UNITED STATES
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from to .
Commission file number 1-14072
PEN INTERCONNECT, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0430260
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
2351 South 2300 West, Salt Lake City, UT 84119
(Address of Principal Executive Offices) (Zip Code)
(801) 973-6090
(Issuer's telephone number)
N/A .
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No .
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No .
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 15, 1997 the issuer had 3,238,975 shares of its common
stock, par value $0.01 per share, issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X .
<PAGE>
FORM 10-QSB
PEN INTERCONNECT, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Financial Information 3
Balance Sheets at
June 30, 1997 (unaudited) and September 30, 1996 4-5
Statements of Earnings for the
Quarter Ended June 30, 1997 and 1996 and
Nine month period ended June 30, 1997 and 1996 6
Statements of Cash Flows for the nine month
period ended June 30, 1997 and 1996 7-10
Notes to Financial Statements 11-15
Item 2 Management's Discussion and Analysis or
---------------------------------------
Plan of Operation 16-18
-----------------
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in the Securities 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6(a). Exhibits 19
Item 6(b). Reports on Form 8-K 19
Signatures 20
2
<PAGE>
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, 1997 and audited
balance sheet as of September 30, 1996 (the Company's most recent fiscal
year), unaudited condensed statements of earnings for the quarter ended
June 30, 1997 and 1996, and nine month period ended June 30, 1997 and 1996,
and unaudited condensed statements of cash flows for the nine month period
ended June 30, 1997 and 1996, 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 should be read in conjunction with the audited financial
statements of the Company and the notes thereto included in the annual
report of the Company on Form 10-KSB for the year ended September 30, 1996.
The results of operations for the three and nine months ended June 30, 1997
may not be indicative of the results that may be expected for the year
ending September 30, 1997.
3
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30 September 30
1997 1996
--------------- ------------
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 15,128 $ 169,445
Receivable (Note C)
Trade accounts, less allowance for doubtful accounts of $236,083 and
$273,852 at June 30, and September 30,
respectively. 3,003,295 4,259,298
Current maturities of notes receivable 394,811 37,494
Income tax refund receivable (Note D) 306,693 228,241
Inventories (Notes B and C) 4,575,543 6,198,392
Prepaid & other assets 715,718 386,494
Deferred tax asset 209,000 525,800
------------- -------------
Total current assets 9,220,188 11,805,164
PROPERTY AND EQUIPMENT, AT COST
(Note C)
Production equipment 2,441,263 3,010,575
Furniture and fixtures 776,973 717,821
Transportation equipment 69,217 49,373
Leasehold improvements 368,137 354,150
------------- --------------
3,655,590 4,131,919
Less accumulated depreciation 1,175,917 1,065,205
------------- --------------
2,479,673 3,066,714
OTHER ASSETS
Notes receivable, less current maturities 597,748 19,630
Investments (Note D) 400,000 -
Trademarks, designs & other intangibles 622,214 -
Goodwill 1,591,290 1,589,313
Other 174,021 176,097
------------- --------------
3,385,273 1,785,040
------------- --------------
$ 15,085,134 $ 16,656,918
============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30 September 30
1997 1996 .
---------------- ---------------
(Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Line of credit (Note C) $ 2,960,000 $4,969,864
Bridge loan (Note D) 1,000,000 -
Current maturities of long-term obligations 46,500 19,265
Current maturities of capital leases 53,435 59,878
Accounts payable 2,026,721 2,954,601
Accrued liabilities 577,124 611,739
Income taxes payable 111,644 -
-------------- ---------------
Total current liabilities 6,775,424 8,615,347
LONG-TERM OBLIGATIONS, less current
maturities 83,721 96,758
CAPITAL LEASE OBLIGATIONS, less current
maturities 75,466 150,382
DEFERRED INCOME TAXES 40,000 225,800
----------- ---------------
Total liabilities 6,974,611 9,088,287
STOCKHOLDERS' EQUITY (Notes A and E)
Preferred stock, $0.01 par value, authorized
5,000,000 shares, none issued - -
Common stock, $0.01 par value, authorized
50,000,000 shares, issued and outstanding
3,238,975 shares at June 30 and
3,003,407 shares at September 30, respectively. 32,390 30,334
Additional paid-in capital 7,737,965 7,431,669
Retained earnings 340,168 106,628
------------ -----------
Total stockholders' equity 8,110,523 7,568,631
----------- -----------
$15,085,134 $16,656,918
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 4,479,882 $ 8,582,794 $ 15,220,519 $ 18,595,250
Cost of sales 4,083,240 7,446,724 12,912,356 15,606,248
------------ ------------ ------------ ------------
Gross profit 396,642 1,136,070 2,308,163 2,989,002
Operating expenses
Sales and marketing 230,040 322,570 695,152 914,173
Research and development 60,914 - 101,283 -
General and administrative 390,479 582,661 1,115,630 1,127,700
Depreciation and amortization 96,347 80,667 285,025 166,329
------------ ------------ ------------ ------------
Total operating expenses 777,780 985,898 2,197,090 2,208,202
------------ ------------ ------------ ------------
Operating income (loss) (381,138) 150,172 111,073 780,800
Other income (expense)
Interest expense (134,763) (92,354) (403,539) (296,584)
Gain (loss) on sale of division (Note A) - - 611,912 -
Other income (expense) net 19,522 23,759 77,194 6,781
------------ ------------ ------------ ------------
Total other income (expense) (115,241) (68,595) 285,567 (289,803)
------------ ------------ ------------ ------------
Earning (loss) before income taxes (496,379) 81,577 396,640 490,997
Provision (benefit)for income taxes (198,500) 35,422 163,100 192,862
------------ ------------ ------------ ------------
Net earnings (loss) $ (297,879) $ 46,155 $ 233,540 $ 298,135
============ ============ ============ ============
Earnings (loss) per common share $ (0.09) $ 0.02 $ 0.08 $ 0.11
============ ============ ============ ============
Weighted average common
shares outstanding 3,238,975 3,033,407 3,101,930 2,644,469
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
For nine months ended June 30
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------------ ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
<S> <C> <C>
Net earnings $ 233,540 $ 298,135
Adjustments to reconcile net earnings to net
cash used in operating activities
Depreciation and amortization 285,025 166,329
Bad debts (19,314) 649
Gain on sale of division (611,912) -
Deferred taxes 131,000 (215,089)
Changes in assets and liabilities
Trade accounts receivable 615,329 (119,440)
Inventories (15,587) (418,506)
Prepaid expenses and other assets (369,942) (337,023)
Deferred offering costs - 294,158
Accounts payable (703,410) (1,239,585)
Accrued liabilities (627,103) 707,537
Income taxes 33,192 (158,267)
--------------- ---------------
Total adjustments (1,282,722) (1,319,237)
----------------- ---------------
Net cash used in
operating activities (1,049,182) (1,021,102)
---------------- --------------
Cash flows from investing activities
Purchase of property and equipment (207,994) (649,776)
Acquisition of net assets (3,500,000)
Proceeds from sale of division 2,000,000 -
Issuance of notes receivable (35,435) (14,254)
Collections on notes receivable - 15,331
---------------- --------------
Net cash (used in) or provided
by investing activities 1,756,571 (4,148,699)
-------------- --------------
</TABLE>
(Continued)
7
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the nine months ended June 30
<TABLE>
<CAPTION>
1997 1996
------------------- ----------------
Cash flows from financing activities
<S> <C> <C>
Principal payments on notes payable - (1,600,000)
Net change in line of credit (2,009,864) 2,296,044
Proceeds from bridge loan 1,000,000 -
Principal payments on long-term obligations (76,842) (527,723)
Proceeds from sale of common stock and warrants 225,000 4,707,802
----------------- ---------------
Net cash (used in) or provided
by financing activities (861,706) 4,876,123
------------- -------------
Net increase (decrease) in cash
and cash equivalents (154,317) (293,678)
Cash and cash equivalents at beginning of period 169,445 376,488
---------------- ---------------
Cash and cash equivalents at end of period $ 15,128 $ 82,810
=============== =========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 390,157 $ 351,294
Income taxes - 521,038
</TABLE>
(Continued)
8
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the nine months ended June 30, 1997 and 1996
Non-cash investing and financing activities
- -------------------------------------------
Effective November 1, 1996, the Company sold substantially all assets and
certain liabilities of the San Jose Division for $2 million cash and other
consideration. Assets and liabilities sold were as follows:
Accounts receivable $680,420
Inventories 1,644,336
Prepaid expenses 34,177
Other assets 26,099
Property and equipment 638,373
Accounts payable (277,429)
Accrued liabilities (35,373)
Capital leases (22,515)
------------------
Net assets sold 2,688,088
Less non cash consideration received
Notes 900,000
Stock 400,000
1,300,000
Cash consideration 2,000,000
------------------
Gain on sale of division $ 611,912
=================
Acquisition of businesses
- -------------------------
During May 1996, the Company acquired substantially all assets and assumed
certain liabilities and the operations of InCirT Technology, a division of the
Cerplex Group, Inc. for $3.5 million in cash and 333,407 shares of stock. Assets
acquired and liabilities assumed in conjunction with this acquisition were as
follows:
Accounts receivable (net) $ 3,463,186
Inventories 3,311,416
Prepaid expenses 5,436
Property and equipment 705,899
Other assets 30,424
Accounts payable (3,563,436)
Accrued liabilities (33,906)
-----------------
Net Assets Acquired $ 3,919,019
Excess purchase price over net assets
acquired allocated to goodwill 1,380,981
================
Purchase price $ 5,300,000
Less Stock issued 1,800,000
----------------
Total cash paid $ 3,500,000
=================
9
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the nine months ended June 30, 1997 and 1996
Effective January 1, 1996, the Company acquired selected net assets of Overland
Communications (MOTO-SAT). Assets acquired and liabilities assumed in
conjunction with this acquisition were as follows:
Accounts receivable (net) $ 145,439
Inventories 306,306
Prepaid and other assets 5,798
Furniture and equipment 43,755
Accounts payable (256,182)
Accrued liabilities (46,209)
Long term obligations (306,698)
------------
Net liabilities assumed $ (107,791)
============
Excess purchase price over net assets acquired resulted
in recognition of goodwill
Effective April 1, 1997, the Company acquired the net assets of Powerstream
Technology, Inc. (Powerstream). Assets acquired and liabilities assumed in
conjunction with this acquisition were as follows:
Accounts receivable (net) $ 20,432
Inventories (net) 5,900
Prepaid and other assets 603
Furniture and equipment 53,325
Accounts payable (52,959)
Accrued liabilities (402,861)
Long term obligations (32,198)
------------
Net liabilities assumed (407,758)
Plus stock issued 225,000
------------
Excess purchase price over net assets acquired
resulted in recognition of goodwill $ 632,758
=========
The accompanying notes are an integral part of these statements.
10
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS AND DISPOSITION OF ASSETS
Effective April 1, 1997, the Company acquired the assets of Powerstream
Technology, Inc. (Powerstream) by issuing 150,000 shares of common stock.
Powerstream is a research and development company specializing in power
recharging devices and powersupply products.. This transaction was accounted for
using the purchase method of accounting; accordingly the purchased assets and
liabilities have been recorded at their fair value at the date of acquisition.
The results of operations of the acquired business have been included in the
financial statements since the effective date of the acquisition.
Effective April 1, 1996, the Company entered into an agreement to acquire
substantially all assets and assumed certain liabilities and the operations of
InCirT Technology, a division of the Cerplex Group, Inc. for $5.3 million
comprised of $3.5 million in cash and 333,407 shares of common stock. In
addition, the Company agreed to deliver to Cerplex .09261 shares of its common
stock for every dollar of past due over 90 days accounts receivable of InCirt
Technology collected by the Company during the first 180 days after the date of
the acquisition closing up to a maximum of 55,568 shares of common stock. These
additional shares were issued in June 1997. This transaction was accounted for
using the purchase method of accounting. The results of operations of the
acquired business have been included in the financial statements since the
effective date of the acquisition.
Effective January 1, 1996, the Company acquired the assets of Overland
Communication, Inc. d.b.a. MOTO-SAT by assuming that company's debt and offering
future stock distributions contingent upon achievement of performance
milestones. MOTO-SAT is a manufacturer of high-end satellite television systems
for recreational vehicles. This transaction was accounted for using the purchase
method of accounting; accordingly the purchased assets and liabilities have been
recorded at their fair value at the date of acquisition. The results of
operations of the acquired business have been included in the financial
statements since the effective date of the acquisition.
Effective March 24, 1995, the Company acquired substantially all assets and
assumed certain liabilities and the operations of Quintec Interconnect Systems
(QIS) of San Jose, California (San Jose Division) for $2,107,457 including
acquisition costs of $107,457. This transaction was accounted for using the
purchase method of accounting; accordingly the purchased assets and liabilities
were recorded at their estimated fair value at the date of acquisition.
However, effective November 1, 1996, the Company sold all of the net assets used
by the San Jose Division ("Division") to Touche Electronics, Inc. ("Touche"), a
subsidary of TMCI Electronics, Inc. ("TMCI"). The sales price for the net assets
of the Division was $3,300,000; consisting of $2,000,000 in cash, $900,000 in
promissory notes, and 53,669 shares of TMCI common stock with an agreed upon
guaranteed value of $400,000. In addition, Pen has the rights to receive
$700,000 in contingent earnouts for a potential total sale price of $4,000,000.
Pen originally purchased the Division in March 1995 for approximately
$2,100,000. As part of the transaction, Touche and TMCI also assumed certain
liabilities associated with the operations of the Division.
(Continued)
11
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS AND DISPOSITION OF ASSETS - CONTINUED
The $900,000 in promissory notes are comprised of two promissory notes in the
amounts of $400,000 and $500,000, respectively. The $400,000 promissory note
bears interest at one-half of one percent above the prime rate and is to be
fully amortized and paid monthly over a 24 month period. The $500,000 promissory
note bears interest at the rate of one-half of one percent above the prime rate,
is amortized over a 48 month period and is payable monthly with the entire
balance coming due on October 31, 1999. As of June 30, 1997 no payments have
been made under the terms of these notes. See Part II item 1.
In addition, Pen has the right to receive up to $700,000 of contingent earnouts.
These contingent earnouts are described as follows:
1. Accounts Receivable Over 120 Days. Pen is entitled to receive .13417 shares
of TMCI common stock for every $1 of past due over 120 days accounts
receivable of the Division as of October 31, 1996 collected within 180 days
of the closing date, up to a maximum of 13,417 shares of stock or $100,000.
2. Division Earnings. Pen has the right to receive up to 80,503 shares of TMCI
common shares or cash equivalent at the option of TMCI contingent upon the
earnings of the Division. To the extent the earnings of the Division,
determined before interest, income taxes and corporate overhead
allocations, exceed $800,000 in any one year, Pen shall be entitled to
receive such excess on a dollar for dollar basis in the form of TMCI common
shares valued at $7.4532 per share until Pen has received up to $600,000 in
the aggregate worth of TMCI common stock or 80,503 shares or cash
equivalent at the option of TMCI. Pen has the right to earn these shares
during the calendar years 1997 through 2000. Based on the historical
earnings if the transaction had occurred in March 1995 (the date the
Division was purchased) the earnout amount would have been approximately
$600,000 at June 30, 1996. However, the actual earnout amount may vary
based on future earnings of the Division and the timing of such earnings.
The net assets sold by the Company include all of the assets used by the
Division in its operations including, but not limited to, inventory, accounts
receivable, furniture, fixtures and equipment, customer lists, intellectual
property and the assumption of accounts payable and other liabilities.
The sales price for the Division was determined on the basis of arms-length
negotiations between the Company, Touche and TMCI and was based in a large part
on the earnings and net assets of the Division. There was no material
relationship between the Company and TMCI prior to the acquisition however, the
Company leased space and sold product to Touche in the normal course of
business.
(Continued)
12
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS AND DISPOSITION OF ASSETS - CONTINUED
The results of operations include zero and one month of operations for the three
and nine month period ended June 30, 1997, respectively and three and nine
months of operations for three and nine months ended June 30, 1996,
respectively. The balance sheet excludes the Division as of June 30, 1997 and
includes it as of September 30, 1996.
Pro forma data. The following unaudited pro forma summary represents the results
of operations as if the disposition of the San Jose Division had occurred on
October 1, 1994, and do not purport to be indicative of what would have occurred
had the transactions been made as of October 1, 1994, or of results which may
occur in the future. The pro forma weighted shares is reported as if outstanding
at the beginning of the period.
<TABLE>
<CAPTION>
Three months ended June 30, Nine month ended June 30,
(amounts in thousands, except share data)
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,480 $ 6,888 $ 14,935 $ 12,879
Operating income (loss) (381) (177) 50 (482)
Net earnings (loss) (298) (7) (380) (40)
Earnings (loss) per share (0.09) (0.00) (0.12) (0.01)
Weighted shares outstanding 3,238,975 3,238,975 3,238,975 3,238,975
</TABLE>
NOTE B - INVENTORIES
Inventories consist of the following:
June 30 September 30,
1997 1996
Raw materials $2,734,673 $ 3,780,800
Work-in-process 1,695,423 1,830,891
Finished goods 145,447 586,701
--------------- ---------------
$ 4,575,543 $ 6,198,392
----------- ------------
13
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE C - CREDIT FACILITY
On April 8, 1996, the Company completed a new 3 year financing agreement with a
bank for a $6 million revolving line of credit with interest at one-half (.5)
percent over the prime rate. The line of credit is collateralized by accounts
receivable, inventory, property and equipment. This agreement requires that the
Company maintain certain financial ratios and meet specified minimum levels of
total assets, earnings and restrictions on the payments of dividends. Because
the Company did not comply with certain of these requirements, the bank
exercised its right to increase the interest rate to 2.5% over prime (10.5 % at
June 30, 1997, and September 30, 1996) until such time as these requirements are
met. This new line of credit replaced the previous $3,000,000 revolving line of
credit. The Company has borrowed $2,960,000 and $4,969,864 under the new line of
credit at June 30, 1997 and September 30, 1996, respectively (the Company still
has $3,040,000 available under the line at June 30, 1997). As a result of the
Company's failure to meet these requirements the Company was in default under
the loan agreement. The lender has waived these defaults as of September 30,
1996. The requirements are reviewed on an annual basis.
NOTE D - BRIDGE LOAN
During the six months ended June 30, 1997, certain investors, in connection with
a private placement, loaned the Company $1,000,000. The loan was secured by the
income tax refund and the TMCI stock received by the Company associated with the
sale of the San Jose Division and bears interest at 8% per annum. The loans are
due and payable in 180 days from the date issued.
NOTE E - STOCK TRANSACTIONS
Initial public offering
On November 17, 1995, the Company successfully completed an initial public
offering of 1,000,000 shares of its Common Stock and warrants to purchase
1,000,000 shares of Common Stock. The initial public offering price was $6.00
per share of Common Stock and $0.10 per Warrant. Each Warrant was immediately
exercisable and entitled the registered holder to purchase one share of Common
Stock at a price of $6.50 and expires on November 17, 2000. The outstanding
Warrants may be redeemed by the Company upon 30 days' written notice at $0.05
per Warrant, provided that the closing bid quotations of the Common Stock have
averaged at least $9.00 per share for a period of any 20 trading days ending on
the third day prior to the day on which the Company gives notice.
(Continued)
14
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE E - STOCK TRANSACTIONS
Initial public offering - Continued
In connection with the offering, the Company granted the underwriter the right
to purchase up to 100,000 shares of common stock and 100,000 warrants. The
underwriter was also granted an over-allotment option of 150,000 shares of
common stock and/or warrants to purchase an additional 150,000 shares of common
stock. In December 1995, the underwriter exercised its option and purchased the
150,000 warrants. The option to purchase the 150,000 shares of common stock has
expired.
Shares issued in Acquisition
As discussed in Note A, the Company issued 333,407 shares of common stock in
connection with an acquisition in May 1996. In addition, the Company agreed to
issue an additional 55,568 shares of common stock ("Contingent Stock") to The
Cerplex Group, Inc. based on collections of amounts over 90 days in the accounts
receivable. The Contingent shares were issued in June 1997 and were included in
the weighted average shares outstanding.
As discussed in Note A, the Company has committed to issue 150,000 shares of
common stock in connection with an acquisition in April 1997. These shares were
not issued before June 1997 but were included as if issued in the financial
statements and were therefore included in the weighted average shares
outstanding.
15
<PAGE>
PART I
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATIONS
The following discussion and analysis provides certain information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition for the three and
nine month periods ending June 30, 1997 and 1996. 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, 1996.
General
The Company develops and produces on a turnkey basis interconnection solutions
for original equipment manufacturers ("OEMs") in the computer, computer
peripheral and other computer related industries such as the telecommunications,
instrumentation and testing equipment industries. The Company's products connect
electronic equipment, such as computers, to various external devices (such as
video screens, printers, external disk drives, modems, telephone jacks,
peripheral interfaces and networks) and connect devices within the equipment
(such as power supplies, computer hard drives and PC cards). Most of the
Company's sales consist of custom cable interconnections developed in close
collaboration with its customers. The Company's customers include OEMs of
computers including mainframes, desktops, portables, laptops, notebooks, pens
and palmtops as well as OEMs of computer peripheral equipment such as modems,
memory cards, LAN adapters, cellular phones, faxes and printers. Other customers
include OEMs of telecommunications, instrumentation and testing equipment. The
InCirT Division is engaged in the electronic manufacturing services industry
(EMSI), and provides sophisticated ISO 9002-certified assembly and testing
services for complex printed circuit boards and subsystems. In addition, the
Company's MOTO-SAT Division is a manufacturer of satellite receiving systems for
recreational vehicles. Powerstream was purchased on April 1, 1997 and is a
battery charger and power supply developer and sales company.
Results of Operations
Effective April 1, 1997, the Company acquired the net assets of Powerstream
Technology, Inc. (Powerstream), which has been accounted for as a purchase. The
statement of earnings data for the three and nine months ended June 30, 1997
includes the results of operations for this division.
Effective April 1, 1996, the Company acquired the net assets of InCirT
Technology (InCirT), which has been accounted for as a purchase. The statement
of earnings data for the three and nine months ended June 30, 1997 includes the
results of operations for this division.
16
<PAGE>
Effective January 1, 1996, the Company acquired the net assets of MOTO-SAT which
has been accounted for as a purchase. The statement of earnings data for the
three and nine months ended June 30, 1997 and 1996 includes the results of
operations for this division from the purchase date.
Effective March 24, 1995, The Company acquired the net assets of QIS which has
been accounted for as a purchase. This division was sold on November 1, 1996
(see Note A - to Financial Statements). Therefore, the statement of earnings
data include the results of operations for only one month in the nine months
ended June 30, 1997 and for the three and nine months ended June 30, 1996.
Net sales
Net sales for the Company decreased approximately 48% and 18% for the three and
nine month periods ended June 30, 1997 as compared to the same periods in the
prior year, respectively. These decreases principally resulted from the
exclusion of the San Jose division which was sold on November 1, 1996, and the
Salt Lake City divisions transfer of its manufacturing for its major customer to
China which resulted in a loss of at lease one months worth of sales due to
manufacturing delays. In addition, the Company experienced a general decrease in
sales from all divisions aggravated by difficulty in obtaining parts. There have
been no material increases in prices of any of the Company's products between
the periods. The Company anticipates that prices will remain subject to downward
competitive pressures in the foreseeable future which may prohibit a significant
price increase and may result in decreased sales.
Cost of sales
Cost of sales as a percentage of net sales have increased to approximately 91%
for the three months ended June 30, 1997, as compared to 87% for the same period
in the prior year. Cost of sales as a percentage of net sales have increased
slightly to approximately to 85%, for the nine month period ended June 30, 1997,
as compared to 84% for the same period in the prior year. These percentage
increases resulted primarily from sales dropping below break-even levels which
reduced management's ability to reduce cost sufficiently to maintain a
reasonable margin. In addition, freight has increased cost of sales due to the
global expansion of the customer base and sales territory.
Operating expenses
Operating expenses decreased by $208,118 for the three month period compared to
the prior year and by $11,114 for the nine month period compared to the prior
year. These decreases have occurred despite the acquisitions, the increases in
research and development costs, and increases in depreciation and amortization
costs due to machinery and equipment purchases and the recording of goodwill.
Management continues to focus on ways to decrease operating expenses.
Other income and expenses
Other income and expenses (not including the gain on the sale of the San Jose
Division) have increased in the current periods as compared to prior years
periods due to increases in interest expense. Interest expense has increased due
to higher rates and the interest associated with the bridge loans. The Company
also sold its San Jose Division as of November 1, 1996 which resulted in a
current gain of approximately $612,000.
Net earnings (loss) and earnings (loss) per share
The net earnings (loss) for the three months ended June 30, 1997 totaled
($297,879) or ($0.09) per share, compared with $46,155 or $0.02 per share for
the same quarter in the prior year. For the nine months ended June 30, 1997 net
earnings totaled $196,492 or $0.06 per share compared with $298,135 or $0.11 per
share for the same period in the prior year. The current quarter loss resulted
from decreases in sales due to the delay in transferring some production to
17
<PAGE>
China, a general decrease in sales aggravated by delayed shipments due to parts
requirements, and increased interest expense. The decrease in earnings in the
nine month period from 1996 to 1997 resulted from loss due to factors discussed
above and the exclusion of the San Jose Division's earnings reported in 1996.
Liquidity and Capital Resources
The Company has historically financed its operations through operating cash flow
and lines of credit. However, on November 17, 1995, the Company completed an
initial public offering which produced net proceeds of approximately $4.8
million. This offering significantly increased the cash and equity balances. It
also allowed the Company to retire the $1,600,000 debt associated with the QIS
acquisition, and to purchase additional inventory and equipment to support the
increased production levels.
Working capital decreased in the current period to approximately $2.4 million at
June 30, 1997 compared to approximately $3.2 million at September 30, 1996. This
decrease is principally the result of losses occurred in operations as discussed
above.
Management believes that additional working capital may be required to meet its
future operating costs, for business expansion opportunities and to adequately
support its China strategic manufacturing alliance in addition to its existing
cash balances, borrowings available under the line of credit, and cash generated
from operations. However, there can be no assurance that such additional
financing, if required, would be available on favorable terms if at all.
Inflation and Seasonality
The Company does not believe that it is significantly impacted by inflation.
Historically, the industry sales tend to decline in January, February, July and
August when activity in the personal computer industry as a whole is reduced.
18
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
In 1996, the Company sold its San Jose Division to Touche Electronics, Inc.
("Touche") and TMCI Electronics, Inc., ("TMCI"). On February 14, 1997, Touche
and TMCI filed a demand for arbitration for the purpose of rescinding the Asset
Purchase Agreement in Santa Clara County, California under the arbitration
provisions of the California Code of Civil Procedure Sections 1282 through 1284
as provided in the contract of sale. The plaintiffs are alleging that, in
connection with the sale of the San Jose Division, (the Division) (1) the
Company overstated the value of the Division's inventory, (2) the Division's
vendors have refused to deal with Touche and TMCI, and (3) the Company failed to
disclose certain accounts payable. As an alternative to rescinding the agreement
the plaintiffs requested a reduction in the purchase price in excess of
$1,050,000 plus fees. The Company is vigorously contesting those allegations in
the arbitration.
On April 8, 1997, the Company filed a complaint against TMCI, Touche and Rolando
Loera in the Superior Court of the State of California, in and for the County of
Santa Clara, with respect to the defaulted Notes which were part of the sale of
the Division to Touche (the "Complaint"). In the Complaint, the Company made
claims against TMCI, Touche and the other defendants for, among other things,
breach of contract, fraud, conversion and claim and delivery. The Company has
also filed motions in the lawsuit for writs of attachment and possession and has
requested an order allowing the Company to attach the equipment and other assets
acquired by TMCI and Touche in the sale of the Division. Hearings on those
motions were held on May 29, 1997. The Company's writ of attachment motion was
denied. The Company will now pursue the arbitrator for purposes of resolving
certain "offset" claims of the obligees under the Notes and to enforce full
payment of the Note obligations.
Item 2. Changes in the Securities. None.
-------------------------
Item 3. Defaults Upon Senior Securities. None.
-------------------------------
Item 4. Submission of Matters to a Vote of Security Holders. None during the
---------------------------------------------------- quarter.
Item 5. Other Information. None
-----------------
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
A: Reports on Form 8-K
No 8-K's were issued during the quarter ended June 30, 1997.
B. Exhibits
11 Calculation of earnings per share.
27 Financial Data Schedule.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEN INTERCONNECT, INC.
By: /s/ James S. Pendleton
James S. Pendleton,
Chairman, CEO and Director
By: /s/ Wayne R. Wright
Wayne R. Wright,
Vice-Chairman, CFO,
Principal Accounting
Officer and Director
20
<PAGE>
EXHIBIT 11
PEN INTERCONNECT, INC.
CALCULATION OF EARNINGS PER SHARE
FOR THE THREE AND NINE MONTHS ENDED
JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
Months Weighted
NINE MONTHS ENDED Common Out- Average
JUNE 30, 1997 Shares standing Shares
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at October 1, 1996 3,033,407 9 3,033,407
Contingent shares 55,568 3 18,523
Issued shares 150,000 3 50,000
-----------------
Balance at June 30, 1997 3,101,930
=================
Earnings for nine months ended June 30,1997 $233,540
=================
Earnings per share $ 0.08
=================
</TABLE>
<TABLE>
<CAPTION>
Months Weighted
THREE MONTHS ENDED Common Out- Average
JUNE 30, 1997 Shares standing Shares
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at April 1, 1997 3,033,407 3 3,033,407
Contingent shares 55,568 3 55,568
Issued shares 150,000 3 150,000
-----------------
Balance at June 30, 1997 3,238,975
=================
Loss for three months ended June 30, 1997 $ (297,879)
=================
Loss per share ($ 0.09)
=================
</TABLE>
<TABLE>
<CAPTION>
Months Weighted
NINE MONTHS ENDED Common Out- Average
JUNE 30, 1996 Shares standing Shares
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at October 1, 1995 1,700,000 9 1,700,000
Issued shares November 17 1995 1,000,000 7.5 750,000
Issued shares 333,407 3 111,136
-------
Balance at June 30, 1996 2,644,469
=========
Earnings for six months ended June 30,1996 $ 298,135
=========
Earnings per share $ 0.11
======
</TABLE>
<TABLE>
<CAPTION>
Months Weighted
FOR THREE MONTHS Common Out- Average
JUNE 30, 1996 Shares standing Shares
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at April 1, 1996 2,700,000 3 2,700,000
Issued shares 333,407 3 333,407
-----------------
Balance at June 30, 1996 3,033,407
=================
Earnings for three months ended June 30, 1996 $ 46,155
=================
Earnings per share $ 0.02
=================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Pen Interconnect, Inc. June 30, 1997 financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001000266
<NAME> Pen Interconnect, Inc.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 15,128
<SECURITIES> 0
<RECEIVABLES> 3,239,378
<ALLOWANCES> (236,083)
<INVENTORY> 4,575,543
<CURRENT-ASSETS> 9,220,188
<PP&E> 3,655,590
<DEPRECIATION> (1,175,917)
<TOTAL-ASSETS> 15,085,134
<CURRENT-LIABILITIES> 6,775,424
<BONDS> 0
32,390
0
<COMMON> 0
<OTHER-SE> 8,078,133
<TOTAL-LIABILITY-AND-EQUITY> 15,085,134
<SALES> 15,220,519
<TOTAL-REVENUES> 15,220,519
<CGS> 12,912,356
<TOTAL-COSTS> 15,109,444
<OTHER-EXPENSES> 285,567
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 403,539
<INCOME-PRETAX> 396,640
<INCOME-TAX> 163,100
<INCOME-CONTINUING> 233,540
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233,540
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
