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 March 31, 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
incorporation or organization) (I.R.S. Employer Identification No)
2351 South 2300 West, Salt Lake City, UT 84119
(Address of Principal Executive Offices) (Zip Code)
(801) 973-6090
(Issuer's telephone number)
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 12, 1997 the issuer had 3,033,407 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
March 31, 1997 (unaudited) and September 30, 1996 4-5
Statements of Earnings for the
Quarter Ended March 31, 1997 and 1996 and
Six month period ended March 31, 1997 and 1996 6
Statements of Cash Flows for the six month
period ended March 31, 1997 and 1996 7-9
Notes to Financial Statements 10-14
Item 2 Management's Discussion and Analysis or
---------------------------------------
Plan of Operation 15-18
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 March 31, 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
March 31, 1997 and 1996, and six month period ended March 31, 1997 and
1996, and unaudited condensed statements of cash flows for the six month
period ended March 31, 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 six months ended March 31, 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>
March 31 September 30,
1997 1996
------------- -------------
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 51,087 $ 169,445
Receivable (Note C)
Trade accounts, less allowance for doubtful accounts of $232,590 and
$273,852 at March 31, and September 30,
respectively. 3,969,403 4,259,298
Current maturities of notes receivable 396,716 37,494
Income tax refund receivable (Note D) 320,513 228,241
Inventories (Notes B and C) 4,497,006 6,198,392
Prepaid & other assets 617,077 386,494
Deferred tax asset 260,456 525,800
------------- -------------
Total current assets 10,112,258 11,805,164
PROPERTY AND EQUIPMENT, AT COST
(Note C)
Production equipment 2,455,288 3,010,575
Furniture and fixtures 775,839 717,821
Transportation equipment 69,217 49,373
Leasehold improvements 368,137 354,150
----------- --------------
3,668,481 4,131,919
Less accumulated depreciation 1,103,383 1,065,205
----------- ------------
2,565,098 3,066,714
OTHER ASSETS
Notes receivable, less current maturities 594,713 19,630
Investments (Note D) 400,000 -
Goodwill 1,543,601 1,589,313
Other 129,020 176,097
------------ -------------
2,667,334 1,785,040
------------ -------------
$15,344,690 $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>
March 31, September 30,
1997 1996
------------- -------------
(Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Line of credit (Note C) $ 3,513,943 $4,969,864
Bridge loan (Note D) 700,000 -
Current maturities of long-term obligations 45,000 19,265
Current maturities of capital leases 57,433 59,878
Accounts payable 1,996,557 2,954,601
Accrued liabilities 372,951 611,739
Income taxes payable 361,600 -
------------- -------------
Total current liabilities 7,047,484 8,615,347
LONG-TERM OBLIGATIONS, less current
maturities 57,523 96,758
CAPITAL LEASE OBLIGATIONS, less current
maturities 99,635 150,382
DEFERRED INCOME TAXES 40,000 225,800
----------- -----------
Total liabilities 7,244,642 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
3,033,407 shares at March 31 and
September 30, respectively. 30,334 30,334
Additional paid-in capital 7,431,669 7,431,669
Retained earnings 638,045 106,628
------------ -----------
Total stockholders' equity 8,100,048 7,568,631
----------- -----------
$15,344,690 $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 March 31, Six months ended March 31,
1997 1996 1997 1996
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales $ 5,482,251 $ 5,442,143 $ 10,740,637 $ 10,012,456
Cost of sales 4,471,980 4,596,168 8,829,116 8,159,524
------------ ----------- ------------ -----------
Gross profit 1,010,271 845,975 1,911,521 1,852,932
Operating expenses
Sales and marketing 262,793 327,296 465,112 591,603
Research and development (4,939) 42,732 40,369 42,732
General and administrative 390,793 227,184 725,151 502,307
Depreciation and amortization 96,389 46,662 188,678 85,662
------------ ----------- ------------ -----------
Total operating expenses 745,036 643,874 1,419,310 1,222,304
------------ ----------- ------------ -----------
Operating income 265,235 202,101 492,211 630,628
Other income (expense)
Interest expense (128,613) (89,868) (268,776) (204,230)
Gain on sale of division (Note A) - - 611,912 -
Other income (expense) 41,414 1,051 57,672 (16,978)
------------ ------------ ----------- -----------
Total other income (expense) (87,199) (88,817) 400,808 (221,208)
------------ ------------ ----------- -----------
Earning before income taxes 178,036 113,284 893,019 409,420
Provision for income taxes 76,049 41,600 361,600 157,440
------------- ------------ ----------- -----------
Net earnings $ 101,987 $ 71,684 $ 531,419 $ 251,980
============= ============ =========== ===========
Earnings per common share $ 0.03 $ 0.03 $ 0.18 $ 0.10
============= ============ =========== ===========
Weighted average common
shares outstanding 3,033,407 2,700,000 3,033,407 2,450,000
============= ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
For six months ended March 31,
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
<S> <C> <C>
Net earnings $ 531,419 $ 251,980
Adjustments to reconcile net earnings to net
cash used in operating activities
Depreciation and amortization 188,678 85,662
Bad debts (22,807) 9,201
Gain on sale of division (611,912) -
Deferred taxes 79,544 -
Changes in assets and liabilities
Trade accounts receivable (367,718) (1,102,020)
Inventories 57,050 (1,147,571)
Prepaid expenses and other assets (249,298) (209,306)
Deferred offering costs - 294,158
Accounts payable (680,615) 350,903
Accrued liabilities (203,414) 109,013
Income taxes 269,328 (285,348)
--------------- ---------------
Total adjustments (1,541,164) (1,895,308)
--------------- ---------------
Net cash used in
operating activities (1,009,745) (1,643,328)
---------------- --------------
Cash flows from investing activities
Purchase of property and equipment (274,210) (457,253)
Proceeds from sale of division 2,000,000 -
Issuance of notes receivable (34,305) (12,647)
Collections on notes receivable - 8,195
--------------- -------------
Net cash (used in) or provided
by investing activities 1,691,485 (461,705)
--------------- ------------
</TABLE>
(Continued)
7
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the six months ended March 31,
<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 (1,455,921) 335,701
Proceeds from bridge loan 700,000 -
Principal payments on long-term obligations (44,177) (235,264)
Proceeds from sale of common stock - 4,806,893
--------------- -------------
Net cash (used in) or provided
by financing activities (800,098) 3,307,330
---------------- -------------
Net increase (decrease) in cash
and cash equivalents (118,358) 1,202,297
Cash and cash equivalents at beginning of period 169,445 376,488
--------------- -------------
Cash and cash equivalents at end of period $ 51,087 $ 1,578,785
=============== =============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 272,477 $ 199,628
Income taxes - 442,788
</TABLE>
(Continued)
8
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the six months ended March 31, 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:
<TABLE>
<CAPTION>
<S> <C> <C>
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
================
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
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)
============
</TABLE>
Excess purchase price over net assets acquired resulted
in recognition of goodwill
The accompanying notes are an integral part of these statements.
9
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS AND DISPOSITION OF ASSETS
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 will 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. 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)
10
<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 March 31, 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)
11
<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 six month period ended March 31, 1997, respectively and three and six months
of operations for three and six months ended March 31, 1996, respectively. The
balance sheet excludes the Division as of March 31, 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 March 31, Six months ended March 31,
(amounts in thousands, except share data)
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 5,196 $ 3,297 $ 10,455 $ 5,991
Operating income (loss) 248 (269) 475 (305)
Net earnings (loss) 101 (64) 530 (33)
Earnings (loss) per share 0.03 (0.02) 0.17 (0.01)
Weighted shares outstanding 3,033,407 3,033,407 3,033,407 3,033,407
</TABLE>
NOTE B - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1997 1996
-------------- ---------------
<S> <C> <C>
Raw materials $ 2,723,499 $ 3,780,800
Work-in-process 1,732,616 1,830,891
Finished goods 40,891 586,701
-------------- ---------------
$ 4,497,006 $ 6,198,392
-------------- ---------------
</TABLE>
12
<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 (10.75% at
March 31 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 $3,513,943 and $4,969,864 under the new line of
credit at March 31, 1997 and September 30, 1996, respectively (the Company still
has $2,486,057 available under the line at March 31, 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.
NOTE D - BRIDGE LOAN
During the quarter ended March 31, 1997, certain investors, in connection with a
private placement, loaned the Company $700,000. The loan was secured by the
income tax refund and a 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 a 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)
13
<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 not included in the weighted average
shares outstanding as they were not issued at March 31, 1997 and would not
materially change the earnings per share calculation.
14
<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
six month periodS ending March 31, 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.
15
<PAGE>
Results of Operations
Effective April 1, 1996, the Company acquired the net assets InCirT Technology
(InCirT), which has been accounted for as a purchase. The statement of earnings
data for the three and six months ended March 31, 1997 includes the results of
operations for this division.
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 six months ended March 31, 1997 includes the results of operations for
this division.
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 six months
ended March 31, 1997 and for the three and six months ended March 31, 1996.
Net sales. Net sales for the Company increased approximately 1% and 7% for the
three and six month periods ended March 31, 1997 as compared to the same periods
in the prior year respectively. These increases principally resulted from the
inclusion of the recent acquisitions of the InCirT Division and the MOTO-SAT
Division which were offset by the loss of revenue from the sold division. There
have been no material increases in prices of any of the Company's products
between the periods and the Company anticipates that prices will remain subject
to competitive pressures in the foreseeable future which may prohibit a
significant price increase.
Cost of sales. Cost of sales as a percentage of net sales have decreased to
approximately 81% for the three months ended March 31, 1997, as compared to 84%
for the same period in the prior year. Cost of sales as a percentage of net
sales have increased slightly to approximately to 82%, for the six month period
ended March 31, 1997, as compared to 81% for the same period in the prior year.
This slight decrease in costs for the current quarter resulted primarily from
improved cost controls.
Operating expenses. Operating expenses in total as a percent of net sales have
increased to approximately 14% and 13% for the three and six month periods in
1997, respectively as compared to approximately 12% in both the prior year
periods. These increases resulted from, the Company adding research and
development costs with its recent acquisitions and an increase in depreciation
and amortization due to machinery and equipment purchases and the recording of
goodwill.
16
<PAGE>
Other income and expenses. Other income and expenses (not including the gain on
the sale of the San Jose Division) have remained constant at approximately 1.6%
and 2.2% for the three and six months ended March 31, 1997, compared to
approximately 1.6% and 2% for the same periods in the prior year. The Company
also sold its San Jose Division as of November 1, 1996 which resulted in a
current gain of approximately $612,000. This Division was profitable in the
prior year but was not producing to the same level of sales and profits in the
current year.
Net earnings and earnings per share. Net earnings for the three months ended
March 31, 1997 totaled $101,987 or $0.03 per share, compared with $71,684 or
$0.03 per share for the same quarter in the prior year. For the six months ended
March 31, 1997 net earnings totaled $531,419 or $0.18 per share compared with
$251,980 or $0.10 per share for the same period in the prior year. This
significant increase in the six month period resulted from a gain on the sale of
a division of approximately $367,000 (after tax) or $0.12 per share and income
from operations of approximately $164,000 or $0.06 per share. These current per
share amounts occurred despite increasing the weighted shares outstanding by
more than 638,900 shares in the current six month period compared to the same
period in the prior year.
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 was approximately $3.1 million at March 31, 1997 compared to
approximately $3.2 million despite the sale of the San Jose Division in November
of 1996. The current ratio has remained consistant at about 1.4 to 1 at March
31, 1997 and at September 30, 1996.
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.
17
<PAGE>
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.
On February 14, 1997, Touche and TMCI filed a demand for arbitration in
California 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. The Company is vigorously contesting those
allegations in the arbitration.
On April 8, 1997, the Company filed a complaint against TMCI, Touche and
an individual in the Superior Court of the State of California, in and
for the County of Santa Clara, with respect to the defaulted Notes (the
"Complaint"). In the Complaint, the Company made claims against TMCI,
Touche and the other defendants for, amounts 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 are set currently for May
29, 1997.
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 March 31, 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 SIX MONTHS ENDED
MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
Months Weighted
Common Out- Average
1997 Shares standing Shares
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at October 1, 1996 3,033,407 6 3,033,407
---------
Balance at March 31, 1997 3,033,407
=========
Earnings for six months ended March 31,1997 $531,419
========
Earnings per share $ 0.18
======
</TABLE>
<TABLE>
<CAPTION>
Months Weighted
Common Out- Average
1997 Shares standing Shares
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1997 3,033,407 3 3,033,407
---------
Balance at March 31, 1997 3,033,407
=========
Earnings for six months ended March 31, 1997 $ 101,987
=========
Earnings per share $ 0.03
=========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Months Weighted
Common Out- Average
1996 Shares standing Shares
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at October 1, 1995 1,700,000 6 1,700,000
Issued shares November 17 1995 1,000,000 4.5 750,000
---------
Balance at March 31, 1996 2,450,000
=========
Earnings for six months ended March 31,1996 $251,980
========
Earnings per share $ 0.10
======
</TABLE>
<TABLE>
<CAPTION>
Months Weighted
Common Out- Average
1996 Shares standing Shares
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1996 2,700,000 3 2,700,000
---------
Balance at March 31, 1996 2,700,000
=========
Earnings for six months ended March 31, 1996 $ 71,684
==========
Earnings per share $ 0.03
==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Pen Interconnect, Inc. March 31,1997 financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001000266
<NAME> i$krjk9q
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 51,087
<SECURITIES> 0
<RECEIVABLES> 4,201,993
<ALLOWANCES> (232,590)
<INVENTORY> 4,497,006
<CURRENT-ASSETS> 10,112,258
<PP&E> 3,668,481
<DEPRECIATION> (1,103,383)
<TOTAL-ASSETS> 15,344,690
<CURRENT-LIABILITIES> 7,047,484
<BONDS> 0
0
0
<COMMON> 30,334
<OTHER-SE> 8,069,714
<TOTAL-LIABILITY-AND-EQUITY> 15,344,690
<SALES> 10,740,637
<TOTAL-REVENUES> 10,740,637
<CGS> 8,829,116
<TOTAL-COSTS> 10,248,426
<OTHER-EXPENSES> 669,584
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268,776
<INCOME-PRETAX> 893,019
<INCOME-TAX> 361,600
<INCOME-CONTINUING> 531,419
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 531,419
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
