UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-15374
PENTECH INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2259391
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
195 Carter Drive, Edison, New Jersey 08817
(Address of principal executive offices) (Zip Code)
(908) 287-6640
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities and Exchange Act of 1934 during the preceding 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. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Outstanding at
Class of Common Stock June 30, 1995
--------------------- -----------------
$.01 par value 10,858,258 shares
Page 1 of 15. There is no Exhibit Index.
INDEX
Part I. Financial Information:
Item 1. Financial Statements (unaudited) Page
----
Condensed Consolidated Balance Sheets as of
June 30, 1995 and September 30, 1994. . . . . . . . . . .3-4
Condensed Consolidated Statements of Operations for the
three and nine months ended June 30, 1995 and 1994. . . . .5
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 1995 and 1994. . . . .6-7
Notes to Condensed Consolidated Financial Statements. . 8-11
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operation. . . . . . . . . . .12-13
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . 14
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(000's omitted)
(Substantially all pledged or assigned)
June 30, 1995 September 30, 1994
-------------- ------------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash $ 554 $ 698
Accounts receivable, net of
allowances for doubtful
accounts of $79 at
June 30, 1995 and
$55 at September 30,
1994 19,121 13,130
Inventories (Note 1) 23,786 21,327
Income taxes receivable 572 369
Prepaid expenses and other 2,168 1,308
------ ------
Total current assets 46,201 36,832
------ ------
Furniture and equipment (Note 1) 7,423 6,890
Less accumulated depreciation 2,555 1,889
------ ------
4,868 5,001
------ ------
Other assets:
Trademarks, net of amortization
(Note 1) 279 289
Due from officer 110 78
Deposits on equipment 47
------ -----
436 367
------ -----
$ 51,505 $42,200
====== ======
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted)
June 30, 1995 September 30, 1994
------------- ------------------
(unaudited)
<S> <C> <C>
Current liabilities:
Notes payable, banks
(Note 2) $20,499 $ 9,163
Bankers' acceptances
payable (Note 2) 2,039 1,860
Accounts payable 1,725 1,425
Accrued expenses 2,726 2,932
------ -------
Total current liabilities 26,989 15,380
------ -------
Deferred income taxes 440 340
Commitments and contingencies
(Notes 4 and 5)
Shareholders' equity (Note 3):
Preferred stock, par value $.10
per share; authorized 500,000
shares; issued and outstanding
none
Common stock, par value $.01
per share; authorized 20,000,000
shares; 10,858,258 shares issued
and outstanding at June 30, 1995
and 11,692,958 at September
30, 1994 109 117
Capital in excess of par 6,047 6,512
Retained earnings 19,319 20,894
Treasury stock (1,399) (1,043)
------ ------
24,076 26,480
------ ------
$51,505 $42,200
====== ======
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
(unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted except for per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $20,013 $22,928 $41,906 $46,155
Cost of sales 13,208 14,713 27,370 29,463
------ ------ ------ ------
Gross profit 6,805 8,215 14,536 16,692
------ ------ ------ ------
Selling, general and
administrative expenses 5,035 4,295 10,895 9,983
Loss on Mexican affiliate 350
Interest expense 310 194 786 492
Interest (income) (7) (2) (24) (6)
------- ------- ------- -------
5,338 4,487 12,007 10.469
------- ------- ------ -------
Income before
taxes 1,467 3,728 2,529 6,223
Income taxes 557 1,448 961 2,396
------- ------ ------- ------
Net income $ 910 $2,280 $1,568 $ 3,827
======= ====== ====== ======
Net income per share
fully diluted $ .09 $ .19 $ .15 $ .32
======= ====== ====== ======
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(unaudited)
Nine Months Ended
June 30,
-----------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,568 $ 3,827
------ -------
Adjustments to reconcile net
income to net cash (used in)
operating activities:
Depreciation and amortization 770 556
(Increase) decrease in:
Accounts receivable (5,991) (4,661)
Inventories (2,459) (5,367)
Prepaid expenses and other (860) 320
Income taxes receivable (203)
Due from officer (32) (66)
Increase (decrease) in:
Bankers' acceptances payable 179 (690)
Accounts payable 300 541
Accrued expenses (206) 281
Income taxes payable 78
Deferred income taxes payable 100 307
------- ------
Total adjustments (8,402) (8,701)
------- ------
Net cash (used in) operating
activities (6,834) (4,874)
------- ------
Cash flows from investing activities:
(Purchase) of furniture/equipment (533) (726)
(Increase)/Decrease in trademarks (94) 29
(Increase) in equipment deposits (47) (3)
-------- ---------
Net cash (used in) investing activities (674) (700)
-------- ---------
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(000's Omitted)
(unaudited)
Nine Months Ended
June 30,
-----------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase in notes payable $11,336 $ 5,294
Payments to acquire treasury stock (3,964) (546)
Proceeds from the issuance of Common Stock
and exercise of options 10
Payments to retire Common Stock options (8)
------ ------
Net cash provided by
financing activities 7,364 4,758
------ ------
Net decrease in cash and cash equivalents (144) (816)
Cash and cash equivalents,
beginning of period 698 843
------ ------
Cash and cash equivalents, end of period $ 554 $ 27
------ ------
Supplemental disclosures of cash flow
information and non-cash financing activities:
Non-cash financing activities:
Issuance of Common Stock pursuant
to exercise of options $ 606
Acquisition of treasury stock $ 606
Retirement of treasury stock $ 606
Cash paid during the period for:
Interest $ 762 $ 492
Income taxes $1,064 $2,030
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 1995 and 1994 is unaudited)
1. Summary of significant accounting policies:
Organization:
Pentech International, Inc. (the "Company") was formed in
April 1984. A wholly-owned subsidiary, Sawdust Pencil
Company ("Sawdust"), was formed in November 1989 and
commenced operations in January 1991. The Company and
its subsidiary are engaged in the production, design and
marketing of writing and drawing instruments. In October
1993, the Company formed a wholly-owned subsidiary,
Pentech Cosmetics, Inc., to manufacture and distribute
cosmetic pencils. The Company's fiscal year ends
September 30.
Principles of consolidation:
The consolidated financial statements include the
accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have
been eliminated.
Unaudited financial statements:
All unaudited financial information includes all
adjustments (consisting of normal recurring adjustments)
which the Company considers necessary for a fair
presentation of the financial position at June 30, 1995,
the results of operations for the three and nine month
periods ended June 30, 1995 and 1994, and cash flows for
the nine month periods ended June 30, 1995 and 1994
Inventory:
Inventory, is stated at the lower of cost or market
(first-in, first-out). Interim inventories are based on
an estimated gross profit percentage by product,
calculated monthly.
Equipment and depreciation:
Equipment is stated at cost. Depreciation is provided by
the straight-line method over the estimated useful lives
of the assets, which range from five to ten years. Major
improvements to existing equipment are capitalized.
Expenditures for maintenance and repairs which do not
extend the life of the assets are charged to expense as
incurred.
Trademarks:
The costs thereof are being amortized over a five-year
period on a straight-line basis.
2. Notes payable, bank:
Rates June 30, 1995 Rates September 30, 1994
----- ------------- ----- ------------------
Notes payable 9.00% $ 2,999,000 7.75% $ 9,163,000
==========
Notes payable 8.15% 5,000,000
Notes payable 8.20% 8,000,000
Notes payable 7.80% 4,000,000
Notes payable 8.00% 500,000
----------
$20,499,000
==========
Bankers' acceptances
payable $ 2,039,000 $ 1,860,000
========== ==========
The above were collateralized by a security interest in
substantially all of the assets of the Company. The credit
lines available to the Company at the discretion of the banks
with which the Company maintains these lines (the "Banks")
were increased to $34,000,000. This $34,000,000 is subject to
limitation based upon eligible inventory and accounts
receivable as defined by the Banks.
3. Common Stock:
From October 1994 through June 1995, the Company purchased
950,400 shares of Common Stock at prices ranging from $2.875 to
$5.03 per share. As of June 30, 1995, 312,500 shares of Common
Stock remained in treasury.
In February 1994, options to purchase an aggregate of 175,000
shares of Common Stock were exercised at prices ranging from $3.19
to $3.51 per share resulting in the issuance of 175,000 shares of
Common Stock. The persons paid the exercise price of those options
by delivery of 91,506 shares of Common Stock with a value of
$606,250 to the Company. These 91,506 shares of Common Stock have
been retired.
In March 1994, options to purchase an aggregate of 2,000
shares of Common Stock were exercised at $5.125 per share,
resulting in the issuance of 2,000 shares of Common Stock and
proceeds of $10,250.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Financial Statements (con't)
4. Contingency:
At June 30, 1995, the Company was contingently liable for
outstanding letters of credit of approximately $2,557,000.
5. Income taxes: Three Months Ended Nine Months Ended
June 30, 1995 June 30, 1995
------------------ -----------------
Federal:
Current $ 435,000 $ 718,000
Deferred 34,000 91,000
State:
Current $ 82,000 $ 143,000
Deferred 6,000 9,000
------- --------
$ 557,000 $ 961,000
======= ========
Income tax at Federal statutory
rate applied to income before
taxes $ 499,000 $ 860,000
Add: state income taxes 88,000 152,000
Less: effect of deduction of
state income taxes for
Federal purposes (30,000) (51,000)
-------- --------
Income taxes provided $ 557,000 $ 961,000
======== ========
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
Effective October 1, 1993, the Company adopted FASB Statement
No. 109, Accounting for Income Taxes. Under Statement 109, the
liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined
based on the difference between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. Prior to the adoption of Statement 109,
income tax expense was determined using the deferred method.
Deferred tax expense was based on items of income and expense that
were reported in different years in the financial statements and
tax returns and were measured at the tax rate in effect in the year
the differences originated.
As permitted by Statement 109, the Company has elected not to
restate the financial statements for prior years. The effect of
the change on pretax income from continuing operations for the
three and six months ended June 30, 1995 was not material.
Significant components of the Company's deferred tax liability
as of June 30, 1995 and September 30, 1994 are as follows:
June 30, September 30,
1995 1994
------- -------------
Deferred tax liability:
Depreciation $818,000 $698,000
------- -------
Deferred tax assets:
Reserve for lawsuit 99,000 99,000
Inventory reserve 37,000 37,000
Reserve for returns and
allowances 124,000 124,000
Unicap 16,000 16,000
Loss on foreign 96,000 76,000
affiliate
Other 6,000 6,000
------- -------
378,000 358,000
------- -------
Deferred income tax $440,000 $340,000
liability, Net ======= =======
6. Related party transactions:
In December 1993, the Company sublet premises, which it
originally used as its primary offices and leased from a Company
controlled by two officers/shareholders (the "sublease"). The
Company's lease of those premises expires September 30, 1995, is
triple net and provides for a base rent of $3,930 per month. The
sublease, to an unaffiliated company, is for $2,750 per month and
expires June 30, 1996.
</TABLE>
<PAGE>
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(1) Material Changes in Results of Operations
Net sales decreased in the three and nine months ended June
30, 1995, 13% and 9%, respectively, over the same periods in 1994.
This was principally due to one of the Company's largest customers
significantly reducing their back to school orders. The Company's
relationship with this customer however, still remains solid. The
remainder of the Company's customer base continued to demonstrate
a strong demand for new products.
Gross profit as a percentage of net sales decreased in the
three months ended June 30, 1995 to 34.0% from 35.8% in the same
1994 period, and decreased to 34.7% in the nine month period ended
June 30, 1995 from 36.2% in the same 1994 period. This decrease
was due to the product mix, primarily the commodity pencil program
and higher packaging and display costs. The Company also
accelerated the closeout of slow moving inventory.
Selling, general and administrative ("SG&A") expenses as a
percentage of sales increased during the three months ended June
30, 1995 to 25.1% from 18.7% in the prior year. SG&A expenses
increased to 26.0% of sales during the nine months ended June 30,
1995 from 21.6% of sales in the year earlier period. The increases
were caused principally by royalty expenses associated with the new
licensed products and the lower sales for the year associated with
a similar level of fixed SGA expenses.
There was an increase in interest expense due largely to
financing the stock buy back and higher interest rates.
During the three months ended June 30, 1995, net income
decreased to $910,000, or $.09 per share, from $2,280,000, or $.19
per share, for the three months ended June 30, 1994. This is a
decrease of 60%. During the nine months ended June 30, 1995 net
income decreased to $1,568,000, or $.15 per share, from $3,827,000,
or $.32 per share, in the year earlier period, a deease of 59.0%.
These decreases in net income are a direct result of lower sales.
(2) Material Changes in Financial Condition
Working capital decreased $2,240,000 to $19,212,000 from
$21,452,000 during the nine months ended June 30, 1995. This
decrease was primarily related to the Company funding its share
repurchase programs with its working capital.
On a long-term basis, the Company's liquidity is strong due to
its relatively stable credit facilities, its strong current ratio,
the quality of its receivables, the largely finished nature of its
inventory, and the size of its shareholders' equity as compared to
its traditional borrowing needs. The Company is prohibited,
without the consent of its primary lender, from declaring cash
dividends.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(b) The Company did not file any reports on Form 8-K
during the quarter ended June 30, 1995.
<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.
PENTECH INTERNATIONAL, INC.
Dated: August 11, 1995 By: /s/ David Melnick
David Melnick, President and
Principal Financial Officer
ptk\10q-jun.95
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> JUN-30-1995
<CASH> 554
<SECURITIES> 0
<RECEIVABLES> 19,121
<ALLOWANCES> 79
<INVENTORY> 23,786
<CURRENT-ASSETS> 46,201
<PP&E> 7,423
<DEPRECIATION> 2,555
<TOTAL-ASSETS> 51,505
<CURRENT-LIABILITIES> 26,989
<BONDS> 0
<COMMON> 109
0
0
<OTHER-SE> 24,076
<TOTAL-LIABILITY-AND-EQUITY> 51,505
<SALES> 20,013
<TOTAL-REVENUES> 20,013
<CGS> 13,208
<TOTAL-COSTS> 5,035
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 303
<INCOME-PRETAX> 1,467
<INCOME-TAX> 557
<INCOME-CONTINUING> 910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 910
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
