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 December 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 December 31, 1995:
10,496,758 shares of common stock, par value $.01 per share.
<PAGE>
INDEX
Part I. Financial Information:
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Balance Sheets as of
December 31, 1995 and September 30, 1995 3-4
Condensed Consolidated Statements of Operations for the
three months ended December 31, 1995 and 1994 5
Condensed Consolidated Statements of Cash Flows
for the three months ended December 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
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<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)
December 31, 1995 September 30, 1995
(unaudited)
<S> <C> <C>
Current Assets:
Cash $ 1,052 $ -
Accounts receivable, net of
allowances for doubtful
accounts of $88 at
December 31, 1995 and
$70 at September 30,
1995 10,574 12,451
Inventories (Note 1) 23,089 22,844
Income taxes receivable 1,951 1,823
Prepaid expenses and other 1,151 1,227
Deferred Tax Asset 800 991
Total current assets 38,617 39,336
Furniture and equipment (Note 1) 7,641 7,542
Less accumulated depreciation 2,964 2,737
4,677 4,805
Other assets:
Trademarks, net of amortization
(Note 1) 245 267
Due from officer 110 110
355 377
$43,649 $44,518
See notes to condensed consolidated financial statements.
<CAPTION>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted)
December 31, 1995 September 30, 1995
(unaudited)
<S> <C> <C>
Current liabilities:
Notes payable, banks
(Note 2) $15,853 $15,169
Bankers' acceptances
payable (Note 2) 1,186 1,842
Accounts payable 1,604 2,383
Accrued expenses 2,749 3,014
Total current liabilities 21,392 22,408
Deferred income taxes 782 765
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; 10,496,758 shares issued
and outstanding at December 31,
1995 and September 30, 1995, re-
spectively 105 105
Capital in excess of par 5,846 5,846
Retained earnings 15,524 15,394
21,475 21,345
$43,649 $44,518
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
1995 1994
<S> <C> <C>
Net sales $11,892 $ 9,644
Cost of sales 7,656 6,208
Gross profit 4,236 3,436
Selling, general and
administrative expenses 3,713 2,480
Loss on Mexican affiliate 350
Interest expense 324 157
Interest (income) (11) (9)
4,026 2,978
Income before
taxes 210 458
Income taxes 80 175
Net income $ 130 $ 283
Net income per share-
primary and fully diluted $.01 $ .03
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income $ 130 $ 283
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Depreciation and amortization 257 240
(Increase) decrease in:
Accounts receivable 1,877 1,997
Inventories (245) (1,136)
Prepaid expenses and other 76 (240)
Income taxes receivable/
payable (128) 95
Increase (decrease) in:
Bankers' acceptances payable (656) (500)
Accounts payable (779) (356)
Accrued expenses (265) (190)
Deferred income
taxes payable\receivable 208 30
Total adjustments 345 (60)
Net cash provided by
operating activities 475 223
Cash flows from investing activities:
(Purchase) of furniture/equipment (99) (192)
(Increase) in deposits (47)
(Increase) in trademarks (8) (6)
Net cash (used in)
investing activities (107) (245)
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Three Months Ended
December 31,
1995 1994
<S> <C> <C>
Cash flows from financing activities:
Net increase in notes payable $ 684 $ 3,735
Payment to retire common stock options (8)
Payments to acquire treasury stock (3,746)
Net cash provided by (used in)
financing activities 684 (19)
Net increase (decrease) in cash and cash
equivalents 1,052 (41)
Cash and cash equivalents,
beginning of period -0- 698
Cash and cash equivalents, end of period $ 1,052 $ 657
Supplemental disclosures of cash flow
information and non-cash financing activities:
Cash paid during the period for:
Interest $ 324 $ 157
Income taxes $ -0- $ 50
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 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 products. 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 December 31,
1995 and the results of operations and the statements of
cash flows for the three month period ended December 31,
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
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1995 and 1994 is unaudited.)
incurred.
Trademarks:
The costs thereof are being amortized over a five-year
period on a straight-line basis.
2. Notes payable, bank:
December 31, September 30,
Rate 1995 Rate 1995
Notes payable(a) 7.8125% $ 9,750,000 7.875% $ 9,000,000
8.50% 6,103,000 8.75% 6,169,000
$15,853,000 15,169,000
Bankers' acceptances $ 1,186,000 None $ 1,842,000
payable(a)
(a) Collateralized by a security interest in substantially all
of the assets of the Company. A credit line of $34,000,000
is available at the bank's discretion. This $34,000,000 is
subject to limitation based upon eligible inventory and
accounts receivable as defined by the bank.
3. Common Stock:
From October 1994 through December 1994, the Company purchased
880,400 shares of its common stock at prices ranging from $3.5 to
$5.375 per share. As of December 31, 1994, 826,400 shares of common
stock remained in treasury. The Company has completed both of its
500,000 share repurchase programs.
4. Contingency:
At December 31, 1995 the Company was contingently liable for
outstanding letters of credit of $2,317,017.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1995 and 1994 is unaudited.)
Three Months Ended
December 31
1995 1994
5. Income taxes:
Federal:
Current $ 51,000 $118,000
Deferred 16,000 29,000
State:
Current 12,000 27,000
Deferred 1,000 1,000
$ 80,000 $175,000
Income tax at Federal statutory
rate applied to income before
taxes $ 71,000 $ 156,000
Add: state income taxes 13,000 28,000
Less: effect of deduction of
state income taxes for
Federal purposes (4,000) (9,000)
Income taxes provided $ 80,000 $ 175,000
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1995 and 1994 is unaudited.)
Significant components of the Company's deferred tax liability
as of December 31, 1995 and September 30, 1995 are as follows:
December 31, September 30,
1995 1995
Deferred tax liability:
Depreciation $782,000 $ 765,000
Deferred tax assets:
Reserve for lawsuit 141,000 141,000
Inventory reserve 520,000 520,000
Reserve for returns and
allowances 51,000 260,000
Unicap 34,000 34,000
Bad debts 45,000 27,000
Other 9,000 9,000
800,000 991,000
Deferred income tax asset $ 18,000 $226,000
Net
6. New authoritative accounting pronouncements:
The Financial Accounting Standards Board has issued Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation"
("FAS 123"). FAS 123 will take effect for transactions entered into
during the fiscal year beginning October 1, 1996; with respect to
disclosures required for entities that elect to continue to measure
compensation cost using a prior permitted accounting method, such
disclosures must include the effects of all awards granted in the
fiscal year beginning October 1, 1995. The Company's election under
FAS 123 has not been determined and the effect of adoption of FAS 123
on the Company's financial statements has not be determined.
<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 December 31, 1995
23.3% compared to the same period in 1994. This was principally due
to the success of the Company's licensed products.
Gross profit as a percentage of net sales remained unchanged in
the three month period ended December 31, 1995 at 35.6% compared to
the same 1994 period.
Selling, general and administrative ("SG&A") expenses as a
percentage of sales increased to 31.2% from 25.7% in the three months
ended December 31, 1995 compared to the same prior period. The three
month period increase was caused principally by the higher royalty
expenses and the cost to move into the Company's new distribution
facility.
In addition, interest expense increased compared to same prior
period due to the increased borrowings for the stock buyback programs.
During the three months ended December 31, 1995, net income
decreased to $130,000 or $.01 per share, from $283,000 or $.03 per
share, for the three months ended December 31, 1994. This is a
decrease of 54%. This decrease in net income is principally due to
higher SG&A expenses and interest costs.
(2) Material Changes in Financial Condition
Working capital increased $297,000 to $17,225,000 during the
three months ended December 31, 1995. This increase was primarily due
to the net income generated for the period.
On a long-term basis, the Company's liquidity is strong due to
its continuing profitability, 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.
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: February 14, 1996 By: /s/ David Melnick
David Melnick,
Principal Operating Officer
ptk\10-q-dec.95
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 1,052
<SECURITIES> 0
<RECEIVABLES> 10,574
<ALLOWANCES> 88
<INVENTORY> 23,089
<CURRENT-ASSETS> 38,617
<PP&E> 7,641
<DEPRECIATION> 2,964
<TOTAL-ASSETS> 43,649
<CURRENT-LIABILITIES> 21,392
<BONDS> 0
0
0
<COMMON> 105
<OTHER-SE> 21,370
<TOTAL-LIABILITY-AND-EQUITY> 43,649
<SALES> 11,892
<TOTAL-REVENUES> 11,892
<CGS> 7,656
<TOTAL-COSTS> 3,713
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 324
<INCOME-PRETAX> 210
<INCOME-TAX> 80
<INCOME-CONTINUING> 130
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 130
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
