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, 1999
[] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from to
Commission file number 1-14072
PEN INTERCONNECT, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0430260
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
1601 Alton Parkway Irvice, Ca. 92606
(Address of Principal Executive Offices) (Zip Code)
(949) 798-5800
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 15, 1999 the issuer had 7,539,838 shares of its common stock, par
value $0.01 per share, issued and outstanding. Transitional Small Business
Disclosure Format (check one):
Yes No X
<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, 1999
(unaudited) and September 30, 1998 4-5
Statements of Operations for the three months
ended March 31, 1999 and 1998 (unaudited) and 6
six month periods ended March 31, 1999 and
1998 (unaudited)
Statements of Cash Flows for the six months
ended March 31, 1999 and 1998 (unaudited) 7-8
Notes to Condensed Financial Statements (unaudited) 9-12
Item 2 Management's Discussion and Analysis or
Plan of Operation 13-16
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Changes in the Securities and Use of Proceeds 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6(a). Exhibits
Item 6(b). Reports on Form 8-K 17
Signatures 18
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, 1999 and audited balance sheet as
of September 30, 1998 (the Company's most recent fiscal year), unaudited
condensed statements of operations for the three and six months ended March 31,
1999 and 1998, and unaudited condensed statements of cash flows for the six
months ended March 31, 1999 and 1998, together with unaudited condensed notes
thereto. In the opinion of management of the Company, the financial statements
reflect all adjustments, all of which are normal recurring adjustments,
considered necessary to fairly present the financial condition, results of
operations and cash flows of the Company for the interim periods presented. The
financial statements included in this report on Form 10-QSB 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, 1998. The results of operations for the six months ended
March 31, 1999 may not be indicative of the results that may be expected for the
year ending September 30, 1999.
3
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
------------------ -------------------
(unaudited)
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 258,681 $ 657,777
Receivables
Trade accounts less allowance for
doubtful accounts of $67,434 at March 31, 1999 1,840,858 3,350,970
$108,575 at September 30, 1998, respectively
Current maturities of notes receivable 762,409 35,675
Investments in common stock 242,739 242,739
Inventories 2,777,230 3,680,169
Prepaid expenses and other current assets 410,078 261,375
Deferred tax asset 41,324 41,324
------------------ -------------------
Total current assets 6,333,319 8,270,029
PROPERTY AND EQUIPMENT, AT COST
Production Equipment 655,423 2,624,513
Furniture and fixtures 243,178 837,594
Transportation equipment 22,149 83,522
Leasehold improvements 242,274 613,248
------------------ -------------------
1,163,024 4,158,877
Less accumulated depreciation 275,307 1,680,266
------------------ -------------------
887,717 2,478,611
OTHER ASSETS
Notes receivable, less current maturities 8,798 3,989
Investments in common stock 482,220 482,220
Deferred income taxes 725,667 725,667
Goodwill and other intangibles, net 2,041,517 2,031,685
Assets transferred under contractual arrangement 454,742 0
Other 4,325 98,455
------------------ -------------------
Total other assets 3,717,269 3,342,016
------------------ -------------------
$10,938,305 $14,090,656
================== ===================
</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,
1999 1998
------------------ -------------------
(unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Subordinated debentures $ 325,000 $ 1,401,429
Line of credit 2,922,349 4,064,361
Current maturities of long-term obligations 717,871 1,132,538
Current maturities of capital leases 0 69,621
Accounts payable 2,130,094 2,926,797
Accrued liabilities 906,393 389,889
------------------ -------------------
Total current liabilities 7,001,707 9,984,635
LONG TERM OBLIGATIONS, less current maturities 7,314 51,965
CAPITAL LEASE OBLIGATIONS, less current maturities 0 22,333
LIABILITIES TRANSFERRED UNDER CONTRACTUAL ARRANGEMENTS 514,813 0
DEFERRED INCOME TAXES 165,755 165,755
------------------ -------------------
Total liabilities 7,689,589 10,224,688
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value
authorized 5,000,000 shares, 1,800,000
issued and outstanding at March 31, 1999 1,800 0
Common stock, $0.01 par value,
authorized 50,000,000 shares, issued and 68,648 50,184
outstanding 6,864,838 shares at March 31,
1999 and 5,018,437 at September 30, 1998
Additional paid-in capital 14,057,834 10,890,022
Accumulated deficit (10,879,566) (7,074,238)
------------------ -------------------
Total stockholders' equity 3,248,716 3,865,968
------------------ -------------------
$10,938,305 $14,090,656
================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
(Uaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
-------------------------------------- -----------------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
------------------ ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales $ 2,828,078 $ 3,698,727 $ 7,585,916 $ 7,603,444
Cost of sales 2,400,695 2,842,148 6,968,163 5,897,521
------------------ ----------------- ---------------- ----------------
Gross profit 427,383 856,579 617,753 1,705,923
Operating expenses
Sales and marketing 55,692 17,590 137,411 69,405
Research and development 180,606 104,982 492,634 193,369
General and administrative 1,312,513 395,599 2,035,143 997,628
Depreciation and amortization 79,010 127,662 191,307 241,937
------------------ ----------------- ---------------- ----------------
Total operating expenses
1,627,821 645,833 2,856,495 1,502,339
------------------ ----------------- ---------------- ----------------
Operating income, (loss) (1,200,438) 210,746 (2,238,742) 203,584
Other income (expense)
Interest expense (192,903) (175,670) (385,775) (254,707)
Loss on sale of division (948,312) 0 (948,312) 0
Other income (expense) net (158,281) 4,104 (232,499) 34,337
------------------ ----------------- ---------------- ----------------
Total other income (expense) (1,299,496) (171,566) (1,566,586) (220,370)
------------------ ----------------- ---------------- ----------------
Loss before income taxes (2,499,934) 39,180 (3,805,328) (16,786)
Income tax expense (benefit) 0 16,123 0 (5,677)
------------------ ----------------- ---------------- ----------------
Net earnings (loss) $ (2,499,934) $ 23,057 $ (3,805,328) $ (11,109)
================== ================= ================ ================
Earnings (loss) per common share
Basic $ (0.47) $ 0.01 $ (0.72) $ (0.00)
Diluted $ (0.47) $ 0.00 $ (0.72) $ (0.00)
Weighted average common shares outstanding
Basic 6,321,553 4,234,009 5,932,173 4,165,952
Diluted 6,321,553 6,486,509 5,932,173 4,165,952
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
(Uaudited)
<TABLE>
<CAPTION>
Six months ended
------------------------------------
March 31, March 31,
1999 1998
----------------- -----------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
<S> <C> <C>
Net loss $ (3,805,328) $ (11,109)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 191,307 241,937
Bad debts 13,247 14,527
Interest on debenture conversion 98,571 0
Loss on sale of cable division 948,312 0
Contingent stock San Jose agreement 0 (40,000)
Loss on disposal of equipment 0 16,534
Changes in asset and liabilities
Trade accounts receivable 1,005,502 (779,795)
Inventories 334,368 (963,648)
Prepaid expenses and other assets (166,211) (164,054)
Accounts Payable (513,019) 489,269
Accrued liabilities 619,125 (263,156)
Income taxes 0 21,454
----------------- -----------------
Total adjustments 2,531,202 (1,426,932)
----------------- -----------------
Net cash used in operating activities (1,274,126) (1,438,041)
----------------- -----------------
Cash flows from investing activities
Purchase of property and equipment (76,395) (158,967)
Proceeds from sale of division 0 0
Issuance of notes receivable (614,920) (72,760)
Collections on notes receivable 0 22,800
----------------- -----------------
Net cash used in operating activities (691,315) (208,927)
----------------- -----------------
</TABLE>
(Continued)
7
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINED
(Uaudited)
<TABLE>
<CAPTION>
Six months ended
------------------------------------
March 31, March 31,
1999 1998
----------------- -----------------
Cash flows from financing activities
<S> <C> <C>
Principal payments on notes payable 0 (574,902)
Net change in line of credit (393,513) 653,801
Proceeds from bridge loan 900,000 0
Principal payments on bridge loan (800,000) (100,000)
Principal payments on long-term obligations (153,217) (174,767)
Proceeds from issuance of subordinated debentures 0 1,000,000
Proceeds from issuance of long-term obligation 0 500,000
Proceeds from sale of common stock 213,075 181,999
Proceeds from issuance of preferred stock 1,800,000 0
----------------- -----------------
Net cash provided by financing activities 1,566,345 1,486,131
----------------- -----------------
Net decrease in cash and cash equivalents (399,096) (160,837)
Cash and cash equivalents at beginning of period 657,777 272,148
----------------- -----------------
Cash and cash equivalents at end of period $ 258,681 $ 111,311
================= =================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest expense $ 287,204 $ 243,728
Income tax expense $ 0 $ 0
</TABLE>
Noncash investing and financing activities
During the first and second quarters of FY 99 $1,150,000 of subordinated
debentures were converted into 1,566,741 shares of common stock. Along with the
conversion on the debentures, $98,571 of unamortized interest on the
subordinated debentures was charged to interest expense.
During the second quarter of FY 99, $1,800,000 of Series A Preferred Stock was
issued. Of this amount, $800,000 was used directly to pay off $800,000 of bridge
loans made to the Company during the first quarter of FY 99.
The letter of intent for the sale of the MotoSat division to James Pendleton,
Pen's former Chairman and CEO, all assets and liabilities of the MotoSat
division will be transferred to Mr. Pendleton in exchange for an elimination of
future obligations to pay retirement benefits under Mr. Pendleton's employment
contract. If the transaction had been closed as of March 31, 1999 it would have
yielded a gain of $60,072, representing the excess of liabilities over assets to
be transferred. This gain must be deferred pending the closing of this
transaction, which is anticipated for summer 1999.
The accompanying notes are an integral part of these statements.
8
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - ACQUISITIONS/DISPOSITIONS
Laminating Technologies Inc.
On December 23, 1998, the Company signed a definitive agreement to merge with
Laminating Technologies Inc. (LTI). On April 2, 1999 the Company and LTI
mutually terminated this definitive agreement to merge.
Cables To Go Inc.
On January 29, 1999 the Company signed an agreement to sell certain assets and
transfer certain liabilities of the Cable division to Cables To Go Inc (CTG).
CTG purchased certain of the receivables, inventory, machinery equipment and
assumed capital lease liabilities for $1,075,000 thus yielding the Company a net
loss on the sale of ($948,312).
Mobile Technology Inc.
On February 1, 1999 the Company signed a letter of intent with Mobile Technology
Inc. (MTI) to sell all assets and liabilities of the MotoSat division. MTI's
principal owner is James Pendleton, a former Chairman and CEO of the Company.
The letter of intent calls for MTI to assume all assets and liabilities of the
MotoSat division. If the transaction were closed as of March 31, 1999, it would
yield a gain to the Company on the sale of $60,071. Pending the closing of the
sale, the Company has agreed to maintain and/or provide a $300,000 credit
facility with the Company's major lender. The Company anticipates closing the
transaction when MTI is able to secure independent sources of financing. In the
interim, MTI has assumed operational control of the MotoSat division but the
Company retains ownership of the MotoSat division's receivables and inventory
which are collateral for the Company's credit facility.
Inasmuch as the Company is still at risk for the credit facility made available
to MTI, on the receivables and inventory currently being submitted to finance
the current operations of MotoSat, the Company has recorded the position of
financial condition as of the date of the letter of intent only (February 1,
1999). Assets and liabilities have been reclassified as "Assets /Liabilities
Transferred Under Contractual Arrangements" on the balance sheet at March 31,
1999.
Transdigital Communications Inc.
In December 1998, the Company signed a nonbinding letter of intent to negotiate
a possible merger with Transdigital Communications Inc. (TCC). TCC is a
privately held developer of entertainment and database systems for the
transportation markets which includes narrow bodied commercial aircraft and
cruise ships. Pen and TCC are currently engaged in due diligence investigations
and the negotiation of terms for definitive contracts.
9
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE B - INVENTORIES
Inventories consist of the following:
March 31, September 30,
1999 1999
--------------- ------------------
Raw materials (net of allowance) $ 1,942,174 $ 2,253,933
Work-in-process 835,056 1,391,664
Finished goods - 35,572
--------------- ------------------
$ 2,777,230 $ 3,680,169
=============== ==================
NOTE C - BRIDGE LOANS
During the 1st quarter of FY 1999 the Company secured two bridge loans both of
which were to be repaid with funds to be received from the merger with LTI. The
term of each loan was 90 days and carried an interest rate of 8 percent. One
bridge loan was secured in November for $500,000 and the other in December for
$400,000. Both bridge loans were subsequently repaid from proceeds received from
the issuance of preferred stock. (See Note E)
NOTE D - WARRNATS TO PURCHASE COMMON STOCK
During the first quarter of FY 1999 the Company issued warrants to purchase
490,000 shares of the Company's common stock. The following table outlines the
features of these warrants:
Number of Exercise Expiration
warrants price date
- --------------- ---------------- ----------------------
150,000 $1.000 October 2002
125,000 $0.875 October 2002
215,000 $0.875 November 2001
During the second quarter of FY 1999 the Company issued warrants to purchase
160,000 shares of common stock in conjunction with the issuing of a Series A
Preferred Stock. The terms of the conversion of the warrants to shares of common
stock are discussed in Note E.
10
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE E - PREFERRED STOCK
The Company has issued two series of Preferred Stock. Series A was issued in
February 1999 consisting of 1,800 shares, par value $0.01 per share, for $1,000
per share. Series B was issued in April 1999 at the same price but only 1,000
shares were issued. As mentioned in Note C, part of the funds raised from the
issuance of this stock were used to repay the bridge loans made earlier in the
fiscal year. After repayment of the bridge loans and paying $238,500 in fees and
expenses, the net cash raised by the Company for operations was $1,665,500. Both
series of Preferred Stock carry a 16 percent dividend rate which is paid
quarterly.
Both issuances of Preferred Stock are convertible into shares of the Company's
Common Stock. Each share of Series A Preferred Stock is convertible into an
amount of shares of Pen Common Stock equal to $1,000 divided by the average of
the two lowest closing bid prices for Pen Common Stock during the period of 22
consecutive trading days ending with the last trading day before the date of
conversion, after discounting that market price by 15 percent (the "Conversion
Price"). The maximum Conversion Price for the Series A Preferred Stock is $1.17
per share. The shares of Series B Preferred Stock are convertible into Common
Stock at the same Conversion Price as the Series A Preferred Stock with a
maximum Conversion Price of $0.79 per share. Warrants to acquire 335,453 shares
of Common Stock at conversion prices ranging from $0.86 to $1.434 per share were
also issued to the purchasers of the Series A and Series B Preferred Stock. The
Warrants expire three years from date the Preferred Stock and warrants were
initially issued.
NOTE F - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing net earnings
(loss) available to common shareholders by the weighted average number of common
shares outstanding during each period. Diluted earnings per common share are
similarly calculated, except that the weighted average number of common shares
outstanding includes common shares that may be issued subject to existing rights
with dilutive potential.
For the three and six months ended March 31, 1999, net loss attributable to
common shareholders includes a non-cash imputed dividend to the preferred
shareholders related to the beneficial conversion feature on the 1999 Series A
Preferred Stock and related warrants. (See Note E). The beneficial conversion
feature is computed as the difference between the market value of the common
stock into which the Series A Preferred Stock can be converted and the value
assigned to the Series A Preferred Stock in the private placement. The imputed
dividend is a one-time non-cash charge against the loss per common share.
11
<PAGE>
PEN INTERCONNECT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE F - EARNINGS (LOSS) PER SHARE - CONTINUED
Basic and diluted loss per common share were calculated as follows:
Three Six
months months
ended ended
March 31, March 31,
1999 1999
--------------- --------------
Net loss $ (2,499,934) $ (3,805,328)
Preferred dividends (30,773) (30,773)
Imputed dividend from beneficial
conversion feature (449,438) (449,438)
--------------- ---------------
Net loss attributable to
common stockholders $ (2,980,145) $ (4,285,539)
=============== ===============
Weighted-average common and
common equivalent shares $ 6,321,553 $ 5,932,173
Loss per common share (0.47) $ (0.72)
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
FORWARD-LOOKING STATEMENTS. This report contains certain forward-looking
statements within the meaning of section 27A of the Securities Act of 1933 as
amended, and section 21E of the Securities Exchange Act of 1934, as amended,
that involve risks and uncertainties. In addition, the Company may from time to
time make oral forward-looking statements. Actual results are uncertain and may
be impacted by the following factors. In particular, certain risks and
uncertainties that may impact the accuracy of the forward-looking statements
with respect to revenues, expenses and operating results include without
limitation, cycles of customer orders, general economic and competitive
conditions and changing consumer trends, technological advances and the number
and timing of new product introductions, shipments of products and components
from foreign suppliers, and changes in the mix of products ordered by customers.
As a result, the actual results may differ materially from those projected in
the forward- looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
The following discussion and analysis provides certain information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition for the six months
ended March 31, 1999 and 1998. This discussion should be read in conjunction
with the audited financial statements of the Company and notes thereto included
in the Annual Report of the Company on Form 10-KSB for the year ended September
30, 1998.
General
Pen Interconnect, Inc. is a provider of contract manufacturing services for
original equipment manufacturers. It builds electronic systems and subsystems
for customers in a range of industries including computers, consumer
electronics, industrial and medical instrumentation, avionics, communications,
and semiconductor applications. Pen Interconnect's services include product
design and prototyping, systems assembly, software duplication, packaging, and
warehousing.
Pen Interconnect, Inc. provides the total manufacturing solution including
circuit design, board design from schematic, mechanical and product design,
prototype assembly, volume board assembly, system services and end-user
distribution. The Company was incorporated under the laws of the State of Utah
on September 30, 1985. Pen Interconnect, Inc. has support manufacturing
facilities in California, Utah and China.
Sale of Divisions
January 29, 1999 the Company sold the Cable division in order to reduce the
losses being incurred each month and focus on more strategically promising
divisions. The sale of the Cable division resulted in a loss to the Company of
($948,312). Although the transaction yielded a substantial loss, the Company
anticipates reducing losses by approximately $170,000 per month. The agreement
with CTG also provides for royalty payments equal to 2 percent of sales to be
paid quarterly up to an amount of $600,000, of which $150,000 is guaranteed.
13
<PAGE>
Results of Operations
Net sales. Net sales for the Company decreased $870,649 or approximately 24
percent for the three month period ended March 31, 1999 as compared to the same
period in the prior year. This decrease resulted primarily from the sale of the
Cable division in January 1999 and a decline in the sales at the InCirT division
as the contract expansion for a major customer was completed and sales returned
to regular levels. Net sales for the six months ending March 31, 1999 decreased
$17,528 or 0.2 percent from the same period during the prior fiscal year. The
contract expansion in the InCirT division was still ongoing the first fiscal
quarter which offset the decline of sales following the sale of the Cable
division in the second quarter.
Cost of sales. Cost of sales as a percentage of net sales have increased to
approximately 85 percent for the three months ended March 31, 1999 as compared
to 77 percent for the same period in the prior year. This increase is due to a
decline in sales at the InCirT division and the impact of fixed manufacturing
costs on a lower sales base. Cost of sales as a percentage of net sales for the
first six months of fiscal 1999 increased to 92 percent compared to 78 percent
for the same period last year. This increase was further worsened by declining
sales in the Cable division during the first quarter with no corresponding
reduction in overhead costs. The increase was also due to a decrease in the
margins on a major contract at the InCirT division.
Operating expenses. Operating expenses increased $981,988 or 152 percent for the
three months ended March 31, 1999 over the same three month period during the
prior fiscal year. For the first six months of fiscal 1999, operating expenses
increased $1,354,156 or 90 percent compared to the same period from the prior
fiscal year. The increases for both the second quarter and for the six months
were mostly associated with an increase in general and administrative expenses
of $916,914 and $1,037,515, respectively. The increases in general and
administrative expenses during the second quarter are primarily responsible for
the increase. These included (1) $208,599 in professional fees associated with
the issuance of the Company's Series A preferred stock, the negotiation of
proposed merger agreements and agreements for the sale of the Cable and Motosat
divisions, and Nasdaq compliance hearings, (2) $429,259 for financial
representation services, and (3) $97,000 in supplemental payroll expenses
associated with the termination of employees with the sale of the Cable
division. Operating expenses also increased for the quarter and for the six
months due to the need to expense rather than capitalize certain development
costs at the PowerStream division.
Other income and expenses. Other expenses increased $351,184 net of the loss on
the sale of the Cable division or 205 percent for the three months ended March
31, 1999 as compared to the same period in the prior year. These expenses also
increased $618,274 or 281 percent for the first six months of fiscal 1999 as
compared to the same period in the prior fiscal year. The increases in other
expenses for the second quarter of fiscal 1999 primarily include brokerage fees
and other expenses in connection with the issue of the Series A Preferred Stock
in the second quarter and of subordinated debentures during the prior fiscal
year. Interest expense for both the second quarter and for the first six months
of fiscal 1999 are higher than corresponding amounts from the prior year because
of interest expense associated with the favorable conversion feature of the
subordinated debentures issued during the prior fiscal year.
14
<PAGE>
Net earnings (loss) and earnings (loss) per share. Net loss for the second
fiscal quarter ended March 31, 1999 totaled ($2,499,934) or ($0.40) per basic
share, compared with a gain of $23,057 or $0.01 per basic share for the second
quarter of fiscal 1998. The change in the loss per basic share of ($0.41) is
mostly comprised of ($0.15) related to the increase in General and
Administrative expenses, ($0.03) related to the increase in other expenses,
($0.07) related to the decline in sales and the decline in profit margins on
sales, and ($0.15) related to the loss on the sale of the Cable division. The
loss for the first six months of fiscal 1999 of $3,805,328 or ($0.64) per basic
share was ($0.64) per share more than that of the first six months of the prior
fiscal year. The change in loss per basic share for this period was mostly
comprised of ($0.17) related to the increase in General and Administrative
expenses, ($0.05) related to the increase in development costs, ($0.04) related
to the increase in Other Expenses, ($0.18) related to the decline in margins on
sales, and ($0.16) related to the loss on the sale of the Cable division.
Liquidity and Capital Resources
The working capital deficit at March 31, 1999 is ($668,388) compared to
($2,263,049) at December 31, 1998 and ($1,714,606) at September 30, 1998. The
decrease in negative working capital is primarily due to 1) the decrease in
accounts payable and the Company's line of credit from the proceeds of the sale
of the Cable division, and 2) the issuance during the second quarter of the
Series A Preferred Stock.
During the second quarter of fiscal 1999 the Company sustained losses from
operations of ($1,200,438) compared to a loss incurred during the first fiscal
quarter of ($1,038,304). The Company's management believes that a significant
portion of the losses in the second quarter were due to nonrecurring items.
These include increases in general and administrative expenses related to merger
and divisional sale transactions. If these nonrecurring items were excluded, the
Company's management believes that the loss from operations in the second
quarter would have been only $600,000, or roughly half of that incurred during
the first quarter.
Cash from operations has not been sufficient during the recent quarter or during
the current fiscal year to cover expenses. Pen anticipates an increase in sales
and new contracts with more profitable margins generating a return to
profitability beginning in the third quarter of fiscal 1999. Pen's management
has also taken steps to reduce losses by selling the Cable division to CTG Inc
and by signing a letter of intent to sell the MotoSat division. With the sale of
the these two divisions, Pen expects to save approximately $170,000 per month in
operating costs and interest. The sale of the Cable division yielded proceeds of
$1,075,000.
Pen's management estimates that approximately $1 million may have to be raised
to sustain operations. Funds have been realized from the issuance of Series A
Preferred Stock and Series B Preferred Stock in the second and third fiscal
quarters of fiscal 1999. The issuance of the Series A Preferred Stock raised
$850,000 after payment of $150,000 in fees and applying $800,000 towards the
repayment of two bridge loans made to Pen during the first quarter of fiscal
1999. The sale of the Cable and Moto-Sat divisions, the anticipated increases in
sales from the remaining divisions and the anticipated return to profitability
should generate sufficient cash to fund operations for the rest of calendar year
1999. However, Pen may be unable to raise funds and the anticipated increases in
sales may not occur.
15
<PAGE>
Inflation and Seasonality
The Company does not believe that it is significantly impacted by inflation. The
Company has been marginally influenced with seasonality of sales in the past.
With the sale of the Cable and MotoSat divisions, the Company is even less
impacted by seasonality than before.
Year 2000 Readiness
In general, the Year 2000 issue relates to computers and other systems being
unable to distinguish between the years 1900 and 2000 because they use two
digits, rather than four, to define the applicable year. Systems that fail to
properly recognize such information will likely generate erroneous data or cause
a system to fail possibly resulting in a disruption of operations. The Company's
products do not incorporate such date coding so the Company's efforts to address
the Year 2000 issue fall in the following three areas: (i) the Company's
information technology ("IT") systems; (ii) the Company's non-IT systems (i.e.,
machinery, equipment and devices which utilize technology which is "built in"
such as embedded microcontrollers); and (iii) third-party suppliers. Management
has initiated a program to prepare for compliance in these three areas and
expects such program to be implemented and completed by June 1999. Costs will be
expensed as incurred and currently are not expected to be material.
The Company believes its current IT systems are year 2000 compliant. The Company
is currently conducting an inventory of non-IT systems which may have inadequate
date coding and will commence efforts to remedy any non-compliant systems by the
end of the first quarter of 1999. Third party suppliers and customers present a
different problem in that the Company cannot control the efforts of such third
parties. The Company anticipates requesting confirmations from third party
suppliers that they are year 2000 compliant to avoid disruptions of services and
supplies. However, any failure on the part of such companies with whom the
Company transacts business to be year 2000 compliant on a timely basis may
adversely affect the operations of the Company.
16
<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 has had a judgement made
against it pertaining to an obligation of $79,000 to YC Intl. which has not been
paid. Agreements made with the legal counsel of YC Intl. Call for monthly
payments of $10,000 to be made. To date the Company has made payments of $20,000
towards this obligation.
Item 2. Changes in the Securities and Use of Proceeds. None
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None during the
quarter.
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits
11 Calculation of earnings (loss) per share.
27 Financial Data Schedule.
B. Reports on Form 8-K
On February 17, 1999, the Company filed a report on Form 8-K reporting the sale
of the Cable division, the execution of the merger agreement with LTI, and the
issuance of the Series A Preferred Stock. It consisted of: Item 2. Acquisition
or Disposition of Assets, Item 5. Other Events, and Item 7. Financial
Statements, Pro Forma Financial Information, and Exhibits.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PEN INTERCONNECT, INC.
By: /s/ Stephen J Fryer
Stephen J. Fryer
President and CEO
By: /s/ Robert J. Albrecht
Robert J. Albrecht
CFO, Principal Accounting
Officer and Vice-Chairman
18
<PAGE>
Exhibit 11
Pen Interconnect, Inc.
CALCULATION OF EARNINGS PER SHARE
(Uaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
-------------------------------------- ----------------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
------------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Earnings (loss) available to common shareholders $ (2,980,145) $ 23,057 $ (4,285,539) $ (11,109)
=================== ================= ================ ===============
Basic EPS
- ---------------------------------------------
Common shares outstanding entire period 6,069,160 4,147,863 5,018,437 4,072,863
Weighted average common shares issued 252,393 86,146 913,736 93,089
------------------- ----------------- ---------------- ---------------
Weighted average common shares outstanding
during period 6,321,553 4,234,009 5,932,173 4,165,952
=================== ================= ================ ===============
Earnings (loss) per common shares (0.47) 0.01 (0.72) (0.00)
Diluted EPS
- ---------------------------------------------
Weighted average common shares outstanding
during period - basic 6,321,553 4,234,009 5,932,173 4,165,952
Dilutive effect of stock options and warrants 0 2,252,500 0 0
------------------- ----------------- ---------------- ---------------
Weighted average common shares outstanding
during period - diluted 6,321,553 6,486,509 5,932,173 4,165,952
=================== ================= ================ ===============
Earnings (loss) per common share -
assuming dilution $ (0.47) $ 0.00 $ (0.72) $ (0.00)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Pen Interconnect, Inc. March 31, 1999 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-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 258,681
<SECURITIES> 242,739
<RECEIVABLES> 1,908,292
<ALLOWANCES> (67,434)
<INVENTORY> 2,777,230
<CURRENT-ASSETS> 6,333,319
<PP&E> 1,163,024
<DEPRECIATION> (275,307)
<TOTAL-ASSETS> 10,938,305
<CURRENT-LIABILITIES> 7,001,707
<BONDS> 0
0
1,800
<COMMON> 68,648
<OTHER-SE> 3,178,268
<TOTAL-LIABILITY-AND-EQUITY> 10,938,305
<SALES> 7,585,916
<TOTAL-REVENUES> 7,585,916
<CGS> 6,968,163
<TOTAL-COSTS> 6,958,163
<OTHER-EXPENSES> 2,856,495
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 385,775
<INCOME-PRETAX> (3,805,328)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,805,328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,805,328)
<EPS-PRIMARY> (.72)
<EPS-DILUTED> (.72)
</TABLE>
