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, 1996
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, 1996
- --------------------- -----------------
$.01 par value 10,496,758 shares
Page 1 of 16. There is no Exhibit Index.
INDEX
Part I. Financial Information:
Item 1. Financial Statements (unaudited) Page
----
Condensed Consolidated Balance Sheets as of
June 30, 1996 and September 30, 1995. . . . . . . . . . .3-4
Condensed Consolidated Statements of Operations for the
three and nine months ended June 30, 1996 and 1995. . . . .5
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 1996 and 1995. . . . .6-7
Notes to Condensed Consolidated Financial Statements. . 8-12
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operation. . . . . . . . . . .13-14
Part II. Other Information:
Item 1. Legal Proceedings . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . 15
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
PART I. FINANCIAL INFORMATION
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(000's omitted)
(Substantially all pledged or assigned)
June 30, 1996 September 30, 1995
-------------- ------------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash $ 356 $ -
Accounts receivable, net of
allowances for doubtful
accounts of $190 at
June 30, 1996 and
$70 at September 30,
1995 20,070 12,451
Inventories (Note 1) 22,948 22,844
Income taxes receivable 515 1,823
Prepaid expenses and other 1,940 1,227
Deferred tax asset 1,071 991
------ ------
Total current assets 46,900 39,336
------ ------
Furniture and equipment (Note 1) 7,919 7,542
Less accumulated depreciation 3,417 2,737
------ ------
4,502 4,805
------ ------
Other assets:
Trademarks, net of amortization
(Note 1) 196 267
Due from officer 110 110
------ -----
306 377
------ -----
$ 51,708 $44,518
====== ======
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted)
June 30, 1996 September 30, 1995
------------- ------------------
(unaudited)
<S> <C> <C>
Current liabilities:
Notes payable, banks
(Note 2) $ 21,132 $ 15,169
Bankers' acceptances
payable (Note 2) 3,169 1,842
Accounts payable 1,785 2,383
Accrued expenses 3,418 3,014
------ -------
Total current liabilities 29,504 22,408
------ -------
Deferred income taxes 816 765
------ -------
Commitments and contin-
gencies (Notes 4 and 7)
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 June 30, 1996 and September
30, 1995, respectively 105 105
Capital in excess of par 5,846 5,846
Retained earnings 15,437 15,394
------ ------
21,388 21,345
------ ------
$ 51,708 $44,518
====== ======
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
(unaudited)
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted except for per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $21,976 $20,013 $44,278 $41,906
Cost of sales 14,982 13,208 29,590 27,370
------ ------ ------ ------
Gross profit 6,994 6,805 14,688 14,536
------ ------ ------ ------
Selling, general and
administrative expenses 5,644 5,035 13,650 10,895
Loss on Mexican affiliate 350
Interest expense 362 310 999 786
Interest (income) (6) (7) (30) (24)
------- ------- ------- ------
6,000 5,338 14,619 12,007
------- ------- ------ ------
Income before
taxes 994 1,467 69 2,529
Income taxes 377 557 26 961
------- ------ ----- ------
Net income (Note 7) $ 617 $ 910 $ 43 $ 1,568
======= ====== ===== ======
Net income per share
fully diluted (Note 7) $ .06 $ .09 $ .00 $ .15
======= ====== ====== =====
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(unaudited)
Nine Months Ended
June 30,
-----------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 43 $ 1,568
------ -------
Adjustments to reconcile net
income to net cash (used in)
operating activities:
Depreciation and amortization 770 770
(Increase) decrease in:
Accounts receivable (7,619) (5,991)
Inventories (104) (2,459)
Prepaid expenses and other (713) (860)
Income taxes receivable/payable 1,308 (203)
Due from officer - (32)
Deferred tax asset (80) -
Increase (decrease) in:
Bankers' acceptances payable 1,327 179
Accounts payable (598) 300
Accrued expenses 404 (206)
Deferred income taxes payable 51 100
------- ------
Total adjustments (5,254) (8,402)
------- ------
Net cash (used in) operating
activities (5,211) (6,834)
------- ------
Cash flows from investing activities:
(Purchase) of furniture/equipment (377) (533)
(Increase) in trademarks (19) (94)
(Increase) in equipment deposits - (47)
-------- -------
Net cash (used in) investing activities (396) (674)
-------- -------
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(000's Omitted)
(unaudited)
Nine Months Ended
June 30,
-----------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase in notes payable $ 5,963 $11,336
Payments to acquire treasury stock - (3,964)
Payments to retire Common Stock options - (8)
------ ------
Net cash provided by
financing activities 5,963 7,364
------ ------
Net increase (decrease) in cash
and cash equivalents 356 (144)
Cash and cash equivalents,
beginning of period - 698
------ ------
Cash and cash equivalents, end of period $ 356 $ 554
------ ------
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 857 $ 762
Income taxes $ - $ 1,064
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 and nine months ended
June 30, 1996 and 1995 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, 1996,
the results of operations for the three and nine month
periods ended June 30, 1996 and 1995, and cash flows for
the nine month periods ended June 30, 1996 and 1995
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.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Financial Statements (con't)
Equipment and Depreciation (continued):
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, 1996 Rates September 30, 1995
----- ------------- ----- ------------------
Notes payable 8.25% $10,057,000 7.875% $ 9,000,000
Notes payable 8.25% 11,075,000 8.750% 6,169,000
----------- ----------
$21,132,000 $15,169,000
=========== ==========
Bankers' acceptances
payable $ 3,169,000 $ 1,842,000
========== ==========
Traditionally, the Company has operated under two lines of
credit with two separate banks equalling $34,000,000, subject to
limitation based upon eligible inventory and accounts receivable as
defined by the banks. The line of credit with one of the banks,
totalling $16,000,000, expired on May 31, 1996. The Company is
engaged in active negotiations with this lender to extend its line
of credit.
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.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Financial Statements (con't)
4. Contingency:
At June 30, 1996, the Company was contingently liable for
outstanding letters of credit of approximately $2,892,332.
5. Income taxes: Three Months Ended Nine Months Ended
June 30, 1996 June 30, 1996
------------------ -----------------
Federal:
Current $282,000 $ 19,580
Deferred 35,000 2,420
State:
Current $ 53,400 $ 3,560
Deferred 6,600 440
------- --------
$377,000 $ 26,000
======= ========
Income tax at Federal statutory
rate applied to income before
taxes $338,000 $ 23,000
Add: state income taxes 60,000 4,000
Less: effect of deduction of
state income taxes for
Federal purposes (21,000) (1,000)
-------- --------
Income taxes provided $377,000 $26,000
======== ========
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
Significant components of the Company's deferred tax liability
as of June 30, 1996 and September 30, 1995 are as follows:
June 30, September 30,
1996 1995
------- -------------
Deferred tax liability:
Depreciation $ 816,000 $765,000
--------- -------
Deferred tax assets:
Bad debts 72,200 27,000
Reserve for lawsuit 236,500 141,000
Inventory reserve 520,000 520,000
Reserve for returns
and allowances 200,000 260,000
Unicap 34,000 34,000
Other 9,000 9,000
------- -------
1,071,700 991,000
--------- -------
Deferred income tax $ 255,700 $226,000
asset, 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 been determined.
7. Litigation:
Pentech International, Inc. v. Leon Hayduchok, All-Mark
Corporation and Paradise Creations, Inc. was filed in the U.S.
District Court, Southern District of New York ("SDNY") in October
1987. This action was for a declaratory judgment against the
defendants that U.S. Patent No. 4,681,471 entitled "Kit Comprising
Multi-Colored Fluid Dispenser Markers Together With Eradicating
Fluid Dispenser" is not infringed, and is invalid and
unenforceable. This action was bifurcated into two parts: (i)
liability and (ii) damages. On November 12, 1990, an opinion and
order of findings of fact and conclusions of law were released
rejecting Pentech's effort to invalidate the patent, rejecting
defendant's counterclaim of Pentech's misappropriation and finding
that Pentech infringed said patent.
Subsequent to the quarter ended June 30, 1996, the court
issued an opinion and order on the damages portion of the action
assessing a royalty of $1,032,000 that Pentech is obligated to pay
Paradise. The court also trebled this award, directed Pentech to
pay Paradise's attorneys' fees and prejudgment interest on the
royalty award. This amount, if it is not modified, will result in
a judgment against Pentech of approximately $5,000,000. The amount
of this judgment is expected to be finalized by September 30, 1996.
Pentech strongly disagrees with the outcome of this opinion
and order and intends to vigorously appeal. There is no assurance
that Pentech will be able to obtain a bond required to stay
enforcement pending such appeal. Although Pentech had established
a reserve for this award based on the then-available information,
it is not adequate to cover this award. As a result, although it
is too early to determine with certainty and to what extent, it is
likely that Pentech will report a sizable loss for its fiscal year
ended September 30, 1996.
<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 and nine months ended June
30, 1996, 10% and 6%, respectively, over the same periods in 1995.
This was principally due to the success of the Company's licensed
products.
Gross profit as a percentage of net sales decreased in the
three months ended June 30, 1996 to 31.8% from 34.0% in the same
1995 period, and decreased to 33.2% in the nine month period ended
June 30, 1996 from 34.7% in the same 1995 period. This decline was
due primarily to higher domestic manufacturing costs and an
increase in the Company's reserve percentage for returns and
allowances. 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, 1996 to 25.6% from 25.1% in the prior year. SG&A expenses
increased to 30.8% of sales during the nine months ended June 30,
1996 from 26.0% of sales in the year earlier period. The increases
were caused principally by royalties, higher freight costs, an
increase in the reserve level for customer charge-backs, and the
legal fees incurred associated with the trial discussed in footnote
7 above as well as an increase in the reserve for the loss
associated with this matter.
There was an increase in interest expense due largely to the
higher level of borrowings that were maintained by the Company
during the current periods.
During the three months ended June 30, 1996, net income
decreased to $617,000, or $.06 per share, from $910,000, or $.09
per share, for the three months ended June 30, 1995. During the
nine months ended June 30, 1996 net income decreased to $43,000, or
$.00 per share, from $1,568,000, or $.15 per share, in the year
earlier period.
(2) Material Changes in Financial Condition
Working capital increased $468,000 to $17,396,000 from
$16,928,000 during the nine months ended June 30, 1996. This
increase was primarily related to the Company's income reported
during the quarter ended June 30, 1996.
The Company has in the past periodically been in technical
default with various covenants with its primary lenders. In
addition, the formal written line of credit with one of its lenders
has expired. The Company is engaged in active negotiations with
these lenders to extend its loans with such entities. In addition,
the Company will likely be required to post a large bond in order to
stay enforcement of the judgment which will likely be entered against
it in the near future as discussed in note 7 above. There is no
assurance that the Company will be able to resolve its outstanding
differences with its primary lenders to extend the loans or that it
will be able to obtain bond necessary to stay enforcement of the
judgment referred to above. Any of these events could result in a
situation where the Company could become illiquid. Such event could
significantly disrupt the business of the Company and have other
material adverse effects on the Company. The Company is exploring
avenues to avoid any such disruption, but there is no assurance that
it will have any degree of success with respect to any such strategies.
The Company is prohibited, without the consent of its primary
lender, from declaring cash dividends.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Pentech International, Inc. v. Leon Hayduchok, All-Mark
Corporation and Paradise Creations, Inc. was filed in the U.S.
District Court, Southern District of New York ("SDNY") in October
1987. This action was for declaratory judgment against the
defendants that U.S. Patent No. 4,681,471 entitled "Kit Comprising
Multi-Colored Fluid Dispenser Markers Together With Eradicating
Fluid Dispenser" is not infringed, and is invalid and
unenforceable. This action was bifurcated into two parts: (i)
liability and (ii) damages. On November 12, 1990, an opinion and
order of findings of fact and conclusions of law were released
rejecting Pentech's effort to invalidate the patent, rejecting
defendant's counterclaim of Pentech's misappropriation and finding
that Pentech infringed said patent.
Subsequent to the quarter ended June 30, 1996, the court
issued an opinion and order on the damages portion of the action
assessing a royalty of $1,032,000 that Pentech is obligated to pay
Paradise. The court also trebled this award, directed Pentech to
pay Paradise's attorneys' fees and prejudgment interest on the
royalty award. This amount, if it is not modified, wil result in
a judgment against Pentech of approximately $5,000,000. The amount
of this judgment is expected to be finalized by September 30, 1996.
Pentech strongly disagrees with the outcome of this
opinion and order and intends to vigorously appeal. There is no
assurance that Pentech will be able to obtain a bond required to
stay enforcement pending such appeal. Although Pentech had
established a reserve for this award based on the then-available
information, it is not adequate to cover this award. As a result,
although it is too early to determine with certainty and to what
extent, it is likely that Pentech will report a sizable loss for
its fiscal year ended September 30, 1996.
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, 1996.
<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 14, 1996 By: /s/ William Visone
William Visone, Treasurer
and Chief Financial Officer
(Duly authorized officer)
ptk\10q-jun.96
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 356
<SECURITIES> 0
<RECEIVABLES> 20,070
<ALLOWANCES> 190
<INVENTORY> 22,948
<CURRENT-ASSETS> 46,900
<PP&E> 7,919
<DEPRECIATION> 3,417
<TOTAL-ASSETS> 51,708
<CURRENT-LIABILITIES> 29,504
<BONDS> 0
0
0
<COMMON> 105
<OTHER-SE> 21,283
<TOTAL-LIABILITY-AND-EQUITY> 51,708
<SALES> 44,278
<TOTAL-REVENUES> 44,278
<CGS> 29,590
<TOTAL-COSTS> 14,619
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 999
<INCOME-PRETAX> 69
<INCOME-TAX> 26
<INCOME-CONTINUING> 43
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
