FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 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.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of March 31, 1995;
10,858,258 shares of common stock, par value $.01 per share.
Page 1 of 15
There is no Exhibit Index.<PAGE>
INDEX
Part I. Financial Information:
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets as of
March 31, 1995 and September 30, 1994 3-4
Condensed Consolidated Statements of Operations for the
three and six months ended March 31, 1995 and 1994 5
Condensed Consolidated Statements of Cash Flows
for the three and six months ended March 31,
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 Operations 12-13
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 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)
March 31, 1995 September 30, 1994
(unaudited)
<S> <C> <C>
Current Assets:
Cash $ 190 $ 698
Accounts receivable, net of
allowances for doubtful
accounts of $76 at
March 31, 1995 and
$55 at September 30,
1994 11,840 13,130
Inventories (Note 1) 24,987 21,327
Income taxes receivable 301 369
Prepaid expenses and other 2,049 1,308
Total current assets 39,367 36,832
Furniture and equipment (Note 1) 7,337 6,890
Less accumulated depreciation 2,331 1,889
5,006 5,001
Other assets:
Trademarks, net of amortization
(Note 1) 286 289
Due from officer 122 78
Deposits on equipment 47
455 367
$44,828 $42,200
See notes to condensed consolidated financial statements.
<CAPTION>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted)
March 31, 1995 September 30, 1994
(unaudited)
<S> <C> <C>
Current liabilities:
Notes payable, banks
(Note 2) $14,923 $ 9,163
Bankers' acceptances
payable (Note 2) 2,214 1,860
Accounts payable 1,688 1,425
Accrued expenses 2,255 2,932
Total current liabilities 21,080 15,380
Deferred income taxes 400 340
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 March 31, 1995
and 11,692,958 at September
30, 1994 109 117
Capital in excess of par 6,053 6,512
Retained earnings 18,405 20,894
Treasury stock (1,219) (1,043)
23,348 26,480
$44,828 $42,200
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted except for per share amounts)
Three Months Ended Six Months Ended
March 31 March 31
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales $12,249 $11,153 $21,893 $23,227
Cost of sales 7,954 6,821 14,162 14,750
Gross profit 4,295 4,332 7,731 8,477
Selling, general and
administrative expenses 3,380 3,049 5,860 5,688
Loss on Mexican affiliate 350
Interest expense 319 144 476 298
Interest (income) (8) (1) (17) (4)
3,691 3,192 6,669 5,982
Income before taxes 604 1,140 1,062 2,495
Income taxes 229 426 404 948
Net income $ 375 714 $ 658 $ 1,547
Net income per share $ .04 $ .06 $ .06 $ .13
primary and fully
diluted
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
Six Months Ended
March 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $ 658 $ 1,547
Adjustments to reconcile net
income to net cash (used in)
operating activities:
Depreciation and amortization 486 408
(Increase) decrease in:
Accounts receivable 1,290 5,441
Accounts receivable-other - (1,151)
Inventories (3,660) (7,067)
Prepaid expenses and other (741) 482
Income taxes receivable/payable 68 (437)
Due from officer (44) (22)
Increase (decrease) in:
Bankers' acceptances payable 354 (1,192)
Accounts payable 263 415
Accrued expenses (677) (446)
Deferred income taxes payable 60 307
Total adjustments (2,601) (3,262)
Net cash (used in)
operating activities (1,943) (1,715)
Cash flows (used in) investing activities:
(Purchase) of furniture/equipment (447) (382)
(Increase) in trademarks (41) (25)
(Increase) in equipment deposits (47) (3)
Net cash (used in) investing activities (535) (410)
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(000's omitted)
Six Months Ended
March 31,
1995 1994
<S> <C> <C>
Cash flows from financing activities:
Net increase in notes payable $ 5,760 $ 1,520
Payments to acquire treasury stock (3,782) (227)
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 1,970 1,303
Net decrease in cash and cash equivalents (508) (822)
Cash and cash equivalents,
beginning of period 698 843
Cash and cash equivalents, end of period $ 190 $ 21
Supplemental disclosures of cash flow
information:
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 $ 476 $ 298
Income taxes $ 276 $ 1,097
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 six months ended March 31,
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 financial position
at March 31, 1995, the results of operations for the three and six
month periods ended March 31, 1995 and 1994 and cash flows for the
six month periods ended March 31, 1995 and 1994.
Inventory:
Inventory is stated at the lower of cost or market (first-in,
first-out). Interim inventories are based on a calculated 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.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
Trademarks:
The costs thereof are being amortized over a five-year period
on a straight-line basis.
2. Notes payable, bank:
Rate March 31, 1994 Rate September 30, 1994
Notes payable 8.20% $ 8,000,000 7.75% $ 9,163,000
Notes payable 8.15% 5,000,000
Notes payable 9.00% 1,923,000
$14,923,000
Bankers' acceptances
payable $ 2,214,000 $ 1,860,000
The above were collateralized by a security interest in
substantially all of the assets of the Company. A credit line of
$27,000,000 is available to the Company at the discretion of the
banks. This $27,000,000 is subject to limitation based upon
eligible inventory and accounts receivable as defined by the banks.
3. Common Stock:
From October 1994 through March 1995, the Company purchased
890,400 shares of its Common Stock for prices ranging from $3.50 to
$5.375 per share. As of March 31, 1995, 252,000 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
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
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.
4. Contingency:
At March 31, 1995 the registrant was contingently liable for
outstanding letters of credit of $6,916,000.
5. Income taxes:
Three Months Ended Six Months Ended
March 31, 1995 March 31, 1995
Federal:
Current $ 165,000 $ 283,000
Deferred 28,000 57,000
State:
Current 34,000 61,000
Deferred 2,000 3,000
$ 229,000 $ 404,000
Income tax at Federal statutory
rate applied to income before
taxes $ 205,000 $ 361,000
Add: state income taxes 36,000 64,000
Less: effect of deduction of
state income taxes for
Federal purposes (12,000) (21,000)
Income taxes provided $ 229,000 $ 404,000
<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 March 31, 1994 was not material.
Significant components of the Company's deferred tax liability
as of March 31, 1995 and September 30, 1994 are as follows:
March 31, September 30,
1995 1994
Deferred tax liability:
Depreciation $778,000 $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 affiliate 96,000 76,000
Other 6,000 6,000
378,000 358,000
Deferred income tax liability $400,000 $340,000
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, 1995.
</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 increased in the three months ended March 31, 1995
10% and decreased 6% for the six months ended March 31, 1995 as
compared to the same periods a year ago. The three months increase
was principally due to the continued successful introduction of new
products, while the six month decrease was principally related to
the loss of one large holiday order with one customer in the first
quarter of this year.
Gross profit as a percentage of net sales decreased in the
three months ended March 31, 1995 to 35.1% from 38.8% in the same
1994 period, and decreased to 35.3% in the six month period ended
March 31, 1995 from 36.5% in the same 1994 period. The changes in
gross profit for the three months ended March 31, 1995 was
principally due to an increase in direct shipment business, a
higher percentage of chalk business, an acceleration of closeout
shipments into the earlier quarters and overall product mix.
Selling, general and administrative (SG&A) expenses as a
percentage of sales increased during the three months ended March
31, 1995 to 27.6% from 27.3% in the prior year. SG&A expenses
increased to 26.8% of sales during the six months ended March 31,
1995 from 24.5% of sales in the year earlier period. The increase
was primarily due to 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 a significant increase in interest expense due to
the funds used to finance the stock buy back program and higher
interest rates.
During the three months ended March 31, 1995, net income
decreased to $375,000, or $.04 per share, from $714,000, or $.06
per share, for the three months ended March 31, 1994, a decrease of
47%. During the six months ended March 31, 1995 net income
decreased to $658,000 or $.06 per share, from $1,547,000, or $.13
per share, in the year earlier period, a decrease of 57%. These
decreases were primarily related to lower sales, the writedown of
the Mexican affiliate and higher interest costs.
(2) Material Changes in Financial Condition
Working capital decreased $3,165,000 to $18,287,000 during the
six months ended March 31, 1995. This decrease ws primarily
related to the Company funding its two 500,000 share repurchase
programs with its working capital.
<PAGE>
On a long-term basis, the Company's liquidity is strong due to
its continuing profitability, relatively stable credit facilities,
the quality of its receivables, the largely finished nature of its
inventory, and the level of its shareholders' equity as compared to
its traditional borrowing needs. The Company is prohibited,
without the consent of its primary lenders, from declaring cash
dividends.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(b) None.
<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: May 12, 1995 By: /s/ David Melnick
David Melnick, President and
Principal Financial Officer
ptk\10q-mar.95
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 190
<SECURITIES> 0
<RECEIVABLES> 11,840
<ALLOWANCES> 76
<INVENTORY> 24,987
<CURRENT-ASSETS> 39,367
<PP&E> 7,337
<DEPRECIATION> 2,331
<TOTAL-ASSETS> 44,828
<CURRENT-LIABILITIES> 21,080
<BONDS> 0
<COMMON> 109
0
0
<OTHER-SE> 23,348
<TOTAL-LIABILITY-AND-EQUITY> 44,828
<SALES> 12,249
<TOTAL-REVENUES> 12,249
<CGS> 7,954
<TOTAL-COSTS> 3,380
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 311
<INCOME-PRETAX> 604
<INCOME-TAX> 229
<INCOME-CONTINUING> 375
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 375
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
