Plan of Operation 16-20
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Changes in the Securities and Use of Proceeds 21-22
Item 3 Defaults Upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6(a). Exhibits 22
Item 6(b). Reports on Form 8-K 22
Signatures 23
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/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 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
and $108,575 at September 30, 1998 3,831,713 3,350,970
Current maturities of notes receivable 765,390 35,675
Investments in common stock 0 242,739
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 9,593,785 8,270,029
PROPERTY AND EQUIPMENT, AT COST
Production equipment 1,288,624 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 0 482,220
Deferred income taxes 725,667 725,667
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 3,209,904 3,342,016
------------------ -------------------
$ 14,320,278 $ $ 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 $ 0 $ 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 0
Accounts payable 3,029,974 2,926,797
Accrued liabilities 174,941 389,889
------------------ -------------------
Total current liabilities 8,519,430 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 0
DEFERRED INCOME TAXES 165,755 165,755
------------------ -------------------
Total liabilities 9,496,678 10,224,688
STOCKHOLDERS' EQUITY
Series A and Series B Preferred stock, $0.01 par value
authorized 5,000,000 shares, 2,800
issued and outstanding at June 30, 1999 28 0
Common stock, $0.01 par value,
authorized 50,000,000 shares, issued and
outstanding 7,976,089 shares at June 30,
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 (11,580,382) (7,074,238)
------------------ -------------------
Total stockholders' equity 4,823,600 3,865,968
------------------ -------------------
$ 14,320,278 $ 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 $ 12,684,442 $ 12,113,556
Cost of sales 4,205,910 3,534,452 11,221,572 9,431,973
------------------ ----------------- ---------------- ----------------
Gross profit 892,615 975,660 1,462,870 2,681,583
Operating expenses
Sales and marketing 22,002 192,071 159,413 261,476
Research and development 41,148 49,675 303,651 243,044
General and administrative 517,517 477,792 2,543,826 1,475,420
Depreciation and amortization 81,952 122,288 303,159 364,225
------------------ ----------------- ---------------- ----------------
Total operating expenses 662,619 841,826 3,310,049 2,344,165
------------------ ----------------- ---------------- ----------------
Operating income (loss) 229,996 133,834 (1,847,179) 337,418
Other income (expense)
Interest expense (96,947) (217,556) (482,722) (703,613)
Loss on disposal of a division 0 0 (948,312) 0
Loss on impairment of investment
in stock (724,959) 0 (724,959) 0
Other income (expense), net (124,325) 84,318 (356,824) 118,655
------------------ ----------------- ---------------- ----------------
Total other income (expense) (946,231) (133,238) (2,512,817) (584,958)
------------------ ----------------- ---------------- ----------------
Earnings (loss) before income taxes (716,235) 596 (4,359,996) (247,540)
Income tax expense (benefit) 0 238 0 (21,562)
------------------ ----------------- ---------------- ----------------
Net earnings (loss) $ (716,235) $ 358 $ (4,359,996) $ (225,978)
================== ================= ================ ================
Earnings (loss) per common share
Basic $ (0.19) $ 0.00 $ (0.78) $ (0.05)
Diluted $ (0.19) $ 0.00 $ (0.78) $ (0.05)
Weighted average common shares outstanding
Basic 7,693,650 4,586,962 6,538,820 4,452,312
Diluted 7,693,650 5,121,153 6,538,820 4,452,312
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 $ (4,359,996) $ (225,978)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 301,898 364,225
Bad debts 99,625 3,420
Stock issued in exchange for services 524,377 0
Interest on debenture conversion 104,861 336,506
Loss on disposal of a division 948,312 0
Loss on impairment of investment in stock 724,959 0
Deferred taxes 0 27,112
Contingent stock San Jose agreement 0 (40,000)
Loss on disposal of equipment 0 16,534
Changes in assets and liabilities
Trade accounts receivable (1,065,998) (1,632,294)
Inventories (1,471,476) (2,305,763)
Prepaid expenses and other assets 82,239 (327,681)
Accounts payable 159,684 974,725
Accrued liabilities (181,530) (254,795)
----------------- -----------------
Total adjustments 226,951 (2,838,011)
----------------- -----------------
Net cash used in
operating activities (4,133,045) (3,063,989)
----------------- -----------------
Cash flows from investing activities
Purchase of property and equipment (751,860) (202,353)
Proceeds from the disposal of a division 1,075,000 389,250
Issuance of notes receivable (611,169) (89,195)
Collections on notes receivable 0 22,800
----------------- -----------------
Net cash provided by (used in)
investing activities (288,029) 120,502
----------------- -----------------
(Continued)
7
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
Nine months ended
------------------------------------
June 30, June 30,
1999 1998
----------------- -----------------
Cash flows from financing activities
Net change in line of credit (160,991) 1,557,851
Proceeds from long-term obligations 1,303,547 0
Proceeds from issuance of subordinated debentures 0 1,910,000
Proceeds from issuance of capital leases 395,648 500,000
Proceeds from sale of common stock and exercise of warrants 400,999 705,058
Proceeds from issuance of preferred stock 2,800,000 0
Principal payments on long-term obligations (900,000) (1,007,173)
Principal payments on capital leases (49,428) 0
----------------- -----------------
Net cash provided by
financing activities 3,789,775 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 $ 380,576 $ 370,028
Income taxes $ 0 $ 0
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 third quarter of FY 99 675,000 shares of common stock were issued to
outside consultants for services performed or to be performed. Of this amount,
$524,377 has been charged to expense and the balance of $232,110 has been
included in prepaid expenses to be written off during the next three months as
the service is provided. At the date of issuance, the market value of the stock
issued was $756,487.
(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
transferred net assets totaling $878,372 to CTG for total proceeds of
$1,075,000. 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
Notes receivable received 150,000
-----------------
Gain on assets sold to CTG 196,628
Write off of remaining Cable division assets (1,144,940)
-----------------
Total loss on disposal of Cable division $ (948,312)
=================
Investments
The Company has an investment in the publicly traded stock of another company.
The stock was received in satisfaction of notes receivable and has a guaranteed
minimum value of $7.4532 per share. At September 30, 1998, the market value of
the stock was approximately $2.25 per share. During the third quarter of FY 99,
a determination was made the investment in TMCI stock with a net book value of
$724,959 was permanently impaired when the major lender of TMCI foreclosed on
their loan for failure to comply with loan covenants. The balance of this
investment was written off during the quarter ended June 30, 1999.
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 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 gain on the sale of $196,628. Concurrently,
the Company determined that assets 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 $1,144,940. When
combined with the gain on the sale of assets that were sold the resulting
net loss related to the disposition of the Cable division was $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, 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 that is being deferred until the transaction is complete.
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. As of September
1, 1999 MotoSat has not yet secured its own lending source which is still
expected to be occur in the month of September. When the credit agreement
between MotoSat and their lender is finalized, the risk of ownership will
pass to MotoSat's new owners and the sale will be recorded.
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 of the MotoSat division 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 June 30, 1999. In
addition, the Company has advanced $96,367 to MTI at 11.75% interest
which is included in notes receivable which 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:
June 30, September 30,
1999 1998
--------------- ------------------
Raw materials (net of allowance) 2,558,829 2,252,933
Work-in-process 1,944,591 1,391,664
Finished goods 79,656 35,572
--------------- ------------------
4,583,076 3,680,169
=============== ==================
NOTE C - NOTES RECEIVABLE
In connection with the merger negotiations with TCC the Company advanced
TCC approximately $516,000. The advance is secured by a promissory note
at an interest rate of 8.00 percent to be repaid when TCC obtains a line
of credit or other financing. The remaining balance of $265,000
represents amounts advanced to MotoSat of approximately $96,000 and
$150,000 from CTG for the guaranteed royalty in connection with the sale
(see Note A).
NOTE D - 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 G)
12
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE E - 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:
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 issuance. The following table outlines the features of these
options:
Number of Exercise Expiration
Warrants Price Date
- ---------------- ---------------- ----------------------
60,000 $0.8000 March 2004
250,000 $0.8000 April 2004
25,000 $1.0000 June 2004
NOTE F - CREDIT FACILITY
As of June 30, 1999, the Company has been in violation of certain of the
covenants of their credit facility with Finova. At June 30, 1999, the
Company has notified the lender of the violations and is negotiating
modifications to the loan agreement with the lender. As of June 30, 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.
13
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE G - 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
and par value but only 1,000 shares were issued. As mentioned in Note D,
part of the issuance of this stock was 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.
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 except for a
maximum Conversion Price of $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 H - 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 earnings (loss)
attributable to common shareholders includes accrued dividends at the
stated dividend rate from date of issuance and 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 G). 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 earnings
(loss) per common share. The calculation of earnings (loss) per share is
included in Exhibit 11.
14
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE I - SUBSEQUENT EVENTS
Effective September 1, 1999 the Company has entered into consulting
agreements with three individuals for the purpose of receiving advice
concerning overall management, strategic planning and marketing of the
Company's business. The consulting agreements call for the issuance of
options to purchase 3,326,667 shares of common stock at $0.30 per share
as compensation for the consulting services. The consulting agreements
are to be included in a Form S-8 Registration Statement to be filed with
the SEC to register the shares being optioned. If the options were
exercised on September 8, 1999 with a market price of $0.54 per share for
the Company's stock, the exercise of the options would result in a charge
of $798,400 of additional expense effecting the Company's fourth quarter.
The exercise of the options would also generate $998,000 of additional
cash proceeds to the Company which is intended to be used to finance
operations.
15
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 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/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
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 Systems (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 are part of the overall contract of being the sole
manufacturer for both of these new customers.
Merger and Acquisitions
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 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 $570,886 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 82 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.
17
Operating expenses. Operating expenses decreased $179,207 or 21 percent for the
three months ended June 30, 1999 compared to the same period of time in the
prior fiscal year. For the nine months ended June 30, 1999, operating expenses
increased $965,884 or 41 percent compared to the same period in fiscal year
1998. This increase was mostly associated with an increase in general and
administrative expenses of $1,068,406. 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. Research and development costs at
the PowerStream division were $8,527 lower during the three months ended June
30, 1999 as compared to the same period in 1998 but were $60,607 higher for the
nine months of 1999 as compared to 1998. These costs represent ongoing new
product development at the PowerStream division.
Other income and expenses. Other expenses increased $812,993 or 610 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. totaling
$724,959. Other expenses also increased due to interest income in fiscal year
1998 which does not exist in fiscal year 1999 and $124,325 in expenses
associated with the issuance of Series B Preferred Stock in 1999. These
increased expenses are offset by higher interest expense related to a favorable
conversion feature associated with subordinated debentures which was recorded in
fiscal year 1998 which does not exist in fiscal year 1999. Other expenses
increased $1,927,859 or 330 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
$1,144,940 and incurred expenses associated with the issuing of the Series A
preferred stock totaling $150,000 in the second quarter of 1999.
Net earnings (loss) and earnings (loss) per share. The net loss for the third
fiscal quarter ended June 30, 1999 totaled ($716,235) or ($0.09) per basic share
before accrued dividends on preferred stock, compared with a gain of $358 or
$0.00 per basic share for the third quarter of fiscal 1998. Included in the loss
per share for the third quarter of 1999 is a loss per share of $0.09 for the
write off of the investment of stock in TMCI stock. For the nine months ended
June 30, 1999 the net loss of $4,359,996 resulted in a loss per share of ($0.67)
before the accrual for dividends on preferred stock compared to a loss per share
of ($0.05) on a loss of $225,978 for the same period in the prior fiscal year.
The increase in the loss per share of ($0.62) includes ($0.18) related to the
write down of impaired assets, ($0.16) related to the increase in general and
administrative expenses, ($0.19) related to the decline in margins on sales, and
($0.15) related to the loss on the disposal of the Cable division.
18
Liquidity and Capital Resources
The Company has positive working capital of $1,074,355 at June 30, 1999 compared
to a working capital deficit of ($429,423), ($2,164,821) 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 by the Company during the third quarter of
fiscal year 1999.
During the third quarter of fiscal year 1999, the Company achieved earnings from
operations of $229,996. These earnings were then impacted by a write off of an
investment in the stock of Touche Manufacturing Inc. of $724,959. During the
first quarter of fiscal year 1999 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.
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
be repaid from future funding sources acquired by TCC.
The Company issued it's 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.
Although the improvement in earnings from operations for the current fiscal year
is good news the Company still faces tight cash constraints with its growth 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.
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.
19
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
therefore 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 percent 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. Costs incurred to date to achieve the Company's readiness for
potential Y2K risk have not been material. Management also believes that any
additional costs necessary to complete the evaluation of supplier readiness will
not be material.
20
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 in consideration of common stock issued as
payment for services.
2. In April 1999, Pen Interconnect Inc. issued 147,000 shares of its common
stock to Jeffery M. Lamberson in consideration of common stock issued as
payment for services.
3. In April 1999, Pen Interconnect Inc. issued 281,250 shares of its common
stock to Liviakis Financial Communications, Inc. in consideration of
common stock issued as payment for services.
4. In April 1999, Pen Interconnect Inc. issued 93,750 shares of its common
stock to Robert B. Prag in consideration of common stock issued as
payment for services.
5. In May 1999, Pen Interconnect Inc. issued 15,000 shares of its common
stock to James Pendleton in consideration of common stock issued as
compensation.
6. In May 1999, Pen Interconnect Inc. issued 20,000 shares of its common
stock to Dave Livingston in consideration of common stock issued as
payment for services.
7. In May 1999, Pen Interconnect Inc. issued 10,000 shares of its common
stock to Corporate Development Group in consideration of common stock
issued as payment for services.
8. In May 1999, Pen Interconnect Inc. issued 7,000 shares of its common
stock to Network Investor Communications in consideration of common stock
issued as payment for services.
9. In May 1999, Pen Interconnect Inc. issued 1,500 shares of its common
stock to Robert Albrecht in consideration of common stock issued as
compensation.
10. In May 1999, Pen Interconnect Inc. issued 2,167 shares of its common
stock to Stephen Fryer in consideration of common stock issued as
compensation.
11. In May 1999, Pen Interconnect Inc. issued 2,500 shares of its common
stock to Mehrdad Mobasseri in consideration of common stock issued as
compensation.
12. In May 1999, Pen Interconnect Inc. issued 1,000 shares of its common
stock to Owen Marsh in consideration of common stock issued as
compensation.
13. In May 1999, Pen Interconnect Inc. issued 1,000 shares of its common
stock to Bill Day in consideration of common stock issued as
compensation.
21
14. In May 1999, Pen Interconnect Inc. issued 1,000 shares of its common
stock to Steve Ngo in consideration of common stock issued as
compensation.
15. In May 1999, Pen Interconnect Inc. issued 1,000 shares of its common
stock to Rafael Batista in consideration of common stock issued as
compensation.
16. In May 1999, Pen Interconnect Inc. issued 400 shares of its common stock
to Ronda Barboa in consideration of common stock issued as compensation.
17. In May 1999, Pen Interconnect Inc. issued 400 shares of its common stock
to Heather Hungate in consideration of common stock issued as
compensation.
18. In May 1999, Pen Interconnect Inc. issued 400 shares of its common stock
to Irene Tafulu in consideration of common stock issued as compensation.
19. In May 1999, Pen Interconnect Inc. issued 400 shares of its common stock
to Lien Hoang in consideration of common stock issued as compensation.
20. In May 1999, Pen Interconnect Inc. issued 400 shares of its common stock
to Waldemar Dziurzynski in consideration of common stock issued as
compensation.
21. In May 1999, Pen Interconnect Inc. issued 171,195 of its shares of common
stock to BNC Bach in consideration of 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 in consideration of 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 (loss) per share
27 Financial Data Schedule.
B. Reports on Form 8-K. None
22
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: September 14, 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
23
Exhibit 11
Pen Interconnect, Inc.
CALCULATION OF EARNINGS (LOSS) PER SHARE
(Unaudited)
Three months Three months Nine months Nine months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
1999 1998 1999 1998
------------------ ------------------ ------------------- -------------------
Net earnings (loss) $ (716,235) $ 358 $ (4,359,996) $ (225,978)
Preferred dividends (109,063) 0 (146,148) 0
Imputed dividend from beneficial
conversion feature of Preferred Stock (626,262) 0 (626,262) 0
------------------ ------------------ ------------------- -------------------
Net earnings (loss) attributable to
common shareholders $ (1,451,560) $ 358 $ (5,132,406) $ (225,978)
================== ================== =================== ===================
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 $ (0.19) $ 0.00 $ (0.78) $ (0.05)
================== ================== =================== ===================
Diluted EPS
Weighted average common shares
outstanding during period - basic 7,693,650 4,586,962 6,538,820 4,452,312
Dilutive effect of stock options and
warrants 0 534,191 0 0
------------------ ------------------ ------------------- -------------------
Weighted average common shares
outstanding during period - diluted 7,693,650 5,121,153 6,538,820 4,452,312
================== ================== =================== ===================
Earnings (loss) per common share -
diluted $ (0.19) $ 0.00 $ (0.78) $ (0.05)
================== ================== =================== ===================