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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from to
Commission file number 1-14072
PEN INTERCONNECT, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0430260
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
2351 South 2300 West, Salt Lake City, UT 84119
(Address of Principal Executive Offices) (Zip Code)
(801) 973-6090
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 11, 1998, the issuer had 4,627,149 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, 1998
(unaudited) and September 30, 1997 4-5
Statements of Operations for the Quarters Ended March 31, 1998
and 1997 and six month periods ended March 31, 1998 and 1997
(unaudited) 6
Statements of Cash Flows for the six month
periods ended March 31, 1998 and 1997 (unaudited) 7-9
Notes to Condensed Financial Statements (unaudited) 10-15
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 and Use of Proceeds 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
Item 6(b).Reports on Form 8-K 19
Signatures 20
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, 1998 and audited
balance sheet as of September 30, 1997 (the Company's most recent fiscal
year), unaudited condensed statements of operations for the quarters ended
March 31, 1998 and 1997, and six month periods ended March 31, 1998 and
1997, and unaudited condensed statements of cash flows for the six month
periods ended March 31, 1998 and 1997, together with unaudited condensed
notes thereto. In the opinion of management of the Company, the interim
condensed 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, 1997. The results of operations for the three and six months ended
March 31, 1998 may not be indicative of the results that may be expected
for the year ending September 30, 1998.
3
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
------------- -------------
(Unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 111,311 $ 272,148
Receivables
Trade accounts, less allowance for doubtful accounts of $116,196 and
$137,058 at March 31, 1998 and September 30, 1997,
respectively. 2,858,324 2,093,056
Current maturities of notes receivable (Note A) 27,978 357,006
Investments in common stock (Note A) 740,000 400,000
Inventories (Notes B) 4,319,519 3,355,871
Prepaid expenses and other current assets 359,511 289,991
Deferred income taxes 160,832 141,324
------------ -------------
Total current assets 8,577,475 6,909,396
PROPERTY AND EQUIPMENT, AT COST
Production equipment 2,526,820 2,418,368
Furniture and fixtures 851,340 834,971
Transportation equipment 83,522 69,217
Leasehold improvements 368,137 368,137
------------ -------------
3,829,819 3,690,693
Less accumulated depreciation 1,447,938 1,303,063
------------ -------------
2,381,881 2,387,630
OTHER ASSETS
Notes receivable, less current maturities (Note A) 86,512 607,524
Investments in common stock (Note A) 684,000 -
Deferred income taxes 1,351,696 1,392,658
Goodwill and other intangibles (net) 2,205,247 2,287,146
Other 505,308 322,630
------------ -------------
4,832,763 4,609,958
------------ -------------
$ 15,792,119 $ 13,906,984
============ =============
</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,
1998 1997
------------ ------------
(Unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Notes payable $ 66,603 $ 641,505
Bridge loan - 100,000
Line of credit 2,891,491 2,237,690
Current maturities of long-term obligations 314,643 263,255
Current maturities of capital leases 66,464 66,464
Accounts payable 2,542,617 2,053,348
Accrued liabilities 302,200 481,356
------------ -----------
Total current liabilities 6,184,018 5,843,618
LONG-TERM OBLIGATIONS, less current
maturities (Note C) 985,679 681,722
CAPITAL LEASE OBLIGATIONS, less current
maturities 40,777 70,889
SUBORDINATED DEBENTURES (Note D) 780,000 -
DEFERRED INCOME TAXES 165,755 165,755
------------ -------------
Total liabilities 8,156,229 6,761,984
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
4,384,987 shares at March 31, 1998 and
4,072,863 shares at September 30, 1997 43,850 40,729
Additional paid-in capital 9,232,004 8,733,126
Accumulated deficit (1,639,964) (1,628,855)
------------ ------------
Total stockholders' equity 7,635,890 7,145,000
------------ ------------
$ 15,792,119 $ 13,906,984
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31, Six months ended March 31
---------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 3,698,727 $ 5,482,251 $ 7,603,444 $ 10,740,637
Cost of sales 2,842,148 4,471,980 5,897,521 8,829,116
------------ ------------- ------------ ------------
Gross profit 856,579 1,010,271 1,705,923 1,911,521
Operating expenses
Sales and marketing 209,110 262,793 427,491 465,112
Research and development 104,982 (4,939) 193,369 40,369
General and administrative 204,079 390,793 639,542 725,151
Depreciation and amortization 127,662 96,389 241,937 188,678
------------ ------------- ------------ ------------
Total operating expenses 645,833 745,036 1,502,339 1,419,310
------------ ------------- ------------ ------------
Operating income 210,746 265,235 203,584 492,211
Other income (expense)
Interest expense (175,670) (128,613) (254,707) (268,776)
Gain on sale of division (Note A) - - - 611,912
Other income (expense), net 4,104 41,414 34,337 57,672
------------ ------------- ------------ ------------
Total other income (expense) (171,566) (87,199) (220,370) 400,808
------------ ------------- ------------ ------------
Earning (loss) before income taxes 39,180 178,036 (16,786) 893,019
Income taxes (benefit) expense 16,123 76,049 (5,677) 361,600
------------ ------------- ------------ ------------
Net earnings (loss) $ 23,057 $ 101,987 $ (11,109) $ 531,419
============ ========== ============ ============
Earnings (loss) per common share:
Basic $ 0.01 0.03 $ (0.00) $ 0.18
============ ========== ============ ============
Diluted $ 0.00 0.03 $ (0.00) $ 0.13
============ ========== ============ ============
Weighted average common and dilutive
common equivalent shares outstanding
Basic 4,234,009 3,033,407 4,165,952 3,033,407
============ ========== ============ ============
Diluted 6,486,509 3,880,407 4,165,952 4,040,407
============ ========== ============ ============
</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>
1998 1997
------------- --------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
<S> <C> <C>
Net earnings(loss) $ (11,109) $ 531,419
Adjustments to reconcile net earnings (loss)
to net cash used in operating activities
Depreciation and amortization 241,937 188,678
Bad debts 14,527 (22,807)
Gain on sale of division - (611,912)
Contingent stock San Jose agreement (40,000) -
Loss on disposal of equipment 16,534 -
Deferred taxes - 79,544
Changes in assets and liabilities
Trade accounts receivable (779,795) (367,718)
Inventories (963,648) 57,050
Prepaid expenses and other assets (164,054) (249,298)
Accounts payable 489,269 (680,615)
Accrued liabilities (263,156) (203,414)
Income taxes 21,454 269,328
------------- --------------
Total adjustments (1,426,932) (1,541,164)
------------- --------------
Net cash used in
operating activities (1,438,041) (1,009,745)
------------- --------------
Cash flows from investing activities
Purchase of property and equipment (158,967) (274,210)
Proceeds from sale of division - 2,000,000
Issuance of notes receivable (72,760) (34,305)
Collections on notes receivable 22,800 -
------------- --------------
Net cash (used in) or provided
by investing activities (208,927) 1,691,485
------------- --------------
</TABLE>
(Continued)
7
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the six months ended March 31,
<TABLE>
<CAPTION>
1998 1997
------------- --------------
Cash flows from financing activities
<S> <C> <C>
Principal payments on notes payable (574,902) -
Net change in line of credit 653,801 (1,455,921)
Proceeds from bridge loan - 700,000
Principal payments on bridge loan (100,000) -
Principal payments on long-term obligations (174,767) (44,177)
Proceeds from issuance of subordinated debentures 1,000,000 -
Proceeds from issuance of long-term obligation 500,000 -
Proceeds from sale of common stock 181,999 -
------------- --------------
Net cash (used in) or provided
by financing activities 1,486,131 (800,098)
------------- --------------
Net decrease in cash
and cash equivalents (160,837) (118,358)
Cash and cash equivalents at beginning of period 272,148 169,445
------------- --------------
Cash and cash equivalents at end of period $ 111,311 $ 51,087
============= ==============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 243,728 $ 272,477
Income taxes - -
</TABLE>
(Continued)
8
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
For the six months ended March 31, 1998 and 1997
Non-cash investing and financing activities
During the second quarter of fiscal year 1998, subordinated debentures totaling
$320,000 were converted to 147,092 shares of common stock.
During the first quarter of fiscal year 1998, notes receivable totaling $900,000
plus accrued interest of $84,000 were converted to investments in common stock.
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
===============
The accompanying notes are an integral part of these statements.
9
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - ACQUISITIONS/DISPOSITIONS
PowerStream Technology
Effective April 1, 1997, the Company acquired substantially all of the
assets, and assumed certain liabilities and the operations, of
PowerStream Technology, Inc. ("PowerStream") by issuing 150,000 shares
of common stock valued at $1.50 per share. PowerStream is a research
and development company specializing in power recharging devices and
power supply products. In addition the Company entered into a 5 year
Employment Agreement with Daniele Reni, the President of PowerStream.
The Company believes that Mr. Reni is an expert in the area of power
recharging devices and power supply 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 and the excess purchase price over
fair value of net tangible assets acquired of $749,114 is being
amortized over 15 years. The results of operations of the acquired
business have been included in the financial statements since the
effective date of acquisition.
SALE OF SAN JOSE DIVISION
Effective November 1, 1996, the Company sold substantially all of the
net assets used by the San Jose Division ("Division") to Touche
Electronics, Inc. ("Touche"), a subsidiary 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, the Company had the right
to receive up to $700,000 in contingent earnouts for a potential total
sale price of $4,000,000. The Company 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.
In February 1997, TMCI filed a notice of demand for rescission of the
purchase and sale of the Division. The Company filed a counterclaim
against TMCI in May, 1997, alleging that TMCI had defaulted in its
obligations under the promissory notes. The disputes were subsequently
submitted to arbitration in August, 1997.
(Continued)
10
<PAGE>
Pen Interconnect, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS/DISPOSALS - CONTINUED
In December 1997, the Company and TMCI entered into a Settlement and
Release Agreement (the "Settlement Agreement"), releasing each other
of any and all respective claims the parties may have had against each
other. The Settlement Agreement provided, in part, that TMCI issue to
the Company, 137,390 shares of TMCI's common stock to replace the
$900,000 of promissory notes and related accrued interest payable by
TMCI to the Company. The Settlement Stock is guaranteed to have a
minimum value of $7.4532 per share. In the event the Settlement Stock
is sold by the Company at less than that amount, TMCI is obligated to
pay the Company the difference between the sales price and the
guaranteed value. The conclusion of the disputes, will allow the
Company and TMCI to continue their joint sales and marketing
arrangements.
The results of operations include one month of operations for the six
month period ended March 31, 1997. The balance sheet excludes the
Division as of March 31, 1998 and September 30, 1997.
Pro forma data. The following unaudited pro forma summary represents
the combined results of operations as if the disposition of the San
Jose Division had occurred on October 1, 1996, and do not purport to
be indicative of what would have occurred had the transactions been
made as of October 1, 1996, 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.
Six months ended March 31,
(amounts in thousands,
except share data)
1998 1997
---------- ----------
Net sales $ 7,603 $ 10,455
Operating income 204 472
Net earnings (loss) (11) 157
Earnings (loss) per common share:
Basic (0.00) 0.05
Diluted (0.00) 0.04
Weighted average common and
dilutive common equivalent shares
outstanding:
Basic 4,165,952 3,033,407
Diluted 4,165,952 4,040,407
11
<PAGE>
Pen Interconnect, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE B - INVENTORIES
Inventories consist of the following:
March 31, September 30,
1998 1997
-------------- -------------
Raw materials (net of allowance) $ 3,161,423 $ 2,531,235
Work-in-process 1,102,710 736,928
Finished goods 55,386 87,708
-------------- -------------
$ 4,319,519 $ 3,355,871
-------------- -------------
NOTE C - LOAN FROM CREDIT FACILITY
On December 8, 1997, the Company obtained the second term under its
credit facility with a bank in the principal amount of $500,000, which
bears interest at a fixed rate of 10.32% per annum. The loan is
payable in 36 monthly installments of $10,417, including interest,
with payments to begin in September 1998.
NOTE D - SUBORDINATED DEBENTURES
On October 22, 1997, the Board of Directors of the Company approved
the issuance of up to $1,500,000 of 3% convertible debentures (the
"Debentures") with a maximum term of 24 months. The Debentures will
mature, unless earlier converted by the holders, into shares of common
stock of the Company. The Company has agreed to file a registration
statement with the United States Securities and Exchange Commission
with respect to the Common Stock of the Company into which the
Debentures may be converted
The Debentures are convertible by the holders thereof into the number
of shares of common stock equal to the face amount of the Debentures
being converted divided by the lesser of (i) eighty percent (80%) of
the closing bid price of the Company's common stock as reported on the
NASDAQ Small Cap market on the day of conversion, or (ii) $2.75. The
Debentures may be converted in three equal installments beginning on
the earlier of (i) the 75th day of their issuance, and continuing
through the 135th day of their issuance, or (ii) the day following the
effective date of the Registration Statement, through the 60th day
following the effective date of the Registration Statement. The
Company may cause the Debentures to be converted into shares of common
stock after the 110th day following the effective date of the
Registration Statement, if the common stock has traded at or above
$5.50 per share for twenty consecutive days.
As of March 31, 1998 the Company had issued $1,100,000 of the
$1,500,000 convertible debentures and $320,000 had been converted to
common stock at an average price of approximately $2.18 per share
(Note F).
12
<PAGE>
Pen Interconnect, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE E - STOCK TRANSACTIONS
1. Stock issued
In the second quarter of fiscal year 1998, the Company issued 89,990
shares of common stock associated with the exercise of certain
warrants and 147,092 shares of common stock associated with the
conversion of subordinated debentures.
In the first quarter of fiscal year 1998, the Company issued 75,000
shares of common stock associated with the exercise of certain
warrants.
2. Earnings (loss) per share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings
per Share." SFAS No. 128 is effective for financial statements for
periods ending after December 15, 1997, and requires companies to
report both "basic" and "diluted" earnings per share. A "Basic"
earnings per share does not include the addition of common stock
equivalents to the shares outstanding. "Diluted" earnings per share
requires the addition of common stock equivalents to the shares
outstanding. Average shares outstanding is the denominator used in
"basic" earnings per share calculations. Accordingly, "basic" earnings
per share will be higher than "diluted" earnings per share. This
statement replaces Accounting Principles Board ("APB") Opinion No. 15,
"Earnings per Share." The following table illustrates the effect on
the Company of presenting EPS in accordance with SFAS No. 128.
Three months Ended March 31, 1998
Earnings Shares Per-Share
---------- ---------- ----------
Basic EPS: Earnings available
to common shareholders $ 23,057 4,234,009 $ 0.01
==========
Effect of Dilutive Securites
Stock options and warrants - 2,252,500
---------- ----------
Diluted EPS: Earnings available
to common shareholders $ 23,057 6,486,509 $ 0.00
========== ========== ==========
(Continued)
13
<PAGE>
Pen Interconnect, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE E - STOCK TRANSACTIONS - CONTINUED
2. Earnings (loss) per share - continued
Three months Ended March 31, 1998
Earnings Shares Per-Share
---------- ---------- ----------
Basic EPS: Earnings available
to common shareholders $ 101,987 3,033,407 $ 0.03
==========
Effect of Dilutive Securites
Stock options and warrants - 847,000
---------- ----------
Diluted EPS: Earnings available
to common shareholders $ 101,987 3,880,407 $ 0.03
========== ========== ==========
Six months Ended March 31, 1998
Loss Shares Per-Share
---------- ---------- ----------
Basic EPS: Loss available
to common shareholders $ (11,109) 4,165,952 $ (0.00)
==========
Effect of Dilutive Securites
Stock options and warrants - -
---------- ----------
Diluted EPS: Loss available
to common shareholders $ (11,109) 4,165,952 $ (0.00)
========== ========== ==========
Due to the above loss all outstanding common stock warrants and options
of 5,102,500 were excluded as they would decrease the loss per share
(anti-dilutive).
Six months Ended March 31, 1997
Earnings Shares Per-Share
---------- ---------- ----------
Basic EPS: Earnings available
to common shareholders $ 531,419 3,033,407 $ 0.18
==========
Effect of Dilutive Securites
Stock options and warrants - 1,007,000
---------- ----------
Diluted EPS: Earnings available
to common shareholders $ 531,419 4,040,407 $ 0.13
========== ========== ==========
Warrants to purchase 2,850,000 shares of common stock at $6.50 a share
were outstanding during the periods presented. They were not included
in the computation of EPS because their exercise price was greater
than the average market price of the common shares.
14
<PAGE>
Pen Interconnect, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE F - SUBSEQUENT EVENTS
In April 1998, the Company issued the remaining $400,000 of
convertible debentures and received proceeds of $363,000 (net of fees)
(Note D). In addition, another $330,000 of the original debentures
were converted to 162,162 shares of common stock at an average price
of approximately $2.035 per share.
15
<PAGE>
ITEM 2.
MANAGEMENTS 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 the timing of operating and changes in the mix of
products ordered by customers. As a result, the actual results may differ
materially from those projected in the forward-looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
The following discussion and analysis provides certain information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition for the three and
six month periods ending March 31, 1998 and 1997. This discussion should be read
in conjunction with the audited financial statements of the Company and notes
thereto included in the Annual Report of the Company on Form 10-KSB for the year
ended September 30, 1997.
General
Pen Interconnect, Inc. (the "Company" or "Pen") is a total interconnection
solution provider offering internal and external custom cable and harness
interconnections, mobile satellite equipment, EMSI (Electronic Manufacturing
Service Industry) manufacturing (circuit board assembly) and custom design and
manufacturing of battery chargers, power supplies and Uninterruptible Power
Supply UPS systems for original equipment manufactures ("OEMs") in the computer,
peripheral, telecommunications, instrumentation, medical and testing equipment
industries. The Company was incorporated under the laws of the State of Utah on
September 30, 1985. The Company maintains divisions located in Salt Lake City,
and Orem, Utah and Tustin, California.
16
<PAGE>
Results of Operations
Effective March 24, 1995, the Company acquired the net assets of the San Jose
Division which has been accounted for as a purchase. This division was sold on
November 1, 1996 (Note A). Therefore, the statement of operations data include
the results of operations for only one month in the six months ended March 31,
1997.
Net sales. Net sales for the Company decreased approximately 33% and 29% for the
three and six month periods ending March 31, 1998 as compared to the same
periods in the prior year, respectively. These decreases principally resulted
from the loss of a large customer, the move out of several orders into the
second half of the year and decreased orders by several other significant
customers. Such move out and loss of orders were not able to be replaced within
the short-term. However, the Company has received several significant orders to
be shipped within the next six month period.
Cost of sales. Cost of sales as a percentage of net sales have decreased to
approximately 77% for the three months ended March 31, 1998, as compared to 82%
for the same period in the prior year. Cost of sales as a percentage of net
sales have decreased to approximately 78% for the six months ended March 31,
1998, as compared to 82% for the same period in the prior year. These decreases
in costs resulted from reduced materials costs due to discounts obtained from
vendors on several new contracts. In addition, the Company has reduced support
costs in cost of goods sold during the most recent six month period to
correspond with the reduced sales levels.
Operating expenses. Operating expenses have increased as a percent of net sales
to approximately 17% and 20% for the three and six month periods at March 31,
1998, respectively as compared to approximately 14% and 13% for the same periods
in the prior year. These cost increases have resulted in the following two
areas: 1) Research and Development expenditures in an effort to develop new
products with improved margins and 2) depreciation and amortization due to
amortization of goodwill and other intangible assets associated with past
acquisitions. Other operating costs (Sales and marketing and General and
Administrative) actually decreased when compared to the prior year but reflect a
increase in relation to sales due to the decrease in sales. Due to the fixed
components included in the other operating costs they could not be significantly
reduced in the short-term and due to the expected rebound in sales in the next
two quarters such reductions may not be necessary in the future.
Other income and expenses. Other income and expenses (not including the gain on
the sale of the San Jose Division) as a percentage of net sales have increased
to approximately 5% and 3% for the three and six months ended March 31, 1998 as
compared to approximately 2% for both the three and six months ended in the
prior year. This increase is primarily in interest expense and is due to an
increased sales order for the next six months that required increased inventory
levels to support these future sales.
17
<PAGE>
Net earnings(loss) and earnings(loss) per share. Net earnings for the three
months ended March 31, 1997 totaled $23,057 or $0.01 basic per share earnings,
compared with $101,987 or $0.03 basic per share earnings for the same period in
the prior year. For the six months ended March 31, 1998 the net loss was $11,109
or $0.00 basic per share loss, compared with earning (net of gain on sale of
division) of $158,153 or $0.05 basic per share earnings for the same period in
the prior year.
These decreases in earnings and earning per share as compared to the prior year
were due to decreased sales levels and the inherent fixed costs associated with
a manufacturing operation that could not be reduced in the short-term to provide
increased profits. As the sales rebound in the next six months such fixed costs
associated with excess capacity should provide improved margins.
Liquidity and Capital Resources
Working capital increased to $2,393,457 on March 31, 1998 from $1,065,778 on
September 30, 1997. The increase is principally due to the proceeds received
from the sale of debentures and from the additional term loan.
Management believes that existing cash balances, borrowings available under the
line of credit and the additional $400,000 of debentures together with cash
generated from operations will be adequate to meet the Company's anticipated
cash requirements during the next twelve months. However, in the event the
Company experiences adverse operating performance or above anticipated capital
expenditure requirements, additional financing may be required. There can be no
assurance that such additional financing, if required, would be available on
favorable terms.
Inflation and Seasonality
The Company does not believe that it is significantly impacted by inflation.
Historically, the computer industry sales tend to decline in December, January,
July and August when activity in the personal computer industry as a whole is
reduced. However, the Company has recently diversified into the medical and
telecommunications products in an effort to offset the seasonality in the
computer industry.
18
<PAGE>
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 is not currently a party to any material litigation and
is not aware of any litigation threatened against it that could
have a materially adverse effect on its business.
Item 2. Changes in the Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
None during the quarter.
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
27 Financial Data Schedule.
B. Reports on Form 8-K.. None
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PEN INTERCONNECT, INC.
By: /s/ James S. Pendleton Date: May 15, 1998
------------------------ ----------------
James S. Pendleton,
CEO and Chairman
By: /s/ Wayne R. Wright Date: May 15, 1998
------------------------- ---------------
Wayne R. Wright,
CFO, Principal Accounting
Officer and Vice-Chairman
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Pen Interconnect, Inc. March 31, 1998 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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 111,311
<SECURITIES> 0
<RECEIVABLES> 3,002,498
<ALLOWANCES> (116,196)
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<CURRENT-ASSETS> 8,577,475
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<TOTAL-ASSETS> 15,792,119
<CURRENT-LIABILITIES> 6,184,018
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0
0
<COMMON> 43,850
<OTHER-SE> 7,592,040
<TOTAL-LIABILITY-AND-EQUITY> 15,792,119
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<TOTAL-REVENUES> 7,603,444
<CGS> 5,897,521
<TOTAL-COSTS> 7,399,860
<OTHER-EXPENSES> (220,370)
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<INCOME-PRETAX> (16,786)
<INCOME-TAX> (5,677)
<INCOME-CONTINUING> (11,109)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,109)
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
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